What should you do if your banking system doesn't work? Some will doubtless celebrate, arguing that banks are the source of all monetary evil. Others will panic, worrying about the onset of another Great Depression. Policymakers, though, should do neither of these things. They need, instead, to find a way to make the financial system function again.

What do a Madonna concert and a banking crisis have in common? Not much, you might think. But, as I sat through an excruciating performance of "Borderline" in Wembley Stadium on Thursday night, I realised that Madonna and mammon go together rather well. The common link is trust (or its loss).

Last week, we learned that retail sales in the UK fell 3.9 per cent in June and that Tim Besley, a member of the Bank of England's Monetary Policy Committee, voted at the last committee meeting for an interest rate increase. This combination is rather intriguing.

Despite all the talk of globalisation, mutual economic dependency and trade linkages, policymakers spend too much time focusing on the domestic minutiae and not enough on the really big international stories which determine our economic destinies. I know this because, like anyone else, I can log on to central bank websites and get a flavour of policymakers' concerns. The Federal Reserve and the Bank of England publish minutes of their regular policy pow-wows. Their discussions too often suggest the non-G7 world simply doesn't exist.

The Mist is one of the most downbeat, serious-minded dramas ever to feature gigantic tentacled aliens from another dimension. Adapted from a novella by Stephen King, it's set almost entirely in a rural New England supermarket. An unfeasibly buff artist, Thomas Jane, is stocking up with his son there one morning, when the supermarket is enveloped in a white fog, and we soon see that cheaply computer-generated beasties are lurking within it. Jane and the other shoppers lock the doors.

Mervyn King, Governor of the Bank of England, told the House of Commons Treasury Select Committee last Thursday that "a change in the prices of food and energy relative to other prices can't by itself produce sustained inflation unless we allow other prices and wages to rise at a faster rate".

There is, I think, an answer to the world economy's growing problem with inflation. It does, however, require acts of bravery on behalf of the developed world's policymakers and acts of maturity on behalf of policymakers in the emerging world. The solution is fraught with risks but at least it would be a coherent response to a crisis which has been associated with inaction and lame excuses.

A few months ago, economic life was both complicated and, yet, so simple. The US housing market was collapsing. The UK housing market seemed to be heading the same way. Banks on either side of the Atlantic were seeing profits haemorrhaging and capital disappearing. The cloying smell of recession was in the air. For central banks, then, the answer was really rather easy. Cut interest rates and hope that, in time, housing would stabilise, banks would recover and recession would be avoided.

The inflation-targeting framework in the UK has seemingly been hugely successful over the years. Arguably, though, it's never really been tested in difficult times. Under current circumstances, with inflation rising and house prices falling, will the framework really be able to cope?

Most economists believe that globalisation is a good thing. By breaking down barriers between nations, globalisation leads to a more efficient allocation of labour and capital. Greater efficiency implies higher output and higher output, in turn, makes us all better off. That, at least, is the theory. Globalisation, however, incorporates a core paradox. It reduces income and wealth inequalities between nations yet it seems to increase these inequalities within nations.

Students of economic developments in the 1970s and 1980s know all too well that the central bank par excellence during those two decades was Germany's Bundesbank. Its reputation in safeguarding the value of its currency, the Deutschmark, was second-to-none. Price stability, year-in, year-out, was supposedly its party trick.

One American bank failure and, apparently, we have proof that market economies just don't work. The move towards ever more deregulation is leading us all into another depression. Greedy capitalists, left to their own devices, will suck the blood out of our economies, leaving the rest of us to suffer ongoing economic hardship.