Recession - the domino effect: Share YOUR story

It began with the banks. Then house prices began to tumble. In the months that followed, the shock waves spread, engulfing first high streets, then factories – and thousands of jobs. In this gripping account, Paul Vallely travels across Britain to meet the people whose lives – and livelihoods – have fallen victim to the domino effect that left a nation broken

Wednesday 12 November 2008 01:00 GMT

We could begin with Peter Sastawnyuk. The 53-year-old businessman filled his £370,000 detached home with petrol canisters, sealed the locks, set tripwires and threatened to set the place alight. More than 40 of his neighbours were evacuated from the posh cul-de-sac on the edge of the Pennines from which Sastawnyuk sent his children to be educated at private school. But the cradle of his dreams imploded, in the end, as the scene of a five-hour police siege. The trigger for it all, a court in Rochdale was told last month, was that he had lost his job, got into debt and had had his home repossessed.

Or we could start with Karl Harrison. The father-of-two was found hanging in his garden shed in Anglesey. The 40-year-old surveyor had lost his job when the housing market began to turn down. He fell behind with his payments on his home loan and was being harassed by a firm called Oakwood Homeloans to pay the arrears, the inquest was recently. His widow has now put the house on the market.

But we do not need melodrama or tragedy to tell this story. So instead let us begin with what is becoming a more everyday misfortune in the society in which we live.

It was an ordinary Thursday morning in early October when Jackie Horn, a 43-year-old IT worker, left her neat little Edwardian town house behind Stockport Grammar School to make the short journey to work. Her destination was the Vauxhall Industrial Estate in which the largest site was occupied by the company for which she had worked for the last 16 years - Chemix Ltd, which manufactured the compounds from which u-PVC window frames and cladding are made.

She looked back casually at the house, with its handsome stained glass windows, and got in her car, a small silver Peugeot. She had bought the house 12 years ago and, though she lived alone, her mortgage was nicely manageable. She had had the car for two years and it was all paid for. At Chemix she had risen over the years from being a receptionist to a computer programmer. She was better paid now. Hers was a settled life.

She had had an inkling that things were not quite right at work. She noticed from her IT processing that orders for resin, Chemix's incoming raw material, had been down for a while. So were orders for the compounds the firm produced as the nation's door-to-door salesmen found ever-larger numbers of people saying No to the idea of having their windows replaced.

Then, about four week's earlier, the management had told the workforce that it might have to move to just 3 or 4 days working each week. The workers had rejected the idea in a ballot and a couple of weeks later were told there might have to be selective redundancies. But letters had gone a few days before saying that jobs in sales and IT were safe.

When she arrived at the little factory "a lot of blokes in suits" had appeared. A meeting of the whole workforce was called. The firm was in administration, the bankruptcy accountants told them. They had all lost their jobs. They should leave immediately.

"It was a real shock," she says. "One day I was receiving a letter telling me my job was safe; the next it had gone. The mood was bad. Everyone was saying goodbye. They were hugging and shaking hands." She was told she would be kept on for an extra two weeks to help with the shutdown. "I couldn't look the men in the eye." Now she, too, sits idle at home.

The Domino Effect

The chain of events - which began with salesmen on commission wildly dishing out sub-prime mortgages (to poor people the United States who did not even have to prove they had the earnings to repay them) and ended with Jackie Horn losing her job - is a long one. I have spent the past few weeks tracing each link in that chain through the stories of a series of people:

* The fall-off in demand for Chemix's products was the result of decisions like the one made by a Birmingham newsagent whose domestic economizing including not having his windows replaced with uPVC frames because his cigarette sales were down.

* Cigarette sales at the newsagent's had fallen because staff at the nearby Range Rover production plant had had their hours cut.

* Range Rover sales are down because a wide variety of businesses are now tightening their belts; not replacing company cars is an obvious money saver.

* Among the businesses not replacing company cars as part of general cost cutting are those like the shop-fitting, sign-writing and advertising firms employed by retail giant Marks & Spencer, which has had two-thirds wiped from the value of its shares this year.

* Trade in shops is down because consumer confidence has fallen in line with catastrophic drops in the price of shares.

* Share market volatility was provoked by the sudden refusal of the banks to lend money to anyone, including each other.

* The crisis of confidence within the banks was fed by the collapse of Lehman Brothers, which was the biggest bankruptcy the world has ever seen.

To make sense of this saga I set out to travel the United Kingdom speak to individuals who had played a key part in each stage of the tumbling of the dominoes. There were repeated surprises along the way. Encounters with the real world are like that. Not everything turns out as you might expect.

Northern Rock - Panic Begins

The giant tower of the new Northern Rock building stands empty, like a monument to the folly of the years of reckless capitalism. It has never been occupied. Out at Gosforth, on the northern edge of Newcastle, it is the place where the first rumblings of the seismic shakeout which is now gripping the globe were first detected in the UK.

Today the yellow brick buildings which surround it are still staffed, but by managers and employees humbled by the events of the past twelvemonths which have turned them from freebooting buccaneers of a banking world - in which the possibilities of growth seemed unlimited - to servants of a nationalised service industry. Even the bricks seem symbolic, for the yellow brick road in the Wizard of Oz lead to a gleaming city with a giant fraud at it heart.

The man who is driving me round the once mighty complex is Dennis Grainger. He was once a senior employee of the firm and is now the leading light in the Northern Rock Shareholders Action Group. The combination makes him uniquely placed to tell the story of the building society which turned bank after Margaret Thatcher's deregulation of the financial sector and which last year provoked the first run on a British bank since the Victorian era.

"Northern Rock was not involved in dodgy sub-prime lending," says Grainger, 61, of Cramlington, Northumberland. "Our loans were good safe lending to people who could afford to repay. The Rock was very strict in asking whether people could afford to borrow that amount." He knows because it one of his jobs was to manage the people checking the paperwork.

"After the crisis broke the media said that the problem was that Northern Rock lent people more than they needed to buy their homes. And it is true that we did offer 125 per cent loans, to cover the house purchase and additional expenses. But the rates of default on those were just half the national average."

What did for Northern Rock was that so much of the money it lent did not come from depositors but was borrowed by the bank on the international money markets. That is what had turned a little provincial building society into the UK's fifth largest mortgage lender - and a FTSE 100 company. "Some 80 per cent of the mortgages we gave out had been borrowed in this way," Dennis Grainger says. " I know I used to sign the documents for millions of transfers each month."

The problem came when, on 9 August 2007, one of France's three biggest banks, BNP Paribas, told investors that they could not take money out of two of its funds because it was unable to value the assets in them. This was because the financial world had created complex financial packages out of the sub-prime debt and sold them on to other investors. It was like pass the parcel; investors had, in effect, bought blind because the deals had so many layers that no-one knew what lay at their heart.

The crunch came when some investors wanted their money back and Parisbas realised it did not know whether it had the money to pay out. It was, in the words of Northern Rock's former chief executive, Adam Applegarth, "the day the world changed''. Money markets across the globe shut down because they did not know which banks would remove the final wrapper from the "credit default swaps" - and find they were holding a booby prize.

When the money stopped flowing banks like Northern Rock - which had, in the jargon, "borrowed short-term to lend long-term" - could not get hold of the cash to finance their next day's business. On 13 September 2007 the BBC's business editor Robert Peston revealed that Northern Rock had asked for emergency support from the Bank of England. But there was no danger of the bank going bust, he added, so customers need not panic.

"It had the same effect that Corporal Jones does in Dad's Army," observes Dennis Grainger wryly. "When you shout 'Don't panic! Don't panic!!" people do exactly the opposite. Peston should have known that." Outside Northern Rock's branches massive queues formed of savers demanding to withdraw their money.

But, if there was compassion for the savers, there was scant sympathy for those running Northern Rock whose chairman was a non-banker - the local oddball free-market environmentalist aristocrat, Matt Ridley - and whose risk committee was chaired by Sir Derek Wanless, who had previously been ousted from NatWest with a reportedly £3m payoff. It was they who had endorsed the aggressive growth strategy of the bullish chief executive Adam Applegarth and, in the words of the financial journalist Alex Brummer, author of The Crunch: the scandal of Northern Rock, "allowed him to run riot, without checks and balances".

The people most often forgotten in all this are the shareholders. "People assume all the shares were held by big institutions and greedy hedge-funds," says Grainger, "but a quarter of the shares are held by little folk." Again he knows because he has met 2,000 of them in the streets where he sets up his Shareholders Action Group stall. Another 4,000 have been in touch with him by email.

"These people are not speculators or gamblers. They are people in their 70s, 80s and 90s living on very small incomes who received a few hundred shares in the original demutualisation. Many are old ladies keeping their shares to pay for their funeral arrangements and who I've seen crying in the streets , saying that they will now be a burden to their family. They are Mr & Mrs Shipyardworker who put their savings, with pride, into the local bank."

Again this is not academic to Dennis Grainger. Every month for 10 years he put £250 of his salary into the Northern Rock employees' Share and Save scheme. It was to be his retirement savings. At one point they were worth £114,000. Today they are utterly worthless. "The real losers in all this are the small investors who worked for Northern Rock or savers who bought shares and remained loyal to the bank," he concludes. "The treatment they have suffered is very unfair."

What compounds the sense of injustice, says Roger Lawson, Chairman of the UK Shareholders' Association, is that the Government, by nationalising Northern Rock, has effectively confiscated all the shares - "even though there was a good private sector solution on the table" that would have enabled the company to recover and to repay the debts it owed to the Bank of England. Much of this debt has already been repaid and yet, he says, "there is no commitment to give back to former shareholders any interest in the company when it is subsequently sold".

It is not the only consequence. In order to accelerate the payback to the taxpayer the new management at the now-nationalised company are pursuing an aggressive policy of repossessing the homes of borrowers who get into arrears. Northern Rock's rate of repossessions is currently running at around double the industry average. And leaked documents from inside Northern Rock reveal that the bank is set to double numbers in its debt collection arm.

There is a quiet indignation in Dennis Grainger's conclusion. "We have been treated very badly by the government," he says. "Northern Rock was illiquid, not insolvent. When there was a run on the bank they wouldn't lend us £2.7bn but they've had to stump up £400bn to prop up other banks since. We should have been given the same terms as other banks were subsequently given."

But there was one other bank not included in the rescue deal. When Lehman Brothers investment bank folded it provoked the biggest corporate bankruptcy ever seen.

Lehman - The Untouchables?

Until recently Andrew Gowers had an office on the 30th floor of a tower in Canary Wharf which offered a stunning panorama of the City of London. It seemed an appropriate location for the UK arm of an investment bank which was one of the big five beasts of Wall Street. If there was any institution whose members might fall prey to the hubris of believing that they truly were Masters of the Universe - as top City traders described themselves with an irony which depreciated with the passing years - then the men at the top of Lehman Brothers might be among their number. The air indeed seemed rarefied at that height. The shame was that nobody bothered to pack the oxygen.

For the past month Mr Gowers, a former editor of the Financial Times - and now a former director of communications at the 150-year-old US investment bank which had begun life in the 1850s as a cotton-trading partnership - has sequestered himself away in a far less public place, having quit the bank just before it collapsed. He has had a month "watching the autumn go by" in the south of France.

Northern Rock was the prequel to the concatenation of events which has seen £3,000,000,000,000 wiped off the value of the world's shares. It has also seen taxpayers across the globe spend double that amount to prop up the world's banks. But it was the collapse of Lehman Brothers - and the sight of well-paid bankers carrying their belongings from their Canary Wharf offices in black sacks and cardboard boxes - which first suggested that something was going on which might have ripples that moved beyond the United States, or indeed, the Northumbrian fastness of Northern Rock.

But for Andrew Gowers the writing had been on the Wharf for a good deal longer.

"There was a general awareness of difficulties," he says, "from August 2007 onwards". Lehman was a very large borrower, with, according to some estimates, around $130bn in debt, much of it in subprime. "But the feeling was that we weren't as badly exposed as some and there appeared to be some good and clever hedging strategies in place, Gowers says. 2007 ended as a record year with bumper revenues and the balance sheet grew in the first quarter of 2008 - "which a lot of people, after the fact, found pretty incomprehensible."

There was no excuse for this complacency. In March a smaller investment bank, Bear Stearns, had collapsed. In response Lehmans' share price fell 48pc in less than a morning. "But the Lehman management told itself that we were different from Bear Stearns," Gowers recalls, "because we weren't so reliant on short-term borrowing and we had large amounts of liquidity." Anyway, the US Federal Reserve - America's equivalent of the Bank of England - had stepped in to save Bear Stearns. Perhaps the top people at Lehman - a far bigger bank - believed they would have a state safety net too.

Even so, says Andrew Gowers, "it all scared the living daylights out of the top management and some major effort was made to shrink the balance sheet, to cut the borrowing and get rid of some of the problem assets".

The trouble was that other banks were doing the same thing at exactly the same time. As a result the prices of the assets they wanted to sell fell at a shockingly fast pace. Lehmans began to run out of time. They could not offload enough of the dodgy sub-prime debts. To make matters worse the "good and clever hedging strategies" began to come unstuck. Indeed instead of offsetting losses some of the hedges magnified them.

"From April I became aware of quite a sizeable loss accumulating. Nobody was quite sure how big it was going to be." In June executives at Lehmans' money management subsidiary, Neuberger Berman, sent emails to the top managers at Lehmans suggesting that they forgo bonuses - to "send a strong message to both employees and investors that management is not shirking accountability for recent performance." Lehmans' executive committee dismissed the idea out of hand.

When the news of the first loss ever in Lehmans' independent history came out the market was shocked. Senior managers, including the chief executive, Dick Fuld, didn't seem to get the measure of the problem. Gowers recalls: "They just thought: we're not in a catastrophic place, we've suffered some buffeting from abnormal developments in the market, but we have a plan to get out of it".

The market did not agree and the Lehman share price continued to plummet. "That caused jaws to drop, says Gowers. "The share price started going south with a momentum that no-one had an explanation for." The bank's chief financial officer Erin Callan and its president Joe Gregory, who had been Dick Fuld's right-hand man for 34 years, resigned.

But it was not enough. Lehman's managers had for some time been focussing on the wrong things, blaming short-selling and the media for the problems. "It was a measure of the bunker mentality that had developed," Gowers says. "Eventually, at one minute before midnight, they came out with an explanation of what had gone wrong and what they planned to do," Gowers recalls. "But it was too late".

In the end, what did for Lehmans was that its executives failed to understand that the politics had changed. On 7 September America's biggest mortgage providers, Fannie Mae and Freddie Mac, had to be rescued by the US government. It was one of the largest bailouts in US history. "A feeling grew in Congress that there had to be a limit," Gowers says.

Lehman Brothers became that limit. "At quite a few points in the downward spiral Lehamns could have been bought but Dick Fuld was too proud to accept that," Gowers adjudges. The result was the largest corporate bankruptcy in world history, much larger even than Enron. The unwinding of the company is so complex it will take years to complete.

Andrew Gowers got out just before the collapse having concluded that his job had become untenable. The evening that I interviewed him he just returned from a relaxed day at the market in Cahors. There would be sea bream for dinner that night. But things looked a little more bleak for some of his former colleagues.

Investment bankers rank fairly low on the public sympathy index. Gowers acknowledges that, yet warns against broadbrush judgements. "There were a lot of people in Lehmans who took 80pc of their pay in shares which were deferred for five years and a relatively low salary," he says. Many borrowed against those shares and are now hiding away and licking their wounds.

"It had been rolling along in a fantastic way for so long that everybody really did began to think there was no way it was going end. They applied that to their own personal finances, as well as the way they ran the firms, borrowing against tomorrow."

But now, grimly, tomorrow has become today.

Heading north

Follow the money. The trail from Canary Wharf pointed north. I took the train to Edinburgh and then a taxi out to one of those anonymous low-rise country park hotels which could have been anywhere. In this case it was halfway between two of the many meetings which Jim Spowart was dashing between that morning.

Spowart does not look like a high-powered banker. He is a relaxed looking character with sandy hair and a casual jacket whom the other guests in the hotel foyer might take for a headmaster who had taken early retirement. But Spowart is the banking wizard who took Direct Line into savings and mortgages, pioneered the flexible home-loan at Standard Life and founded Intelligent Finance - the telephone and internet banking arm of the banking giant HBOS which is Britain's biggest mortgage provider. He orders coffee and some shortbread biscuits which he does not eat.

"They disregarded the risks to go for aggressive growth," he says of his former colleagues in the world of banking. "The City set them targets and put them on the treadmill to their big fat bonuses. The folly of it was obvious at the time to many bankers. But those who put their foot on the brake were told to move aside because they were old-fashioned."

It is five years since Jim Spowart ceased to be an executive with HBOS, the bank formed in 2001 by a merger between Britain's oldest commercial bank and the former Halifax building society. The event turned Britain's Big Four high street banks into a Big Five. Only a few months ago it would have been unthinkable that it would have been anything other than safe as houses. But that was in the days when we thought that house prices were safe.

The weeks following the collapse of Lehman's saw a succession of crises at individual banks. Institutional providers of funds withdrew their cash from banks which they feared, rationally or irrationally, were hiding some monstrous horror in their balance sheets. In September it seemed that the entire banking system was on the brink of total meltdown. Almost no bank seemed safe from going bust.

They began to topple like dominoes. In the United States, in the outright panic after Lehman Brothers collapsed, the big investment bank Merrill Lynch was taken over by Bank of America; then AIG, America's biggest insurance company, was rescued by the Washington government. In the UK one major bank, Alliance and Leicester, fell to an opportunistic bid from the Spanish bank Santander. Another, Bradford & Bingley, was nationalised. And then it was disclosed that three of Britain's biggest banks - including HBOS, the largest retail mortgage provider in the UK - had gone cap-in-hand to the Bank of England seeking a bail out. Despite the insistence of the financial authorities that HBOS was still solvent its share prices began to fluctuate wildly.

In an attempt to save HBOS without the need to inject government money Gordon Brown brokered a deal that it should be taken over by another banking giant Lloyd TSB. The government announced that competition rules would be waived to allow the merger to proceed.

It was not enough. Days later the British government launched a massive $400 billion bail-out - and the US Treasury followed with a $700bn rescue fund to buy back much of the bad debt held by banks and attempt to calm the market.

"Gordon Brown's recapitalisation was a stroke of genius," says Spowart, "but the government have now pumped in sufficient capital that we don't need the merger." The meetings Spowart is shuttling between that morning are designed to put together a bid to foil the merger with Lloyds and hive off the Bank of Scotland so that it becomes a separate company again. "The Lloyds merger will be bad for customers, shareholders and staff," he says. "The corporate headquarters will no longer be in Edinburgh; 40,000 jobs could go, a third of them in Scotland, up to 1,000 branches could be shut; and the new bank would end up with 30 per cent of the mortgage market, with the government controlling 50pc, leaving just 20 per cent for the rest of the market."

That would not be all. "Lloyds will move abroad the HBOS call centres currently in Scotland. And there will be a knock-on in the insurance industry and among the lawyers and accountants in the city who service the financial industry, not to mention the cleaners, sandwich shops, taxi drivers and all the rest. Scotland could lose between 80,000 and 100,000 jobs. It could be a definitive moment for the Union. Northern Rock will be privatised at some point and something will rise from the ashes;

Here, if the merger goes ahead, there will be no ashes."

There is, in all this, more than a touch of Scots romanticism. "But it is not just sentiment," suggests Professor Gavin McCrone, who was chief economic adviser at the Scottish Office between 1970 and 1992. "The Bank of Scotland is the oldest surviving commercial bank in the UK. It was founded in 1695. And it is hard to say how much the loss of an autonomous bank would knock-on to other financial institutions in Scotland."

Scotland is the second biggest financial sector in the UK. It is also a leading international centre for banking, insurance, investment management and asset servicing. Some £500 billion of funds are now managed directly from Scotland. All this contributes more than six per cent of Scotland's total annual income and provides one in ten of the nation's workforce. It is also the fastest growing area; financial services has expanded by 35 per cent in the last five years while the rest of the economy grew by just 8 per cent servicing.

"How important its own banks are to that is hard to say," says Professor McCrone. "I certainly wouldn't want to try the experiment [of moving the Bank of Scotland's HQ from Edinburgh]. If you did that you wouldn't be able to reverse it." The eminent economist is sceptical too of the value of the HBOS-Lloyds merger which he suspects may prove to be a deal conceived in haste. "Now we have a public sector solution do we need a private sector one?"

Such a question may be vital to large numbers of bank workers. But whatever the answer it would not explain the mechanism by which as the shockwaves of the credit crunch rippled through into the real economy. I had to look elsewhere.

Blame it on the young guns

The seats are of the kind of red plush velvet that speaks not of your local Indian restaurant but of discreet wealth. The menu offers seared Isle of Skye scallops with pork belly squares and cauliflower purée. With the chateaubriand of Aberdeen Angus, served with a béarnaise sauce, I suspect that Duncan Glassey's eye might alight at a £58 bottle of 1975 Château Cantenac Brown. But I am wrong. He is happy, he says, with an Australian shiraz, the cheapest on the list of bin ends in the smart Circus Bar & Grill in the austere Georgian elegance of Edinburgh's New Town.

"How did the world's cleverest financiers get into this almighty mess?" I ask him.

There is a lot about Duncan Glassey which is not what you might expect. The former child prodigy turned professional chess player runs a wealth planning consultancy for the mediumly-rich. It grew out of his experience working with lottery winners at the accountants Ernst & Young in the mid-nineties. His firm Wealthflow LLP now specialises in clients with between £1m and £5m to invest.

For all that, he is modest in his own lifestyle. So much so that in the past he has been told that he lost business from new clients after turning up for the initial interview in a car which they decided was insufficiently grand. There is something about him of the solidity of old money. His client list includes aristocrats as well as advocates. Like those whose money he manages his bias is towards the conservative and away from the febrile psychology of "active management" where, he insists, over-activity can sometimes substitute for solid long-term investment.

Glassey has some interesting thoughts on the generational conflicts which have tipped the world into financial crisis and to the brink of recession: "The people who made the strategy in the banks are of the baby-boomer generation born from 1945 onwards. They are a generation of grand visions, optimism and high ideals about combining individual empowerment with social values. They are the Big Talkers and the people with the Vision and Mission Statements."

By contrast the generation who have managed us into the present situation have a very different set of attitudes and values. Generation X are the children of the Thatcher era. "They are at home with globalisation and the Information Revolution," he says. "Change is normal, as is the idea of life-long learning. They are not scared of failure. What's important to them is individualism, choice, self-reliance and immediate gratification. They are Thrill Seekers". They can be pessimists, cynics and selfish.

But the younger generation who created sophisticated financial products which have so dramatically imploded - the "masters of the universe" - are different again, Glassey says. "They are Generation Y, born from 1985 onwards. They are the generation who have not known a world without the internet. They are highly techno-savvy and street smart but information overload has made them hugely naïve in many other ways. They are the Facebook and Bebo generation - networkers who live in a world where divorce and geographical dispersion has broken down the family. They are self-obsessed and close-focused.

"The belief systems of the three groups - the strategists, the managers and the traders - are entirely different," concludes Glassey "They don't really understand one another at all. And they didn't know what each other really wanted or expected out of the complex financial architecture they created. Everybody was locked into the Nick Leeson scenario; no-one asked questions so long as everyone was making money."

The shaven-headed Glassey, aged 39, characterises himself as on the cusp between Generations X and Y but his values hark back to what he calls "the old days when banks were trustworthy and on your side, before they became out-and-out sales organizations." His approach is to keep his clients away from financial fads and fashions and "commission-based products which are deliberately made so complex that clients can't understand them". Glassey was always suspicious of the world of credit swap derivates which he saw as a parade of Emperor's New Clothes. "I view all that as speculation. I'm not paid to make huge money for my clients; I'm paid to diversify risk."

As long ago as 2004 he wrote a book, Financial Freedom, unfashionably warning that it was time for us to look at our expenditure, asking people to keep diaries on where they were spending money. He even told one wealthy client who was a compulsive shopper that next time she saw a £3,000 watch she could not resist she should tell herself she could have it but not until the following day - by which time the shopping urge had evaporated. "She saved herself huge amounts after she adopted the strategy," he recalls.

The book was seen, four years ago, "as a bit quirky and left-field," he says, "but I had a sense that things were getting out of control, and that there would be a market correction, though I didn't anticipate anything on this scale. I thought it would be a far softer landing. But maybe we need all this pain before people will learn the lessons."

But his clients, he acknowledges, will not be the ones to suffer. "Their portfolios may be down 15pc where others are down 35pc or more. But their homes and jobs are not as risk." So whose jobs and homes are in peril? And why? The trail pointed away from the world of pure finance and into that of the Stock Market.

The trillion-dollar wipeout

They are still selling oysters and champagne in the great courtyard of the Royal Exchange which was founded in 1565 as the centre of commerce for the City of London. In the 17th century, stockbrokers were not allowed within its elegant portals because of their rude manners but today it is no longer a Stock Market. Instead it is a luxury shopping centre whose pillared and marbled atrium is lined with discreet boutiques bearing names like De Beers, Hermès, Tiffany, Bulgari and Cartier. A couple of lattés in its magnificent courtyard will set you back the price on an entire lunch for two in Bury market, of which more later.

I was there to meet Richard Hunter, head of British equities at the fund manager Hargreaves Lansdown - which manages £11 billion in shares for its small investor clients. I wanted to find out why the alarm over bank shares which gripped the Stock Market then infected other areas. After the collapse of Lehman Brothers it was not just banking shares that fell; they plummeted in a wide range of companies which had no connections with financial service industry.

"Credit is the oil in the machinery of the business world," he says. Every business needs to borrow to finance the gap between buying its raw materials and the income arriving for what it sells. "The money that used to be available to do that just isn't there any more because the banks have stopped lending to one another. All that has been impacted by the credit squeeze. That's why share prices fell first in certain sectors - the banks and financial services companies - but soon spread to other areas."

But there were a collection of other forces in the real economy which accelerated the speed with which prices fell.

"It was a cocktail of factors" he says. "After the sub-prime crisis broke in the US and after the collapse of Northern Rock here some people became more cautious and started to spend less." Then came the global rise in food prices which raised the cost of bread, rice and other staples in the supermarkets; in April rice prices were double what they had been seven months earlier. Next followed the international hike in the price of oil - it rose as high as $147 in July, almost treble what it had been a couple of years earlier. And that massively increased both domestic fuel bills and petrol prices.

"If it costs you an extra £10 a week to fill your car and you're on a budget," he says, "you have to find that £10 by cutting back somewhere. If you're paying more for your gas and electricity you have to cut back on something else."

Then, on top of all that, house prices had started to fall. The fall-off began slowly, last November. By April this year house prices were actually lower than they had been a year before. It was the first time an annual drop had been recorded for 12 years. The number of new houses being built fell to the lowest level for 60 years. The building industry, after 13 years of unprecedented growth, faced a major slump; in July the housebuilder Taylor Wimpey asked shareholders for an extra £500m and failed to raise it. Mortgage lending crawled to a near standstill in August as approvals for new home hit a record low.

By September house prices across the country had fallen by about 10 per cent. Repossessions rose to triple their previous level. In the worst hit areas, like the centre of Manchester where thousands of buy-to-let apartments had been made in converted inner city warehouses, prices fell by more than 20 per cent. Half the flats in one prestigious block, Albion Mill - a converted Victorian biscuit factory with double-height living rooms and stunning views across to the Pennines - were repossessed. One woman, Jeanette Leach, 31, got off the plane at Manchester Airport after a holiday in Tenerife and received a text message saying her home had been repossessed; she went straight into the toilets at Terminal Two and hanged herself with the cord from her tracksuit bottoms.

The majority of those in difficulties as result of the credit crunch were not driven to such extremes. But, says Richard Hunter, "the Stock Market tries to discount the falls in value which will come over the next 9 to 12 months." As soon as the banking system was pulled back from what the head of the International Monetary Fund called "brink of systemic meltdown" investors began to consider what might be the short-to-medium term implications for the real economy. House prices were a key indicator.

And further contraction was obviously on the cards. Some 1.2 million homeowners in the UK are now faced with the prospect of negative equity because prices have fallen below what they had paid for them. Another 1.4m households are due to come off short-term fixed rate mortgage deals by the end of 2008. The credit crunch on the wholesale markets was making mortgages harder to come by. It was contributed to a growing 'feel-bad' factor on the markets. "With shares and house prices you don't crystallise your loss till you sell, but you feel poorer because of all the bad news," says Richard Hunter, "and so your behaviour begins to change. Everyone cuts back."

Some people do more than that. They panic.

"People who have been in the city 40 years are telling me that they've never seen this degree of volatility before," Hunter says. "Panic overtakes logic. Just a few people running round like headless chickens can infect others because people look at the headless chickens and say: What do they know that I don't? In the past they used to say that the market was driven by one prevailing emotion - greed or fear; this time it's a cocktail of both."

The result was an orgy of frenzied selling in which £2.7 trillion was wiped off the value of shares globally in a single week of extraordinary financial mayhem in October. This was when a crisis that had for months seemed confined to the world of banking began to ripple out into the real world.

When the pain came

Dennis and June Wallworth are the stuff of Sir Stuart Rose's nightmares. The middle-aged middle-class couple are just coming out of Marks & Spencer into the shopping mall in the centre of Bury in Lancashire.

"Oh, we haven't bought anything," says Dennis, now retired from the construction business, "we were just taking a shortcut through the shop from the car park." M&S would still be, they say, their first choice for clothes, but they didn't need any just now. "And we do our food shopping now in Asda."

M&S is the largest clothing retailer in the UK. Its fortunes have long been regarded as a barometer for the state of the British retail economy. After a patch in the doldrums its chief executive, Sir Stuart Rose, had turned around its fortunes with more fashionable ranges of clothing and a high-quality benchmark in luxury food sales. But the economic downturn has hit M&S with a double whammy.

Shoppers - the front line

For nine months Marks and Spencer's sales have been falling. The wild volatility in the share market has hit it badly. Last month, when it announced its worst sales figures and business performance for more than three years, its share price had plummeted to less than half their value of twelve months before. Its profits, Sir Stuart Rose announced, are expected to fall from £1bn last year to around £675m this year.

I had asked for an interview with Sir Stuart or some other M&S luminary but the store's communications department was in No Comment mode. None of its 70,000 employees were available to speak to me, it appeared, so I set off for a typical store to talk to their customers.

Bury seems a good place because the town also has a market, its website informed me, with 200,000 square feet of selling space and 50,000 product lines on 370 stalls and 250,000 shoppers every week. Since it is regularly voted into the Top Ten UK Food Markets - because of Chadwick's celebrated Bury black puddings, a great array of fine Lancashire cheeses - it is clearly a place with a ready alternative to Marks.

It is not all bad news for Sir Stuart. Shoppers like Celia Bartholomew, 61, a retired housing benefits manager from Bolton on what she describes as "a decent pension" leave the store happy shoppers. "I like the Per Una range," she says. And 37-year-old Michelle George, a business consultant pushing her 18-month-old son in a buggy, insists: "It's false economy to go to Primark. I'd rather just buy less of the good stuff".

But most shoppers are making economies. "There is no more impulse shopping on clothes," says Zoe Kelly, a woman in her late forties. "We're going to the market more now, looking for bargains," adds her friend Karen Anderson. "We're not feeling the pinch yet, we're just being prudent."

They are not the only ones. That much is obvious from the massive market a few hundred yards across the square. It seems to sell everything from rare foodie delicacies, like cow heel pieces and black tripe, to brand new DVD players retailing at an extraordinary £29.

At a stall selling hosiery and women's underwear two market traders, Colin and Lisa Parkinson, look surprised to be asked about the impact of the economic downturn on shopping. "We're definitely doing alright at the moment, aren't we love?" says Colin. "We're holding our own. In fact we're a touch better." The stall sells seconds from big name stores and trade is brisk from shoppers now neglecting those high street names.

It is the same story at a nearby butcher's stall. "People are changing the way they shop," says the meat merchant, Steve Maloney, who has been in the trade for over 20 years, and whose Dad passed on to him the recession-tested advice: 'They've always got to eat, son'. "Shoppers are looking for their money to go a little bit further." He is offering a "two-meal deal" involving a ham shank and a chicken. And one of his staff is drumming up trade by shouting: "Two chicken breasts for £1".

An elderly shopper hesitates. "Come on love," he cries to her, "we're desperate!"

All too many people literally are. The jewellery stall opposite has been doing a steady trade all week with people coming in and pawning their precious objects. Four new pawnshops, or "cash generators" as they have been rebranded, have opened in the past few months.

But the market is not just an alternative to the high street it is a microcosm of the economy in its own right. It has its winners and losers too.

Down the alleyway Eric Bevens, who chucked in being a travel agent in 2001 and opened a couple of stalls selling lamps, lights and small pieces of furniture, is having a bad time. "People are being much more cautious. We're 20 per cent down," he says. "The few who are buying are paying cash where once two-thirds of them used credit cards. And suppliers are cutting back on what they hold. I rang the other day to see something I'd seen on display at trade fair at G-Mex two months ago and they told me it had been discontinued." He has just closed one of his two stalls. "That saves us £1,000 a month on rent," he says, uncheered by the saving.

By the market entrance Mohammed Arshid, 58, a trader there for 30 years, sits on a stool nursing a mug of tea. His stall area is utterly deserted. "I sell teenage fashions but Matalan and Primark are open longer hours now," he says. "Tesco and Asda sell clothes now. And they have free parking." Teenagers are just not coming to the market so much these days and those who do don't have much money. He is 30pc down on last year.

"I don't think it will pick up," he says gloomily. "For Christmas I may get out of fashions and try something else."

Retail - the bigger picture

In a pub not far from Mornington Crescent underground station in London four men are talking shop, literally. Bryan Roberts and his colleagues are having a drink on the way home from their work as retail analysts at Planet Retail, the research group with offices in London, Frankfurt and Tokyo that provides the latest business intelligence on the world's shopping trends to the retail industry. It is not a job for half measures. These men are on pints.

"There are very mixed messages on the global picture, says Roberts, who is the firm's Global Research Director. "A lot of retailers are going to go under, especially in, furniture, DIY and the smaller electrical chains. Electricals are the worst hit at present: TVs, fridges, washing machines are all down 7 per cent and computers are down 11pc." The trade is being hit from two sides. It is losing sales on the big items that people buy after moving house, which they aren't doing much at present. And hard times are making people postpone decisions to upgrade.

"The electrical market is driven by new product development," says Greg Hodge, Planet Retail's non-food research manager, "but everyone who wants one has now got a mobile, PC, laptop, widescreen TV and huge US ice-cube making fridge. Over the last two years people have stopped upgrading their phones because the old one does pretty much everything they want and the improvements on the new models are marginal. Firms like Dixons could be under pressure to close a lot of stores over the next 18 months, especially since supermarkets like Asda and Tesco have made heavy incursions into their territory."

"Everywhere people are trading down," says Roberts, "both in what they buy and where they buy it." People are eating out less so alternatives to restaurant fare are selling better. "Gresingham duck breasts are up 110 per cent in Waitrose". On staples they are shifting from Finest ranges to Basics ones. Sainsbury's is playing on this with a 'Switch And Save' labelling scheme which places own-label alternatives next to top brand products - with a sign pointing out the saving to be made. Tesco have begun printing 'Discount brands at Tesco' on some products to create the impression that they are matching the products of discount supermarkets like Aldi, Lidl and Netto. "Own-label products are getting much bigger. And supermarkets like Aldi and Tesco are creating phantom brands which are in fact exclusively for that one supermarket but which have a name like Daisy which implies they are an independent brand".

The other way in which people are trading down is by switching supermarkets. "Loyalty is a thing of the past," says Greg Hodge. Sales may be down at M&S but there has been a surge in discount food stores; Aldi is up 21 per cent and Lidl 13 per cent on last year.

It is the same story on clothing, which is worse news for M&S. "They are essentially a womenswear retailer," says Hodge. "On that they are losing market share to H&M, Zara and Matalan as well as Tesco and Asda." Profits at Marks & Spencer fell by a third over the last three months; by contrast those at its discount clothing rival Primark were up 17 per cent. That is far more serious than a drift a way from M&S's luxury food. "They make 5 per cent profit on food but 30 per cent or more on clothes."

So what will the knock-on effect of that be? Those who are feeling the pain, says Bryan Roberts ordering another pint, are the firms who supply and service chains like M&S. "When supermarkets do "buy two get one free" offers they expect the suppliers to supply at half price, so they bear the brunt of the cost," he reveals. "Similarly when they place products at the end of the display gondolas, where most people pass - in the trade it's called Action Alley - they charge suppliers for their products to be given such prominence. Sometimes they even demand retrospective discounts from suppliers saying: 'Your product sold so well that we want you to knock half a per cent off your invoice'."

But it is not just those who supply the food and clothing to big stores who are hit. M&S recently there will be cuts in the £1bn it planned to spend smartening up its shops. They will spend £700m this year and just £400m next year. That will hit a variety of people from shopfitters and signmakers to advertising agencies and tv stations and magazines that carry the ads. Shopfitters, says the trade paper Retail Week, "are hitting hard times as they start to bear the brunt of retailers' attempts to cut costs".

The trouble was that firms who worked for M&S did not want to talk.

"I can't comment on any of that," said Ida Rezvani who manages the M&S account for the ad agency Rainey Kelly.

A spokeswoman at Berkeley Projects, which has in the past fitted out kitchens for M&S, said: "Someone will get back to you". But no-one did.

"We're not going to be able to help you with this one," said Sally Ann Allman of the Sheffield shopfitters Barlows which lists M&S as one of it clients.

None of that comes as a surprise to Bryan Roberts at Planet Retail. "It's a real No Comment culture. These kind of budget cuts could be really significant for a shopfitter which doesn't have a client base diversified across several sectors. M&S still needs to buy sausages but it can manage without a refit, remodel or refresh." Already four or five firms have gone out of business, according to the National Association of Shopfitters.

The cuts are beginning to bite everywhere. As they leave the pub Bryan Roberts and his colleagues swap examples:

"At the Tesco head office in Cheshunt in the suppliers waiting room they've turned the heating off. And they are showing Aldi ads on a continuous loop to concentrate suppliers' minds".

"In the Walmart waiting room suppliers have to pay for their own coffee."

"An IT company has just told me that M&S has just has cut its IT support budget by 40pc."

On it goes, there are cuts in business travel, in entertaining expenses, in the renewal of company cars. And each one of the cuts ripples out further into the real economy.

Cutting back - at the factory

"The management won't let you on the premises, I'm afraid," says the union rep. We are standing in the car park at the massive factory complex which houses the Range Rover production line in Solihull near Birmingham. "But one of the lads will come out and talk to you outside."

The car industry has been one of the first sectors of the British economy to be visibly affected by the way that the global financial crisis is cascading through to the real economy. Companies seeking cutbacks are not replacing company cars. And private buyers are doing the same. Sales of new cars in the UK fell in October at their fastest rate for 17 years, down 23 per cent from a year ago.

The impact is already being felt throughout the UK car industry. Jaguar, Honda and Bentley have all scaled back production. Here at the Land Rover factory production of the luxury 4x4 Range Rover has been cut from two shifts to one. Night shift working on the Range Rover assembly line has been suspended.

For men like Steve Allen that means a 25 per cent drop in his weekly wage. Steve, aged 40, fits alternators on the 4x4 production line. "The loss of the night shift," which pays more than daytime working he explains, "will cost me nearly £300 a month."

He was already feeling the pinch because overtime at the plant was axed some time ago. He has already lost £150 a month through that. "With the rises in gas and electricity prices that means we'd already started to make economies," he says. Steve looks an unlikely type to be interested in grocery shopping. But he has a formidable command of current prices. "In Sainsbury's we've switched to own brands and Basics. Coke is 89p a bottle; own brand cola is 44p and it's palatable. I've swapped from a £1.30 bag of sweets to a 40p packet of wine gums. The weekly shop used to be £85; now I aim to get it in under £60."

He likes a drink. In the old days he would come off the night shift at 6.30am on a Friday morning, go home to sleep and then meet his mates in the pub on a Friday afternoon. "I'd have 4 or 5 pints. But last week I bought 4 bottles of Newcastle Brown, for £1.09 a piece. That's less than half the price in the pub. And you don't drink them as quick."

One of the things that recession breeds is increased isolation. "My mate was supposed to be getting some and coming round but in the end we didn't bother. Both just stayed at home and had a drink on our own." Economic hard times may, in these little ways, make us a more self-focussed and solipsistic society.

This is not the only part of Steve Allen's social interaction which is being curtailed. "I've knocked ten pin bowling on the head. That save me £20-25 a month." And he hasn't been to a football match all season. He is - unlikely as it might seem for a Midlander - a West Ham fan. "It was the first team I watched as a lad. Usually I go down to, London 6 or 7 times a season. It's £25 on petrol, £35 on a ticket, so with something to eat it comes in around £70. But this year I haven't been at all. I didn't even go when they were playing the Albion up here because the seats were £40 which is extortionate".

He pulls a pack of tobacco from the pocket of his bomber jacket and takes out a roll-your-own he made earlier. "We're still hoping to go on holiday but we're looking at going at Whit which is cheaper than the summer. I've found a camping holiday in Spain; 12 days for £365 and I reckon it'll cost about £200 for petrol, compared with £1500 for two weeks in peak time in Portugal or Spain. I never thought I'd be having a camping holiday at my age. Better than not having one at all. and you only pay that then, whereas with a holiday you have to hand over your cash up front.

"Still," he adds, looking on the bright side, "the tent has a fridge and a mini-cooker."

He looks at the thin cigarette in his hand. The management has just announced that it now wants 400 voluntary redundancies from the 16,000-strong workforce across its three vehicle assembly sites.

"The mood on the line is sombre. People coming up to retirement are thinking about taking redundancy. But I'm 40. I've been a manual car worker for 14 years and I know, if I took redundancy and looked for another job, I wouldn't get anything round here on anything like the same kind of money. Some of the lads have worked in construction in the past but there's nothing going in the building trade just now."

He falls to musing on further economies. "I could get rid of Sky Sports. I could switch to home brew...

All at once he becomes philosophical. "All this might not do me any harm in a sense. Our lives have become consumer-driven. You start reassessing and re-evaluating; you can still enjoy some nice things without having to put your hand in your pocket."

He looks down at the mobile phone on his lap. "I mean, do I really need a mobile phone at £25 a month?"

Would he think about giving up the ciggies? "No. I enjoy smoking; I'd be gutted if I had to stop. Anyway I've already switched from Richmond king size to roll-ups. Richmond are £4.70 a pack and you can get 25gm of tobacco for £5.90.

"That's twice as many smokes for the same money." And he lights up.

Hard hit - the corner shop

Only half of the neon lights are on in the newsagent's shop. The owner, Richard Green, is trying to save money. A quarter of his weekend trade has fallen off since overtime was cancelled at the Land Rover factory down the road. A big part of his profit comes from cigarette sales.

"On a Saturday and a Sunday I used to get 25 to 30 car workers coming in between 5.30am and 7.30am on their way to weekend overtime work," he says, perched on a tall stool behind the counter. "That's been cancelled for a while. There's just one or two skeleton staff in now. And I haven't sold a box of chocolates since Easter and I usually sell two or three a week. Overall, takings are down around 10 per cent".

A woman in a tracksuit enters the shop. She has the whey pasty-face of someone who eats a poor diet. "Can I have a look at your Dr Who cards?" she asks the newsagent. He passes her a box containing packs of the cards that kids collect on their way to school. She goes through the entire box searching for slightly fatter packs.

"The fat ones are the one that have the shiny embossed cards that are the hardest to get," she explains. But though she finds three packs she decides she can only afford to buy two. The cards are £1.50 a pack and even then she doesn't have enough money. She tries to pay with a credit card.

"We don't take them, love," says Richard Green. The woman goes out to the cash machine down the road and comes back with a £10 note. "More and more people are trying to pay with credit cards for everything," the newsagent observes after she has gone.

Money is getting tight all round in Solihull. "I'm definitely concerned," he says. "The car workers are all worried. And it has a knock-on effect. If there's no customers I go out of business." He speaks from the heart. He used to run a pub but got out just before the smoking ban came in.

He's already making changes both in the shop and at home. "Just silly little things but I'm watching the bills. That's why only half the lights are on. And I only stock up on cigarettes once instead of twice a week. I've cut back on the amount of stock I hold. You lose a few sales that way because you run out of stock, but you don't tie up money unnecessarily. I've stopped carrying brands that don't sell much, because you have to buy them from the wholesaler in cartons of 200 and that's too much dead money tie up."

At home he has begun to pinch pennies too. "I've just sent off for some standby savers for the electricity points and I've just bought my son a bus pass so I don't have to drive him places; I'm cutting back on journeys so I have to fill the car every 2 or 3 weeks instead of weekly."

He begins his list hesitantly but is soon in full flow on his new found skimping. "We're having a takeaway every other week instead of every week. The kids have stopped drinking Coke and Dr Pepper and are on cheap brands of pop. I've stopped going to away games for the Blues [Birmingham City] and next season I'll cancel the season tickets for me and my son. We usually go to Florida on holiday; it's good value because money goes a long way when you get there. But with flights, car, hotel etc it costs £4,000 So we haven't even looked at it this year. And we've shelved big things like having the windows replaced.

It is a Thursday. So the local paper is selling well. Thursday is the day with the Jobs section in it. "People are looking for extra jobs, evening jobs, weekend jobs, anything to bring some extra income in."

An unsmiling ginger-haired workman in heavy boots and a luminous jacket comes into the shop and spends £10 on scratchcards. He goes out to his white van to uncover them. Two minutes later he is back; he has won on two. He collects £6 winnings - and uses money to buy more scratchcards. He goes back to the van, and returns with a card on which he has won £2. Again he uses it two buy two more cards and goes back to the van. This time he obviously loses. He drives off.

"He comes in every day and goes through all that. He's looking for a big win."

He is far from the only one. "Sales on scratchcards, and lottery tickets, are up - by about 5 per cent, though not enough to offset the loss on cigarette sales. 'I need to win,' people tell me, and it's not just a joke. They are the only thing I'm selling more of".

Redundancy - and beyond

For 30 years Chemix Ltd was a leading UK manufacturer of the chemical mixtures used increasingly by the building industry to make modern plastic window frames, cladding and facia board. It sold a wide range of rigid PVC extrusion compounds throughout the UK, Europe and the USA. Until recently it was a rapidly growing market.

Then people like Richard Green, the newsagent from Solihull hit by falling cigarette sales, decided he would not have his windows done. Millions of other homeowners made the same decision. Now Jackie Horn, its IT worker, and the rest of the 60-strong workforce at Chemix have lost their jobs.

"I was one of the lucky ones," she says, now in her first week of unemployment. "I was kept on for an extra three weeks to help with the winding down. It gave me time to get used to the idea. The others had to come to terms with it immediately - and one man's wife had just had a baby, another has one due in December, another was abroad on holiday, another was coming to the end of a fortnight's honeymoon. There was no company redundancy, just the state minimum."

For the last three weeks she manned the switchboard. "Everyone who rang in was sympathetic apart from one woman the company owed money too who got angry and said she'd go bankrupt that afternoon as a result. Over the weeks the guys came back to get references. Those who had taken out private insurance to cover their mortgage repayments in the event of redundancy needed to get their claim forms signed. A few had savings but most people don't have much of a cash cushion."

Jackie herself has begun to make economies. "I've gone from M&S ready-meals to beans on toast. I've stopped buying clothes, magazines and make-up. I'm just buying what I need and going to Aldi. My washing machine is broken. I could get a new one for £220 but it's not a priority; I'm just taking my washing to my Mum or my ex boyfriend's". She has cancelled a trip to visit her sister in New Zealand at Christmas. "Fortunately I haven't got big debts and I have a family. My mum has paid off my credit card and my dad says he'll pay my mortgage."

What now? "A couple of the guys have got jobs already; one is driving a van, another is working in Morrisons; and one of the managers has got a new job. The others are job hunting and saying that the wages on offer are low. You want the same wage that you've been on because you get used to the money you've had. But that may not be possible in the future."

Gathering clouds - the future

So what does the future hold for people like Jackie Horn? To find out I return to London to Tokenhouse Yard, the narrow street behind the Bank of England which one housed the office for the delivery of farthing tokens, used for several centuries by many London tradesmen. At the end is the grand town house which was formerly the headquarters of the Queen's stockbrokers, Cazenove. In those days staff were not allowed up the main staircase down which Ian Harnett appears.

Harnett is a formidable figure. Formerly a Bank of England economist he has been in the markets for 20 years. He was European strategist at the global financial services company UBS before setting up his own business, Absolute Strategy, with David Bowers the former chief global strategist at Merrill Lynch three years ago. The clients they advise manage investments worth $4 trillion between them - or at least that was what they were worth until recently.

In a wood panelled office, with a chiming clock and mahogany table, Ian Harnett - a neat, discreetly-suited, bespectacled man who looks the image of financial probity - sketches a grim prognosis. "The US, UK, Spain, Iceland and Ireland have all been living on money borrowed from Asia and the Middle East," he says. "They were all living beyond their means on what was all just a fiction. The end of cross-border flows of money has put a sudden end to this. Globalisation is over, for a while."

The benefit of globalisation was that it brought us cheap products at a lower price. That may be over now. "We won't have access to cheap labour from Asia and Eastern Europe. Prices will rise." The £29 DVD players I saw in Bury market early on my tour of the British economy are is almost certainly a thing of the past. "Is £29 the right price - the answer is probably not. People still don't appreciate the scale of the crisis and the impact it will have on every sector of the economy."

Grim news is what you might expect out of Tokenhouse Yard. This was, after all, where Daniel Defoe recorded in his Journal of the Plague Year that "I had many dismal scenes before my eyes, as particularly of persons falling dead in the streets, terrible shrieks and screeching of women, who in their agonies would throw open their chamber windows, and cry out in a dismal surprising manner. Passing through Tokenhouse Yard, in Lothbury, of a sudden a casement violently opened just over my head, and a woman gave three frightful screeches, and then cried, 'Oh! death, death, death!' in a most inimitable tone, which struck me with horror, and a chilliness in my very blood. There was nobody to be seen in the whole street, neither did any other window open, for people had no curiosity now in any case, nor could anybody help one another."

There is a creeping sense of the economic equivalent of that impotence slowly seizing the nation. Despite global taxpayers having now spent £5 trillion to shore up the world's banks all the indicators, he says, are pointing downwards. House prices continue to fall; they are now 14 per cent lower than a year ago, the sharpest annual drop since 1991. Mortgage lending in the UK has crawled to a near standstill and banks have banks dramatically increased the size of the deposits that are now required by lenders. Sales on the high street remain weak. Some 21 per cent of Britons have scrapped their gym membership.

Taxi drivers in place after place on my travels - Newcastle, Edinburgh, Birmingham, Manchester - all reported that their takings were down £100 a week or more. The use of executive limos in the City is down 40 per cent. A third of small manufacturing firms have shed jobs in last 3 months, a CBI survey this week revealed, and a quarter plan to do the same in the next three months. Meanwhile cheap forms of escapism are flourishing: cinema audiences this summer were their highest since 1972 with the feelgood Abba musical Mamma Mia the biggest grossing blockbuster. And sales of computer games consoles have doubled as people spend more time at home.

On the way to meet Ian Harnett I bumped into Richard Hunter once again. The equities guru from Hargreaves Lansdown had echoed the same dark prophecy. "The UK is not well placed to weather a recession," Hunter had told me. "The currency is weaker; that's good for exporters but - unlike Sweden with its phones or Germany with its cars - we don't export much manufactured stuff. We're a service-dominated economy so we can't export our way out of trouble. We're in for a tough time. The Stock Market should recover nine to 12 months before the real economy does. I like to think that will be sometime next year, but it could take longer."

Indeed. "What's happening now is an epochal change," says Ian Harnett, the man with $4 trillion turning on his analysis. "It's a pivotal moment in world history." He fears a new era of a new protectionism of the kind seen in the 1930s. Then an economic clump turned into the Great Depression when each nation slapped taxes on imports in an attempt to protect their own industries from outside competition. Harnett fears that today nations could do something similar - with money rather than goods. He calls that "capital protectionism" and fears that if each state refuses to lend others that will severely curb worldwide economic activity.

"That's the real choice governments face: whether to move to a more protectionist model or work together to create a new global order with new controls. The latter may be too difficult to agree, though the IMF now has leverage to exert there that it didn't have before. But the current crisis is like global warming, or a pandemic; it's not a national government issue. Gordon Brown has a feel for what's at stake here. But the trouble is it may be hard for the UK to opt out of this credit protectionism."

But what does that mean for us ordinary folk? "People are trying to work out how to put Humpty Dumpty together again. But the answer may be that it can't be. Instead of piecing together the broken jigsaw it may be that we have to make a new picture from just half the pieces. In the 70s and 80s the miners had to find new jobs and reinvent themselves. That will happen to many people today, and not just in banking."

How would that affect the people who have lost their jobs in a company like Chemix. What should a 55-year-old chemical worker, a 45-year-old manager and a 35-year-old IT worker do now?

"The more adaptable you are the better," he replies. "Large scale retraining is needed. Skills are going to be the passport to survival. The trouble is it's unclear what kind of training people should do. For the miners in the 1980s, the shift to IT made sense, but it's not clear what that equivalent will be in the 21st century, though the more IT literate people are the better. Presentation skills will be important and so will skills on dealing with environmental change."

Some of us will find it harder than others, he conceded. Of the three he suggests the 45-year-old manager might have the most difficulty finding a new job. The 55-year-old chemical worker may be better placed to "find a day-job at a supermarket and perhaps do some training in the evening". The 35-year-old IT worker will be best placed. "The financial crisis is causing wealth destruction on a massive scale, but it will also create opportunities".

Meantime the burden of the economic downturn will fall disproportionately on certain individuals. "True, and it's the job of government to address that."

Next stop - the Job Centre

Her last day at work was a Friday. "At the end of the day," says Jackie Horn, "I looked out of my window for the final time. The guy who had been kept on to pack the last orders that Chemix had in train saw me. He looked up from the shop floor and started to sing "Farewell my friend" to me. I had to look away before I started crying."

The last remaining person in accounts was finishing that day too. "We did a tour of the place, going into every room before we locked up and gave the key to the administrators. Then we had a hug and said Goodbye. I loved working there. It was a very friendly place."

Next Monday, home alone, she picked up the phone. "I rang the Social and have an appointment there tomorrow to see about signing on," she says with an enforced brightness. "I've written up my CV with help from the people who used to be the managers. I've looked for jobs on the internet; I found one locally but it had gone when I rang. I would hope to stay in IT; I'm a programmer. But I can do office admin and reception. I hope there are jobs out there but more and more people are being made redundant. I'm optimistic but I'm scared. I only have a small mortgage but I live on my own so I need to work to pay it. I have a few savings. I could maybe manage until the New Year, and then..."

She looks up at the Art Nouveau patterns in the stained glass on her windows. One thing she won't be doing with her savings is having them replaced. "They are a bit draughty. I had a quote to have them replaced in the summer - it would have been £1,700 - but I decided against it. That won't be happening now."

If she is aware of the irony of that she does not disclose it. Perhaps irony is a luxury only those in work can afford nowadays.

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