IMPEACH BUSH

The US Government has just admitted that the financial system was on the verge of total meltdown. And it's right. On Thursday, even blue chip companies were having difficulty rolling over their short-term borrowings.

Armageddon was minutes away - averted by Hank Paulson's plan to insure money-market funds and cut the gangrene out of the banking system.

The US Treasury Secretary is working over the weekend to nationalise around £450bn of banks' balance sheets - equivalent to a third of the British economy.

So, if anything, he was guilty of understatement when he conceded that the "financial regulatory structure is sub-optimal, duplicative and outdated".

However, on Friday - in reaction to all of that - stock markets were partying as though its 1999 again.

Hmmmm.

That doesn't feel like quite the right reaction to me.

Investors are probably right to conclude that one great source of stress will be lifted from the banking system, as and when Paulson sucks their toxic subprime loans, unsellable asset-backed securities, and radioactive collateralised debt obligations into a vast, lead-lined box financed by US taxpayers.

In the country that brought us Ghostbusters, he is styling himself as the Debtbuster.

And it's not all front: the risk of a calamitous, domino-effect, collapse of banks all over the world - and especially throughout the US - has receded somewhat.

That said, the devil will be in the detail of the mechanics of the rescue. What we don't yet know, for example, is whether Paulson's First Toxic Bank - as I shall christen his vehicle for buying the stinky housing loans - will pay the written-down price for the debt, the market price (which after Lehmans collapse is lower than the written-down price) or a discount to the market price.

This matters.

There is an argument that Paulson should pay a discount to the market price, to protect US taxpayers and soundly spank the banks and their owners.

However if he did that, banks' capital resources would be further depleted, which would further undermine their ability to lend to the rest of us. And it wouldn't do a great deal to reinforce the foundations of the creaking banking system.

But if he bails banks out at the price of this stuff in their books or above, well that would be an acknowledgement that an entire generation of banking executives had behaved wholly irresponsibly in their lending practices for years.

Arguably, they should all be sacked and thrown on to the mercy of a jobs market made all the less kind by their own recklessness.

Let's assume for now that Paulson finds a mechanism to extract the poison from the banks, without enfeebling them in the process. Can we all then breathe a sigh of relief and assume our economic prospects will improve markedly?

Sadly, I don't think so.

Banks, money managers, controllers of trillions of dollars on behalf of the cash-rich states of Asia and the Middle East have all had a painful lesson in the meaning of risk over the past fortnight.

They will for an extended period - possibly years - be less willing to fund our banks without demanding a significant increment in what the banks pay them. That'll increase the cost of money for all of us, which will make most of us feel quite a lot poorer for some time.

Also, you can kiss goodbye to the kind of financial creativity, innovation and competition that accelerated the growth of the UK and US economies over the past few years.

Our retail banks, commercial banks and investment banks will all be subject to much tighter regulation. Which will dampen their growth and their profitability.

Just the elimination of HBOS as an independent bank has removed from the scene a competitive thorn in the side of the other big banks which a few years ago shook them out of their torpor to the benefit of consumers and small businesses - for all that it's patently true that HBOS didn't properly appreciate the risks it was running in the way it financed itself.

The UK's unsustainable economic dependence on the City and financial services is coming home to roost.

The shrinkage of that sector may - just on its own - reduce economic growth by well over one percentage point over the coming year.

But, perhaps more significantly, the cutting down of finance into a smaller more regulated industry, and a semi-permanent rise in the perception of the risks of lending, will reduce the potential growth of the economy, probably for many years to come.

Even after the lean years are passed, and there may be a couple of them to come, subsequent recovery may be lacklustre. After the boom years, we may be entering the dismal grey years.