That old pendulum is swinging again and at a speed that threatens disaster for banks and economies alike.

During the Thatcher decade (1980s) the politburo socialism of the 1970s was jettisoned all over the world — apart from in isolated outposts like Castro’s Cuba. Both the Berlin Wall and the Soviet Union crashed to oblivion, and Mao’s China turned to its own version of capitalism.

That long swing to market dominance over centralized control has continued for nearly 30 years. Until now.

It’s about to go into reverse because of the vast mountains of debt built up in the system — an indebtedness that threatens to bring down the whole financial setup, investment and retail banks, and the “real economy” too.

Bank regulators are even now sharpening their swords ready to cut into the once-impenetrable jungle of bonus-led speculation and rampant hedonism that defines the financial markets, once the Rolls Royces of any respectable country.

Should we allow the pendulum — which more and more resembles the scythe of the Grim Reaper — to retrace its path back to the 1970s? Have we learned nothing?

Let’s just glance at the current situation in the markets. A spokeman for French bank Société Générale, itself a victim of the speculation culture, is deeply pessimistic, “We expect global equity prices to fall by up to 75pc from their peaks as a deep global economic downturn unfolds over the next few years.” A 50pc collapse in earnings is on the cards, made worse by an “Ice Age derating of equities”.

A 75pc fall in stocks matches Japan’s Lost Decade in the 1990s when they fell around 80pc.

The danger is that ultra-low rates will fuel another credit bubble which will put the real problem — huge debt levels — off for another turn of the screw, when it will surely be even worse.

Ambrose Evans-Pritchard of the UK’s Telegraph believes, “The capitalist system is now so deformed by debt that it requires ever lower interest rates to keep going. It survives on perma-bubbles. Monetary rigour at this late stage would endanger democracy. How did we ever let matters reach this pass?”

The UK regulator — the Financial Services Agency (FSA), which failed dismally with Northern Rock, has just published a report on the affair which highlights the problems regulators have. The FSA simply lacked the up-to-the-minute expertise on the newest financial instruments of the people it was regulating. To make matters worse, it was grossly understaffed for the job it was asked to do by government.

Rather than going back to the Dark Ages of government control and draconian restrictions, it would be better to do a deal with the banking system to co-opt top bankers for a year to the regulators. They could be paid identical salaries and averaged bonus equivalents as the banks pay out. They would then return to their institutions to keep up with new developments.

This would be expensive and would probably cause outrage in the public sector, but it would be far cheaper and less demoralizing than turning the clock back to the bad old days of politburo socialism.

The depredations of the Sarbanes-Oxley Act in America, following the Enron collapse, is a measure of how to overdo regulation. Let’s learn from the past in order to safeguard the future.

In the meantime the vast columns of red ink splashing across the economies of the world will unwind fitfully and very painfully for years. There is no alternative.

We need to hold our nerve and steady the pendulum.

It’s happening now in America and is due here in the UK and Europe by summer, if the usual time lags apply.

The recession / depression / crash is on its way like an unstoppable tsunami.

A tsunami is not a “tidal wave”. Waves break and retreat when they hit shallow waters or the shore. A tsunami trundles on for miles inshore powered by tremendous forces out in the deep ocean. No power on earth can stop it until its energy is spent.

Those who think we can stop a deep recession from happening by fiddling with interest rates or printing liquidity are looking at wave science not tsunamis. Now we can only watch and hope.

The signs of families cutting back their spending are everywhere here in Britain. Apart from the super-rich, ordinary folk are drawing in their horns as if they never existed. This mass retreat from the markets is beginning to have a cumulative effect which can only build to an inevitable crescendo.

The banks are barely functioning, except as deposit-takers. When they get our money they hoard it like the early Ebenezer Scrooge — the kind of man who creates depressions or shows us how to avoid them, depending on your point of view.

America is in deep trouble now, deserted even by the Sovereign Wealth Funds of the Orient, who just a few weeks ago seemed like saviours. Now they are pulling their cash out and retreating to the new economies of the East.

The “carry trade” to smaller Western economies, like Turkey, Iceland, Latvia, Estonia and others is falling apart, as will these countries in the coming months. Iceland may well be the first to crack, like some monstrous symptom of global warming tearing apart the ice sheets.

Those that are in the eurozone are being held together only by the common currency, the euro. But the fault-lines are beginning to show and it seems only a matter of time before the whole system snaps in a great twanging of over-stretched elastic. Beethoven would not recognize the new European Symphony about to be played. An Ode to Joy it isn’t.

If we look at all this from a Scroogian perspective though, it’s a kind of deep-cleanse that the world’s febrile financial sectors need — and this is certainly a problem of their making. This tsunami began in the boardrooms of banks and retail lenders, not in the real economy where most of us work — although our greed doubtless helped.

As America contracts, like a crab sensing danger, we can only await the storms to come. And they are the least of it. The unstoppable tsunami is the real enemy.

How is your knowledge of the 1929 Wall Street Crash and the Great Depression that followed it in the 1930s?

Not so good? Don’t worry, you’re not alone. But this is likely to be one of the world’s biggest talking points in coming months and years.

I was reminded of the Depression yesterday by the appearance of one of the legendary names from that distant era in the rescue of U.S. bank Bear Stearns.

J.P. Morgan was the renowned banker called on by the President to sort out the financial mess during one of the slumps of the period. Morgan set about systematically weeding out the companies that should be allowed to go to the wall, and those that were too important to allow to fail.

Yesterday the old feller’s bank, JP Morgan Chase and the New York Federal Reserve combined to stuff funds back into failing giant Bear Stearns, brought low by the gathering credit crunch.

The problem this time around is one of leverage and its effects on banks’ lending ratios — the multiple of lending to capital reserves a financial institution is allowed to build up by the authorities. The Geneva standard is that a bank’s capital must not fall below 8 percent of its lending. That number has been around a long time — I remember it from Alfred Marshall’s ancient classic textbook on economics during my university days.

Eight percent represents a ratio of 12.5 of lending to capital. These days it’s the norm for private equity companies to leverage many times more than that — supported by banks, of course, which then calculate their capital on a hugely inflated valuation for partly subprime debt. When the bubble bursts — as is now happening — both sides of the deal collapse.

Recently-bust Carlyle Capital Corporation (CCC) leveraged its equity 32 times to finance a $21.7bn portfolio of residential mortgage-backed securities issued by Freddie Mac and Fannie Mae. These instruments were financed by some of the biggest names in world banking.

With the housing market going south with a vengeance, it’s said that many banks’ capital reserves to lending ratios have slipped close to zero. The global financial system is floating on a cushion of fresh air.

There are always the consolations of philosophy for us to fall back on. Not the nitpicking academic variety which parses the meaning of words to death, but the active philosophy of Socrates whose adage, “The unexamined life is not worth living” should be a talisman of the financial sector.

In Britain, Gordon Brown’s Financial Services Authority (FSA), set up by him ten years ago to police the financial markets and the banks, completely missed the Northern Rock collapse, which was due to the bank raising money solely on the money markets and bundling the debts — many subprime — into packages and selling the risk on. When the money markets dried up, the bank had nowhere to go but to the Government to bail it out and eventually to nationalize it.

“The unexamined life is not worth living”. It seems the FSA did not examine the fifth largest bank in the UK, or spot the snake oil splashing around its floors.

Now consider what happened next as an example of both hubris and the reverse of Socrates’s dictum. Brown is calling for a “global financial watchdog” to perform for the entire planet what his FSA did for Britain.

Self-knowledge where art thou? The man has the richest fantasy life since Walt Disney.

Since we can’t have financial stability, or even politicians who examine their actions carefully, we must fall back on the real consolations of philosophy — everything changes and nothing remains the same.

Except death and taxes, of course.

The American economy is now in recession. A slew of new data clearly reveals both a marked downturn in activity, combined with a rise in inflation — something not seen since the stubborn “stagflation” period of the 1970s.

Some economists expect a robust return to growth later in the year off the backs of aggressive rate cuts by the Fed, and a financial package from the President that will see cheques delivered to taxpayers — and others on low incomes — by June.

That may not be enough, especially as it’s now emerging that the Iraq war is the principal cause of worldwide recessionary trends from two directions : the rise in the price of oil, and the low interest rates that led to reckless lending to the sub-prime market.

A new book by Nobel prizewinning economist Joseph Stiglitz powerfully demonstrates these effects. The Three Trillion Dollar War — The True Cost Of The Iraq Conflict outlines the immense downside across the globe of what must now be deemed a policy catastrophe.

In terms of the current credit crunch, which arose out of the sub-prime mortgage fiasco, many — including Syntagma — had blamed Alan Greenspan, then Chairman of the U.S. Federal Reserve Bank, for keeping rates too low for too long. Combined with steeply rising house prices this gave the banks a one-way bet for lending to the trailer-park poor.

However, it’s becoming clear that the low-rate regime was engineered to mask the terrifying cost to the American economy of the wars in the Middle East.

We can now begin to assess the extent of the disaster to American interests the war is continuing to inflict. The conflicts have led to a strengthening of Gulf, Chinese and other sovereign wealth funds, which have bought up large chunks of prime U.S. assets, including blue-chip bank stock, while, in some cases, simultaneously enjoying a bonanza from higher and higher oil prices.

In ten years, bank stocks should prove exceptionally rich investments as they recover from current adverse credit conditions. The war has given secretive foreign funds a one-way bet.

It’s hard to estimate the effect all this will have on American power and influence around the world. A war that was meant to eliminate Al Qaeda and secure the world’s oil supplies, has had precisely the opposite effect.

Joseph Stiglitz works out the numbers and they make depressing reading.

The news that stagflation is reappearing on the scene is another blow for the West’s economic stability. Stiglitz’s book is required reading for all who want to understand the future of the global economy over the next two decades and the causes of the misery to come.

This is going to be a long haul.