The common wisdom is settled. Bankers made a terrible hash of the financial system. Greed, recklessness and immaturity triumphed over prudence, caution and responsibility. Never before, have so many despised so few.

If the common wisdom had a track record of getting it right, it would be as well for us to take heed and follow its various prescriptions. But alas, the signs are not good. Just consider that a mere five years ago the common wisdom was also firmly settled, but on a different set of errant assumptions – that property prices would rise forever, that inflation was a thing of the past and that the cycle of boom and bust was ancient history.

As the New York Times columnist David Brooks has noted, there appears to be more going on here than a bunch of laissez-faire regulators asleep at the wheel. One needs only look at the phenomenon of the ‘Greenspan put’ – the US Federal Reserve Bank’s policy of averting economic crisis by lowering real interest rates and pumping cash into the economy – to realise that the great and good people of government and policymaking had their fingerprints all over this one.

From the 1987 Black Monday crash, through the first episode of unpleasantness with Saddam in Kuwait, to the 1997 Thai meltdown to the 2001 double-impact of the dotcom slump and 9/11, Alan Greenspan abandoned his previously staunch monetarist credentials in order to turn on the water-cannon of credit instead. Put plainly, this means that for over a decade, the USA’s central bank flooded the world with cheap money.

It all has to go somewhere. Because the markets were awash with dollar-denominated debt, added to by the explosion in sterling that took place under the auspices of Gordon Brown from around 2000 onwards, asset prices rose massively. Ordinary consumers discovered that they could take out multiple mortgages and use perpetually rising property values to finance profligate lifestyles, while private equity firms used truckloads of leverage (debt) to buy healthy companies and strip them of their cash flows. As long as the bubble kept expanding, prosperity was there for the taking – provided one was a reckless speculator and not a prudent saver. Never before, have so many owed so much.

If the story of 1990s America was one of the world’s most powerful republics placating its plebeians with iPods and shoes, the story of China is very different. China, the world’s oldest empire and one of its most magnificent, treats economics as a matter of state, to be decided upon by the mandarins in their ivory towers. Ever since Deng Xiao Peng issued his edict of 1978 – ‘to get rich is glorious’ – the Chinese government has been busy turning that country into a giant exporter of goods, selling cheap products to the West on razor-thin profit margins. The profits from this exercise have mostly been invested in US dollars, so that China has played the role of a giant department store to America’s consumers: buy our products and we’ll extend you credit at the same time.

The result is a gigantic symbiotic relationship turned sour. Cheap goods from the East kept inflation low in the West, while cheap credit in the West provided a safe haven for the profits from China’s mercantilist growth. Getting one’s head round this problem is a not inconsiderable challenge, and when the billions-upon-billions scale of the macroeconomic factors is realised, the diagnosis is made harder to explain.

It is far easier to blame bankers. They play the same role that witches played in the Middle Ages – they personify problems beyond the control of individual humans and therefore become an outlet for frustration. Sir Fred Goodwin, grinning inanely as he collects his undeserved pension, becomes the vampire of nightmare, sucking blood from the economy as he gorges himself. But the truth is that Goodwin was a bit player in a drama that involved the whole world, and was written by Governments and Central Banks.

As with all bubbles, the free market got this one. The market has not failed in recent months. It is working exactly as it should, to reverse an insane expansion of credit and bring prices crashing back to earth. It is restoring some sense of balance to the system of money and credit. It is a painful process but harsh medicine is sometimes the only thing that works.

Thomas Hobbes, in his Leviathan, famously said that the life of man is ‘nasty, brutish and short’. So it is with recessions; they are indeed nasty and brutish. But we must let them run their course, so that at the very least, they are short.