When the markets close this evening, we will have come to the end of one of the most turbulent weeks the financial sector has seen since the 1929 Wall Street crash.

Since Monday alone we have seen the nationalisation of Bradford & Bingley, the largest one-day fall in the Dow Jones's history, the rejection of the largest financial bail-out plan in history – and this morning it is still far from clear whether Congress will accept the revised proposals.

At this time of such apparent pandemonium it is easy to throw our hands up in despair. But we cannot simply avoid the tough choices that we must now take to stabilise both the British and the world economy. We must examine dispassionately how we got to where we are, speak candidly of the position we are now in and then act decisively.

The arguments for what started the credit crisis are now well rehearsed and I don't intend merely to repeat them here. The underlying point we must remember, however, is that millions of people across the world borrowed more money than they could afford, and banks irresponsibly lent it to them in ever-increasing amounts. All of this based on the hopelessly naive assumption that property markets only go one way – up. It is clear that over the last decade financial success bred excess; unearned rewards fed greed; and over-confidence led to folly.

The situation we find ourselves in today is clear for all to see. As the cost of credit has soared and availability has plummeted, millions are now struggling to repay their loans and mortgages. Repossessions are rising as people default on loans, unemployment is increasing as consumer spending dries up and with the country on the verge of, if
not already in, recession, the future looks bleak.

We then have the spectacle of watching formerly towering financial institutions on the verge of collapse. Nowhere in the UK has seen this more so in recent weeks than Yorkshire. HBOS is in the process of being taken over by Lloyds TSB – though even that may be in danger – while Bradford & Bingley has been nationalised. It is an unfortunate truth that with these takeovers we are likely to see job cuts as part of what will be a big contraction in the financial services sector.

This week has seen the once-respected former building societies brought to their knees. These institutions served for decades as
safe community-based financial institutions. Their loss is a
long-term consequence of the Conservative policy of demutualisation in the 1990s.

I was regarded as rather fuddy-duddy when I, and a group called "Save our Building Societies", opposed mass demutualisation in the late 1990s. The reality is though that demutualisation turned a group of building societies which engaged in prudent lending to customers they knew and understood, into some of the most aggressive banks. They acted on
the fringes of the markets and offered billions of pounds to people who couldn't afford it, based on unsustainable business models.

The outcome is plain for all to see: there is now not a single former building society which has not been taken over or nationalised.

As we now sit in the middle of this financial crisis we must construct a clear way forward both at home and internationally, to deal with
both the effects of the credit crisis but also to construct a new financial system to ensure such a crisis never occurs again.

Firstly, to help British families struggling to make ends meet we must act to prevent a tidal wave of repossessions, which will create yet more hardship. Courts must only ever allow repossession as a last
resort when all other avenues, such as loan renegotiation and shared equity, have been investigated.

For those who will find themselves homeless, and the one-and-a-half million who are already, we must use this opportunity of low house and land prices to rebuild the social housing stock. Where it is appropriate, councils and local housing associations must be
allowed to borrow against their assets to increase the amount of social housing.

It has become obvious that in the UK at least we are simply not prepared to allow a retail bank to collapse. As other institutions face difficulties, we must make rapid decisions as to whether they can
be privately taken over, or whether the Government must intervene. If a form of nationalisation is the only answer, it is not acceptable for the state to nationalise losses while profits remain private.

But in return for this, banks in the future must accept that with
the state acting as a lender of last resort they are no longer in a free market and will have to behave differently.

Through intelligent regulation, profits will have to be tempered, business practices will have to be sustainable and, most importantly, we must never see a return to the lending practices which created so many of the problems we face today.


Vince Cable is the deputy leader of the Liberal Democrats and the party's Treasury spokesman.