Ronald Reagan once famously described a recession as when the guy next door loses his job. A depression is when you lose yours. The recession bit is already well on the way. They've taken their time, but all the lead indicators now point to a nasty and possibly quite prolonged recession.

Advertising spend is plummeting, oil and commodity prices are falling like a stone, and even the boom economies of the developing world are bracing themselves for a sharp downturn.

The good news, if any can be taken from the current calamity, is that the policy actions now being taken around the world to stabilise the banking system will, in all probability, prevent recession from turning into economic nemesis. Over the past two weeks, there has been a collective realisation that something dramatic had to be done.

The UK authorities rightly won plaudits for the boldness of their plan announced last Wednesday, which even Hank Paulson, the US Treasury Secretary, acknowledged as a possible model for others.

Paulson is now actively considering earmarking some of the $700bn Wall Street rescue fund for recapitalisation of US banks. Previously, all the money was to have been used for buying up bad debts.

What a shame this realisation didn't come a lot earlier. If it had, the extreme crisis of confidence of the last week might have been avoided. Political inaction helped turn a crisis into a near disaster, which only the boldest of actions was capable of addressing.

Unfair criticism? Everyone has been on a sharp learning curve during this quite unprecedented banking crisis. A year ago, hardly anyone guessed how serious it would become. The authorities have been understandably reluctant to act as long as there was any possibility of a market-based solution.

And it wasn't, in any case, until the collapse of Lehman Brothers a month ago that the banking crisis escalated off the scale. Prior to Lehman's collapse, it had already been virtually impossible to get three-month money. Afterwards, even overnight money started to dry up.

Yet the die had been cast long before Lehman went down, and when the history books are written, it may well be decided that earlier action on liquidity and funding might have saved an awful lot of subsequent pain.

What is certainly true is the banking model being run at the top of the boom was with the benefit of hindsight highly unsafe. Heavy reliance on wholesale funding unbalanced traditional standards of risk assessment. It's remarkable how many financial commentators who thought bank shares a screaming buy two years ago when they were still riding high now say that the model was rotten all along, and even at these depressed prices, now think of banks as a busted flush. The problem arose because banks got used to using short-term, wholesale money – which was once in plentiful supply – for funding what they judged to be relatively riskless lending such as mortgages, credit cards and auto loans. As it turned out, these assets were a good deal riskier than assumed.

Yet it is not clear this was the fault of the 'irresponsible' bankers now widely blamed for the crisis, in the political rhetoric. The root of the problem was the global liquidity boom, which the politicians rode as gleefully as bankers and credit-fuelled consumers. When money is washing around in such quantities, it finds a hole and creates trouble.

As house prices started to fall, loans that had been regarded as entirely safe became self-evidently more risky, transforming the shape of bank balance sheets. Banks had become so highly geared, or to use the jargon, 'leveraged', that they simply didn't have enough capital to sustain the higher-risk profile that was emerging in their loan books.

Banks have since become squeezed at both ends. The funding has dried up, so they cannot sustain as much lending as they did. At the same time, the quality of the asset base has deteriorated. To make up the shortfall, banks need to raise more capital. Is the banking crisis a problem of funding or solvency? It scarcely seems to matter any more. The two things are different sides of the same coin. The funding has gone, and for the time being, the taxpayer must fill the gap. Yet until everyone has confidence in the capital position of banks, the wholesale money markets won't return.

In the meantime, the opportunism of politicians has become quite breathtaking in its audacity, with politicians from both right and left queuing up to condemn the bankers who once wined and dined them.

Excessive, irresponsible, greedy – not to be outdone, the sound bites fall from the politicians' lips like confetti. Some demand 'punishment', yet where to stop is the problem. Personally, I've had quite enough moralising. Everyone is guilty in failing to understand the risk that the funding models of modern banking were building into the system, but none more so than the governments which presided over and encouraged the illusion of economic prosperity that the easy credit of the capital markets delivered.

Shane Coleman is on leave