The problem is a lack of capital - and there's no solution

If you are one of the remaining stock market bulls looking for a sign of the bottom, you have been spoilt for choice this week.

Monday brought news of the Lehman bankruptcy. Tuesday brought the nationalisation of the world's biggest insurer AIG. Wednesday brought the merger between HBOS and Lloyds TSB. Thursday brought rumours of Morgan Stanley being in desperate merger negotiations with the hardly untroubled Wachovia. And Friday came with news that Hank Paulson, US Treasury secretary, was working out a "comprehensive" plan to save the US financial system.

Unfortunately none of these events, extraordinary as each one is and as mad as each one would have seemed a year ago, tells us that the end of our crisis is in sight. It isn't.

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We might get a period of relative calm which would be nice. But no number of mergers, takeovers, bankruptcies, nationalisations and 'comprehensive plans' can really solve the core problem the big banks of the West are grappling with a lack of capital.

They have all had a good go at raising capital so far but they just haven't got enough, not when the quality of their asset bases just keeps deteriorating. US house prices are still falling, as are house prices in the UK and across Europe.

With all eyes on the horrors on Wall Street, let's not forget that anyone who has been lending into, say, the Spanish or the Irish property markets can hardly be sitting comfortably. Will Paulson be including them in his plan? Can't see it. Expect more mergers and more bailouts.

But even when these peter out, don't expect the troubles to be over. Global banks will still be low on capital. So they'll still be unable to lend. And that's the real problem.

I don't care much about the disappearance of the odd 'iconic' Wall Street or Scottish banking brand. And I don't care much about a few thousand bankers suddenly discovering that borrowing against bonuses paid in unvestable options to take out mortgages eight times your nominal salary isn't a very good idea. But I do care as does everyone else about recession. And a shortage of credit is the kind of thing that can produce a really bad one in a hurry.

Without us being able to borrow to keep small businesses going, to start new businesses, to shop and to buy houses, economic growth grinds to a halt.

In the UK, we are already producing all sorts of shockingly bad economic numbers. House prices one of the main drivers of consumer confidence are still falling fast. Unemployment is at its highest for a decade and rising at its fastest for 16 years. If many more bankers lose their jobs, said a friend this week, we'll be able to use Canary Wharf as the Olympic Village.

Consumer confidence is near historic lows and retailers are dreading, rather than relishing, the Christmas selling season. Nasty, isn't it? And that was before the credit markets seized up again this week. There is worse to come.

There's no way out of this. The government has no money. The banks have no money and the consumer has no money. So there's less lending and less spending ahead.

The financial world has a magic number 18. At every turn in this crisis, from the first signs of subprime cracks early last year to this week, I've been told that after a tricky 18 months, all will turn out well.

It's proving to be a very long 18 months. And, even as a good part of the financial community languishes in denial, I suspect it's going to get a lot longer.

So what do you do? Not much. Follow all the rules about not having too much cash in any one account or if not that, shovel it all into the government's bank, Northern Rock. Getting a 100% guarantee on up to £250,000 plus a chart-topping 6% return on your money seems too good a deal to pass up. And don't worry about the administration. Dealing with Northern Rock isn't like dealing with other state-sponsored organisations. When I set up my account this week, it took me all of 10 minutes to do it online and the account was up and running in 24 hours.

And don't forget gold. I've been getting a hard time from readers over the past few months as the gold price slumped but I don't hold it in the expectation of massive price rises (I did when I bought it at $250, but not any more).

Instead, I hold it as insurance against all the terrible things that can happen when credit bubbles burst. And I'm very glad I do: this week the price of an ounce moved from around $770 to nearly $900. And even after the extraordinary rise in the stock markets yesterday, that's better than owning bank shares, isn't it?

This article was first published in the Financial Times