In early 2009, with the real world still mired in recession and credit crunch, financial markets seemed on a different planet, rebounding strongly on the feeling that the worst of the downturn was over. There was much patting-of-backs at the perceived avoidance of a 1930s style depression and former PM Gordon Brown inadvertently boasted in the Commons of having ‘saved the world’, or at least the banks.

But the credit crunch and recession inflicted on us by those risk-taking and dysfunctional banks imposed a huge cost on public purses in many countries, made worse by the state picking up the tab for banks’ dodgy deals.

Bond markets took fright at the resulting sovereign debt (although not in the UK’s case it should be stressed) and governments then panicked by imposing misguided austerity measures. The latter had the effect of - at best - slowing growth and - at worst - pushing some economies back into double dip recession.

Stock markets have seen growth prospects plummet and have also taken a recent turn for the worse, led by banks’ shares, given renewed fears over their status.

Governments take note: markets may dislike sovereign debt, but they dislike the lack of growth even more, as the IMF’s new boss Christine Legarde recently observed dryly.

In the UK in particular, the austerity measures which were supposed to restore confidence to the markets have had the effect of undermining confidence in the wider economy, especially for consumers who are facing the biggest squeeze on living standards for decades. The nosedive in consumer confidence has in turn impacted on business optimism, and investment has stalled.

Not surprisingly, unemployment in the UK has started to rise again, recently reaching 2.49 million. With UK growth prospects looking grim in the short term, the only way for unemployment, sadly, seems to be up. The question is how far it will go?

Meanwhile Chancellor George Osborne maintains that the UK is a “safe haven” as UK bond yields have fallen to such low levels. Some safe haven. With UK growth flat-lining, really markets have decided that bonds may be a safer bet than other investments.

In fact, with government borrowing now historically cheap, you might think the government would borrow to invest and offer some stimulus to a flatlining economy, or use it to invest in a properly funded national investment bank, or even pay off some of the more grotesquely expensive PFI deals that have taken place.

There’s been no prospect of that so far, but one wonders how long the government can let the economy bump along. We’ve had virtually no growth for a year now, and if the third quarter flatlines again or even tips back into negative growth, then the pressure will be on the government to come up with a more substantial growth strategy.

Meanwhile, the lack of growth has again triggered fears over the health of the banking system, in Europe in particular. Recent headlines may note the ‘return of zombie banks’ but the sad truth is that they never actually went away, with a lasting impact especially on small firms which have struggled to get credit on acceptable terms.

There are a number of reasons for the most recent round of fears, however. Firstly, ever since the state intervened to pick up the tab for banks’ dodgy deals (effectively nationalising their losses at my and your expense), markets have accepted the narrative that the massive taxpayer bail-out and a decent spell of growth would lift banking ships off the rocks of effective insolvency.

This was always pretty poor analysis on a number of levels. Firstly a big pile of dodgy assets didn’t actually go away. Those dodgy assets include things like commercial property scattered around various overseas markets. In fact, we didn’t so much bail-out British banks but rather financial behemoths which happened to be headquartered in the UK and which had an international trail of dodgy debts. Far better might have been to carve out the UK portions of their utility bank operations: saving those, letting the rest go. And by letting banks formulate their own policies for ‘recapitalising’ their asset bases, banks thought it a super wheeze to buy shares and bonds in each other, as well as European government bonds. Regulators let them get away with it.