What did we expect? Bankers are not Mother Theresa. Over the past year taxpayers have given them half a trillion pounds in cash, loans, shares, lucre, dosh, quantitative easing, whatever, with not a string or condition attached. We knew, or at least some of us did, what they would do next.

They would not give the money back. They would certainly not lend it to collapsing manufacturers or high street retailers, whom the government had refused to help. Instead they would pay off the gambling debts they had run up from money previously entrusted to them by the public as depositors. They would spend the rest on bonuses, houses, Porsches, yachts, brothels (says the Guardian), Cotswolds farms, commodity shares, bonuses, bonuses and yet more bonuses. After a while, you just cannot get rid of the bloody stuff.

So who is the bigger fool, the bankers or the rest of us? Over the past year we have doled out what the Economist estimates as "the biggest peacetime fiscal expansion in history". A little was taken off VAT, but every other brass farthing went to a banker, with not a jot of regulation to control how it was disbursed.

Ministers certainly pleaded. Brown said last October that "the heart of the problem of averting recession" lay in ensuring that bank lending to the private sector was sustained. The objective was clear. Not a week passed without Alistair Darling insisting, cajoling, begging, threatening and stamping his foot.

Lending was the be all and end all of his subsidies. His officials phoned banks daily to plead for more lending. They refused. Lending to a crashing private sector is hardly wise, especially with interest rates plummeting. Shopping streets and centres became like bombsites. Unemployment soared. Money in circulation stuttered to a halt. As the economist Tim Congdon pointed out, Darling's action in October 2008 "did not protect against a recession. On the contrary, it accelerated and intensified its onset".

The requirement of both Keynesianism and monetarism, that demand somehow be stimulated in a recession, was denied by a chancellor who deflated as ruthlessly as had Thatcher in 1980-81. By the end of this summer, the Bank of England reported "net flow of lending to businesses" falling faster than ever since records began, indeed by £15bn in July alone. Taxpayers' money was being locked up in bank balance sheets. When Britain should have been spending, it was forced to save.

This explains the eccentric financial news. Indicators for output, trade and employment remain gloomy while those for shares, houses and commodity futures are booming. Banks suddenly have lots of money – our money – and nothing to do with it but speculate, this time under the cover of an implicit government. While personal incomes are relatively static, returns to gambling are soaring.

That is why bankers are making such large bonuses, with no one to stop them. As if to reward them, the government is this week planning to give Lloyds another tranche of £5bn to underpin its balance sheet. None of this will leak into demand. It will be hoarded to cover bad losses. It is hard to think of a policy fashioned by so few that has cost so much to so many. It is plain daft.

Throughout the past year there has been not a whiff of remorse, let alone a change in policy. Downing Street has appeared baffled. Advisers are said to be at a loss to explain why pleas to banks from the chancellor and the governor of the Bank of England have fallen on deaf ears. They pondered the Vince Cable option of nationalising domestic deposits and leaving so-called investment banking to default – but could not think how to do it.

They pondered the "helicopter option", employed in China and Taiwan to good effect, of showering money not on banks but directly on consumer demand through vouchers, tax cuts or make-work schemes. To Britain it seemed populist and crude, except when directed at the car industry. Quite why cars were considered good demand but other forms of consumption bad was never explained. Nothing was explained.

It was merely asserted as axiomatic that banks should not fail. The lack was not of political courage but of ideology and intellect. The idea of nationalising and deconstructing a bank, though it was done de facto in the war and in other countries, seemed beyond the tolerance of a Labour government. Saving private deposits – guarding the cash machines – but letting the spiv side of a bank go bust, offended a prime minister who had spent much of his time in office courting spivs. Instead, a gigantic fudge was concocted, that rescuing a bankrupt bank was the way to rescue the entire economy. Subsidies would trickle down from the greedy to the needy.

The American financial guru, Pippa Malmgren, reflected on the Today programme yesterday that it was hard to imagine the financial world would really be a worse place today if a few dud banks had been left to fail. Their asset base would at least be unencumbered with bad debt, and public money would not be guaranteeing rubbish. Meanwhile the mind can only boggle at the debt burden now saddling taxpayers for the rest of their lives.

Why did the government not support demand when the economy entered recession? Why did it bail out banks and car firms but not Woolworths, white goods, the DIY sector, hair salons, hotels, restaurants – anywhere that kept people in work? Why did it not give money to pensioners and the poor, who for sure would not do what banks do and merely save?

Students of the Watergate school of journalism were taught one lesson: "Just follow the money." It was Deep Throat's one message to the Washington Post reporters from the depths of his underground car park. I have long followed this maxim, especially since first trying to understand the credit crunch last year. What motivated those in charge of Britain's financial policy? Why were they so obsessed with saving bankers and nobody else?

The answer must lie in their personal circumstance. Those advising Brown and Darling in Downing Street, such as Lord Myners, Lady Vadera, Lord Turner and John Kingman, were all past or present bankers, or friends of bankers. When they leave public life they are likely to work for a bank. They are the castlist of David Hare's admonitory dialogue, The Power of Yes, at the National Theatre. To them, City banking is like the apostolic succession to the Vatican, or the Royal Navy to Churchill. It is the defining institution of the state.

Economic policy in the 1970s was directed at saving steel, coal, cars and ships. It is now directed at banks. Without a shred of evidence or justification, they are asserted to be too big to fail. For this indulgence, the British people are now to pay an enormous price.

At the end of a year that has seen a prosperous economy brought to its knees, there has been no ministerial apology, no political resignation, no court case, not so much as an inquest. We have only spin doctors combing the landscape looking for green shoots. They are there, but only in a few well-padded back pockets.