Oh, Mr Brown, I loved that. Tickle me again, Mr Darling. Just there. A back rub, please, Sir David. A little oil here, Lord Phillips; a teeny whiplash from you, Lord Myners. And you, Mervyn King, perhaps another velvety stroke on the erogenous zone. You are gorgeous, the lot of you.

Who said bankers "just don't get it"? They get it absolutely. Bankers are doing what they pay themselves to do, make money. They are performing what economists from Adam Smith to Karl Marx regarded as capitalism's sacred ritual, profiting by rigging markets and shedding risk. Like all professions, their first responsibility is to their peer group and their second to their shareholders. It is not their job to run the country, only sometimes to ruin it.

The banking community came a cropper last year but manoeuvred itself out of trouble by deploying the oldest trick in the book: claiming that the government needed them even more than they needed it. They were "too big to fail". As the debt bubble burst and insurance could not pay, bankers staged a crash raid on the Treasury. They ensured enough ex-bankers were inside Downing Street at the time, as one debt edifice after another tottered and collapsed into the Treasury's lap, to be briskly transferred to the insurer of last resort, the taxpayer.

Ministers and regulators bought the gambit hook, line and sinker. They all hollered that bonuses were "ludicrous" (Darling), that banks had "lost sight of basic British values" (Brown) and were "antisocial" (Lord Turner). But it was all mouth. For them to accuse the banks of behaving obscenely might be a brief buzz, but what are a few insults to a banker on a roll?

It was not the banks that do not get it, but those on whom the public relies to guard its interests: Brown, Darling, Myners, King, Turner, the Treasury and the Financial Services Authority. The bankers this past year have played a blinder. Next month they will give themselves large bonuses while the nation troops to the dole office. They merit the order of the golden fleece, first class.

This week the munificence of Downing Street and its regulators turned into a Christmas cargo cult. The governor of the Bank of England, Mervyn King, blithely announced that he had kept secret £62bn of public loans to RBS and HBOS last year, concealing the fact from Lloyds shareholders who were then about to lose their shirts by being forced to merge with the latter.

This is the same King as had told Northern Rock in 2007 that he could not organise a rescue merger "as the legal advice … was that it could not be done". In addition any loan would have to be disclosed by law. This so-called law strangely changed when the big boys came and started beating King about the head.

Then came today's report from the latest Hercules sent by Alistair Darling to clean the City's Augean stables, Sir David Walker of Morgan Stanley. He predictably concluded that nothing more than a feather duster was needed. He seemed to think that his fellow bankers would decamp en masse to Monaco if so much as rapped over the knuckles. So what?

As if that were not galling enough for the taxpayer, the supreme court – asked to adjudicate on the racketeering of banks towards overdraft customers – stepped forward to pat them on the head. The judges said it seemed fine to them and went off to make daisy chains in Parliament Square. The ruling was a repeat of their lordships' awful Equitable Life judgment of 2000, indicating that they knew little of equity and nothing of other people's money. Nobody but a fool believes that a free market in anything, left to its own devices, will tend to perfect competition. Economic history attests that it tends to monopoly. That is why it must be regulated. Such regulation, in every sphere of economic life, is democracy's most onerous but essential responsibility. In the case of British banking in 2008, the government's clear duty was to ensure that marketplace discipline curbed the emergence of a debt bubble and that no residual liability, let alone one for some £1.3 trillion, should fall on the state.

Last year was a tragic failure of that responsibility and not one person in authority has accepted blame. The best-told stories might be of millionaire salaries, fancy derivatives, subprimes and sports cars; but what mattered was the denouement, saddling every man, woman and child in Britain with unprecedented levels of lifetime debt. This will be paid for in unemployment and higher taxation in the short term, and in a lower standard of living for the foreseeable future. The bank crash was a national disaster, the economic equivalent of Munich and appeasement.

As yet, no one has explained why such stupefying sums of money were really needed to pay off the rotten debts of banks, whose speculative activities should have been nationalised and left to default. No one has explained why the enforced separation of good lending from so-called toxic debt was rejected, when just such a separation is planned for Northern Rock. Throughout the past year, Darling and King justified bank subsidies on one ground alone: that the billions in subsidies would sustain the flow of high street credit. But they did no such thing. Every month Darling pleaded for more lending to businesses. Every month the Office of National Statistics showed that such lending was falling, not rising. Demand, the essential underpinning of bank credit, was collapsing.

Ministers have spent the past year propping up toxic debt, but not the British economy, which lurched deep into recession. They did nothing to help it, apart from brief and bizarre assistance to the car market. This was at a time when governments across the world were racing to prop up consumer demand, successfully speeding recovery. It was as if Britain was a one-industry town, that of banking.

Darling and his colleagues were clearly out of their depth. Public money was being spent on an unprecedented scale, with no one in charge knowing where it was going. Where were the public auditors? Still no one has explained the meaning of the much-parroted phrase, too big to fail. A failed bank may be a terrible thing, but then so is an economy crippled by long-term debt service. Which is worse? Why did nobody ever ask?

I find it simply incredible that a chancellor can take over a trillion pounds of public money, some of it in secret, without giving a remotely plausible account of why it was risked as it was, rather than in boosting consumer demand. At present the Chilcot inquiry is asking past ministers and officials why they went to war in Iraq. The reason is that war kills people. What happened to the banks last year did not kill people, but in every other sense it was a seismic event in the history of Britain's political economy. It was a true collapse in political authority. I wonder when someone will stop abusing bankers and fix on those really to blame.

• This article was amended on 1 December 2009. The original said that David Walker worked for Goldman Sachs. This has been corrected.