A new year is usually a time for hope. But today many of us are full of doubt. The financial crisis has brought wave after wave of bad news, replacing the old certainties with a sense of dread and insecurity. And then there's terrorism, climate change and social breakdown... Are our nightmares based in reality or are we the victims of a very modern kind of mass hysteria? Out with the old... in with a new age of anxiety

In the week that Lehman Brothers needed $20bn to stay afloat, I needed £10,000. It was mid-September and we were at the end of a gruelling house renovation "project" (what on earth could we have been thinking of?) that had sucked up more money than I cared to add up and the builder was waiting for his final payment. No problem, I'd thought, we'll just add it to the mortgage. Seeing as it was a relatively modest amount, I guessed a phone call would do it. After all, when I'd organised the loan a year before, they had seemed happy for me to take much more than I had bargained for.

That was then, though, way before Northern Rock, and now, in the week of the world's biggest bankruptcy, it quickly became clear a phone call would no longer do it; £10,000 was suddenly an awful lot of money. In order even to ask for it, my full medical history was apparently required ("Have you ever suffered from anxiety or depression?" "Um, not until now..."). And since my wife had an account in her maiden name, a marriage licence was called for.

Between us, we had banked with our mortgage provider for 40 years, I pointed out. We already had a mortgage with them.

They understood that, sir, but they also needed posted proof of my current address; a couple of utility bills and a council tax account agreement would do it.

But, I said, you send our statements to this address already.

They understood that, too, sir. And then, after that, there would be a three- or four-week period in which a full credit check would be carried out.

We are talking about an extra payment of £47.32 per month here, yes?

We are, sir.

September passed and October. Credit crunched; Gordon Bailout did his desperate stuff. And I spent much of November engaged in character-building trials of mental fortitude with my bank's call centre. We are just connecting you, sir, again, with a screeching noise that will persist until you start the whole press-three-if-you-have-an- existing-mortgage process once more or until your will finally breaks and you exact immediate physical revenge at your nearest branch.

By this time, my builder was keen for his cheque; he'd just had a new baby, Christmas was coming. I called again. My broker was not himself available, but a member of his "pod" was happily around to discover that, actually yes, the application had been turned down.

Was there a reason, I wondered, beyond the fact that the entire financial world was dissolving?

Yes, sir, it says here you were late with a credit card payment in November 2007.

It's not exactly evidence of a life of reckless fiscal abandon, is it?

It's an automatic refusal.

Was his pod going to inform me of this?

A letter does appear to have been sent; have you changed your address, sir?

I proceeded to offer a hastily improvised analysis of the self-serving hypocrisy of the nation's financial system, and of banking call centres, which had always told us they liked to say yes and now just thought they could say no and hang up, not forgetting, of course, the "invisible sodding hand" of the bonus culture that got us into this mess with all of its insane risk-taking with our money; it was a speech he gave the impression of having heard several times before.

The next day, an unnaturally cheerful woman called from India to wonder if I had 10 minutes to complete a customer satisfaction survey on my recent mortgage application. Would I say "on balance that I was very satisfied, moderately satisfied or not satisfied at all with the customer experience I'd had?" Where to begin?

We managed in the end to cobble the builder's money together, but in the nights that followed, I found myself suddenly awake and sweating at two and three in the morning, imagining myself holed up with Little Dorrit in the Marshalsea. The radio alarmed me before it was light with talk of a squeeze and, never requiring much excuse to wake up worrying, I felt that squeeze somewhere in my throat. I was not alone. By November, the BBC was reporting a survey that showed that half the population of Britain was sleeping more fitfully than a year ago. A quarter of those surveyed were waking up "more than three times a night", with two-thirds blaming "money and work worries" for their insomnia.

Like many of us, I've always lived with the sense of being about three pay cheques away from the Big Issue, but that sense has in recent years been softened by the idea that someone, somewhere would always be around to lend some cheap money. (Failing that, there was always the house to sell: ha.) Debt had not been hard to come by; it was positively encouraged. I'd proved that point to myself three years previously when, for an article, I'd spent the morning responding to all those flirty, unasked-for offers of credit cards with childish names - Egg and Smile and Goldfish - that made punitive interest rates seem like a primary coloured land of opportunity. On that occasion, I had raised a theoretical £100,000 by simply offering up my mother's maiden name repeatedly for a couple of hours.

That mood, I'd seen first-hand at the time, was dangerously infectious. I'd also been round various debt agencies and met the people who had taken up all of those offers for real and were living in fear of the consolidated consequences. It remained infectious right up until last September.

There was an extraordinary questionnaire carried out last July for the World Social Survey, one which future analysts of the great downturn of 2008 may find instructive. The survey proposed the idea that urban life was shaped by fear and addressed the question of what people in the 10 major cities of the world - from Cairo to Beijing - were most worried about. Londoners, it turned out in the ancient history of July 2008, were the least anxious people, but it was what they were actually anxious about that was most telling. Whereas in New York, where the new sub-prime reality had already taken hold, three of the top five worries listed were "not being able to maintain the same standard of living in the future" (17 per cent of respondents), "becoming jobless" (10 per cent), "fear that my children's lives will be worse than mine" (10 per cent), in London, these worries did not even register anywhere in the top eight. They were not only eclipsed by the biggest anxiety ("losing loved ones": 12 per cent), they also were felt less keenly than "being the victim of a natural disaster, tsunami, earthquake etc" (2.5 per cent), "being the victim of mass epidemic or food poisoning" (2.2 per cent) and "remaining alone" (1.8 per cent). Can there have been any other time in modern history when we had been so blithely unconcerned about our financial security than last July?

But that was then: BC, before crunch.

Credit is rooted in the Latin credere, "to believe". Financial credit depends not only on a lender's belief in you - and your mental health - but also on your belief in them - and theirs. The sleepless anxiety with which at least half of us are facing the New Year is a crisis not only of liquidity but of faith. Much that we believed in has, since September, melted into air and even Gordon Brown's borrowed billions aren't enough to make it come true again.

There are many things that, as a result, already seem very 2008. There are the smaller things: bottled water, say, or £60 tickets to a bore-draw in the Premier League or letting your children download stuff with your credit card. Then there are bigger things, too, like worries about work-life imbalance (better than no-work-life balance), property ladders (remember them?), early retirement (70 if you are lucky), me-lancing, downshifting, sabbaticals...

The main thing we have lost, though, is the seductive idea that, somehow, our future might follow a predictable pattern. It was always a myth, this, and one not shared in the overwhelming majority of the world. I was in the Democratic Republic of the Congo in September, an awfully long way from where our generally abundant nation was fretting about its mortgage extensions and its job prospects, and I wondered just how the people there - who had lived with war for 15 years - coped psychologically with the constant fears of their lives. Why weren't they all on the verge of a nervous breakdown? How could they sit and laugh in the sun? The most plausible answer was that they did not have even the luxury of anxiety; their expectation of security had never extended much beyond the next hour or two. Anxiety is a disease of relative plenty; it arises not from fear at what you do not have, but fear of what you might lose.

I spent the Christmas holiday anxiously reading Patricia Pearson's recently published A Brief History of Anxiety. Being anxious was not a recognised mental state, really, until the advent of Freud and paid-for psychiatry, and "stress-related illnesses" did not become the leading cause of absenteeism from work until work was readily available and the welfare state made provision for panic attacks.

The idea that we lived in an Age of Anxiety was coined by WH Auden exactly 60 years ago, just after the war. It was a replacement for the age of terror and dread that had just ended, a shadow of those more visceral fears. In industrialised nations since then, anxiety has co-existed with the idea that you had something stable to protect - a home, a family, savings, pension provision - and nurture.

Fears of uncertainty and disaster, though often remote from many of those lives, were still hard-wired in those heads, however, and so found what object they could (hence in July 2008 the fears of tsunamis and pandemic among Londoners). The more you had to protect, the greater the potential anxiety about what might threaten it.

The brain chemistry of anxiety, I discovered in Pearson's book, works like a child's fear of the dark. It is irrational but often overwhelming. The almond-shaped amygdala in the temporal lobes act as mission control for mammalian fear and when anxiety is triggered they send out alarm signals that easily overpower any kind of rational rejoinder or positive sentiment. Neurologically, we have evolved to be far more sensitive to these irrational fears at night - that is when bad things used to happen to our Stone Age ancestors - and that is why we wake up at 3am, fretting about events beyond our control, and wondering if we should turn over the back garden to subsistence crops.

Even if you were not an estate agent or an employee at Woolworths, there have been, over the last few months, many things to fuel such 3am thoughts. There was in the first instance the abrupt trauma of replacing one seductive fiction - that of endless boom - for another, the apparent possibility of endless bust, 'the Death of Capitalism', 'the Age of Scarcity' and so on.

Some of this trauma had to do with numbers. For a long while, it has seemed that numbers in newspapers, especially relating to money, looked barely credible, apparently random and, therefore, unnerving - how could oligarchs, footballers, bankers be that wealthy? How could, for example, the bonuses paid in 2007 to New York employees of Lehman Brothers, months before it collapsed, really amount to $5,700,000,000?

After September, the figures took that surreal quality to new extremes. For a few weeks, and to a certain extent subsequently, everything that mattered seemed to be measured in tens of billions. The numbers reminded me of that old joke: two men in a bar, towards closing time, challenging each other to name the biggest number in the world. The first thinks for a long time before triumphantly announcing: "Eighty-seven!" The second, after some consideration, blearily impressed, replies: "OK. You win." Except, on this occasion, no one won. The numbers just got more preposterously large. Why a £50bn bailout, why not a £500bn one? What, in anyone's head, was the difference?

And once it became clear that the figures were being dreamt up by politicians not because they bore any calculated response to a problem but in the hope that their size alone would restore confidence to people used to checking the sixth zero on their payslip, who wouldn't lie awake anxious? Could this crisis really warrant (in today's figures) the combined cost of the Marshall Plan, the Nasa space programme and the Vietnam War to be agreed as emergency finance by the end of the afternoon? Apparently it could.

With those figures disappeared any sense of proportionality. We were apparently no longer facing a recession but a return of the Great Depression itself. Though some suggested 1993 and 1983 as a comparison, many commentators, watching their pensions dwindling by the second, spurred on by their almond-shaped amygdala, took to comparing the present moment with the months before the Wall Street Crash. Part of this was geographical; if you had grown up, as I had, in the industrial Midlands, say, or the north of England or Wales or Scotland or Northern Ireland, present insecurities had a familiar taste from the Thatcher years. But if you had lived your life in the south east, as had most of the financial services employees initially threatened by the recession, then the previous downturns had likely passed you by and the crisis close to home looked very much like a new kind of catastrophe.

In A History of Anxiety, Pearson suggests that one of the reasons we find it hard to allay irrational fears is that we have no irrational rituals to counter them. Most children no longer pray at bedtime; perhaps, Pearson suggests, if things get really bad, it is a habit we will all rediscover.

One of the most unfortunate aspects of the current crisis, you might argue, is that it coincided with the nadir in popularity of the prime minister. Early on, when he stopped dithering about Northern Rock, Gordon Brown discovered a curious fact. The worse the situation was perceived to be, the more his popularity soared. Thereafter the zeros kept coming.

'If the financial system has a defect,' historian Niall Ferguson wrote in The Ascent of Money, published in August, (surely one of the least well-timed titles of all time), "it is that it reflects and magnifies what we human beings are like. As we are learning from a growing volume of research in the field of behavioural finance, money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility."

And have we ever been more emotionally volatile, more in thrall to our sensations than now? We had become used to viewing all our neuroses as crises; now a genuine crisis was upon us, it was a cataclysm. Atheist or believer, we have in the last decade been primed for an end-time of sorts, with a stock of latent fears ready and waiting: there was the ongoing unease about terrorism, a fear that had been stoked so regularly by politicians that it almost seemed to have become a constant white noise. There was the overriding anxiety of climate change, an anxiety so big and so global that it seemed almost impossible to contemplate.

Suddenly, all of those fears had an outlet. We can probably only cope with one apocalypse at a time, and the financial crisis looked more immediate than the other two; it overwhelmed even them with the drama of its figures. But it was made to carry elements of the other threats - al-Qaida, we learned, rejoiced in the collapse of American and British banks; while somewhere in the collective guilt about the mess we had made of the planet was the sense that greed would eventually produce, in Al Gore's terms, a Reckoning (the balance sheet metaphor was coming true).

And the fact was on a simply rational level, deep down we knew it was coming. We only had to walk down an average street in the last couple of years and see how the value of houses on it had doubled to know; or to absorb the fact that up to 75 per cent of all credit card debt in Europe was on British cards; or to wander on a Sunday afternoon in one of those extraordinary shopping malls in Birmingham or in Leeds and see the spending; or simply observe the way that across society, reward had so completely parted company from effort.

We knew, just as surely as those in the Madoff scam knew, somewhere deep down, that there was a trick involved. But while house prices kept on going up, we kept the faith, just as Madoff's millionaires kept pocketing their unlikely dividends and asking no questions. Because in the absence of faith, what was there but doubt?

For a while now, certain fashionable economists have been warning us about irrationality. It's been in the air, in books like Freakonomics. People don't operate in conventionally predictable ways and, therefore, neither do markets or any of the other institutions they create. We fool ourselves constantly that the world can be orderly and predictable; bankers with their risk-mapping systems have done this on a colossal scale. A good antidote to some of our apocalyptic anxiety is, then, a proper sense of behavioural economics. Dan Gardner's brilliant book Risk: The Science and Politics of Fear is one place to start. It is Gardner's contention that, because of a globalised media, as individuals we have lost our ability to calculate probability and much of our anxiety flows from that. I spoke to Gardner at his home in Canada. I wonder if he believes this current Age of Anxiety is different to those that went before?

"It depends on how you define the age. If you are talking about the last 50 years, then, yes, there is more anxiety in the western world than there has ever been. If you are talking about the time since August when the banks collapsed, then no."

The fact is that we have been primed daily, even during the best of times, for imminent disaster. We are addicted to crisis, perhaps as a factor of guilt at our collective waste and excess. As the French poet Paul Valéry once observed: "If some great catastrophe is not announced every morning, we feel a certain void. Nothing in the paper today, we sigh." In the past decade, mortality rates across the developed world have tumbled, but we have been obsessed with bird flu and Sars. Politicians have routinely traded on fear (George Bush won two elections with it), even while the routine business of our lives was ever more dominated by security. Now that a real crisis has come along, our response comes not from our rational mind but from those almond-shaped amygdala.

"I appreciate that the current economic crisis is very real," Gardner observes. "This is certainly a time to have rational fears. Not least if you are a journalist." But we need also to be doubly vigilant, he suggests, for the psychological traits and the herd instinct that got us into this situation in the first place.

The essential point of Gardner's book is that there is a gap between risk perception and risk reality and often that gap increases to become a chasm. "The problem is we have a brain that evolved in a hunter-gatherer environment, which is completely unlike the world in which we live. You turn on the news, you see a parade of fantastically improbable events that are tragic and awful. A child is snatched on the other side of the planet. Now, you have a rational mind which states this event says nothing about the safety of your own children. But you also have an unconscious mind and that does not process information in the same way.

"The unconscious brain has something called the 'availability heuristic'," Gardner suggests. "If an event happens, it is this part of the brain that tries to work out how common an occurrence it is. And it does so by calculating how often it has seen that event happen before. That worked wonderfully in a Stone Age environment. But when we are constantly gathering news from across the world, that in-built probability no longer works. Have we seen a stranger snatch a child? Yes, we saw it last night on the television. Let's keep our own children indoors."

That globalising of information undermines our sense of control. Our brains are not wired to deal with the computation of large numbers. They are wired to respond emotionally to storytelling. That is why a single picture of a child suffering will prompt infinitely more charitable giving than the statistic that a million children are dying. Or a photograph of a lottery winner unconsciously blows away the fact that your chance of winning is one in 14 million. In fact, the more statistical information we have, the more likely we are to rely on irrational decision-making.

When applied to financial decisions, this fact becomes scary. "There were two causes," Gardner observes of the latest meltdown. "One thing was the housing bubble and the other was a Wall Street misunderstanding of that bubble. Did everyone who backed those positions on Wall Street understand those positions? No, they looked to their left and right and adopted the position that other so-called Wall Street wizards were adopting."

Behavioural economists are fond of the idea of "attention cascades". The term was coined by Yale professor Robert Shiller, the man who, in his book Irrational Exuberance, was most prophetic of the current crisis. An attention cascade is the herd instinct in action; when many people believe something - that we are all going to hell in a handcart - the belief becomes exponentially attractive for no other reason than that many people believe it.

That's the cascade. The "attention" part is the result of what psychologists call "confirmation bias". Once a belief is in place, we look for information to support it - and disregard information that does not. The internet multiplies this possibility by a googol.

The problem we have now, the reason for all our mounting anxieties and in part for the current crisis, is that, Gardner suggests: "Attention cascades are being empowered by technology. At the sharp end of this, a trader can get information about market moves around the planet 24 hours a day." Even, you might add, in the wee small hours when his or her anxiety faculties are most awake. "The herd as a result is now that much more dynamic and that much larger."

A classic argument about the Great Depression is that the market was more volatile in the 1920s because of the introduction of the telephone, which allowed information to move that much more quickly. "We have this impression that more information, quicker information, gives us better decisions," Gardner says, "but that is often false. If we are suffering information overload, we are going to fall back on cognitive crutches - namely doing what everyone else is doing. The herd dynamic is getting much more potent."

When you start to recognise the evidence of attention cascades in the current climate, you see them wherever you look. The other morning, I was woken by the BBC leading its news with the fact that Whittard of Chelsea was talking to the receivers. There are undoubtedly many indications that we are facing a testing new year, but sad though it is for Whittard's employees, you wonder whether the possible demise of an upmarket tea merchant in hock to an Icelandic bank is necessarily one of them.

One of the most amusing - if that is the word - things to emerge from the current anxiety is the persistence of those analysts, commentators and politicians who say things like: "The recession will bottom out in October 2009 and we will start to see recovery in the housing market at the beginning of 2010." Or: "Unemployment will rise by one million before it starts to fall." How, you ask yourself, having almost universally failed to call the most cataclysmic financial event of our lifetimes, do they suddenly know these things? Have they no shame? And why do they think we will believe them? If there is one lesson that should arise from the humiliation of the financial system, it is a version of William Goldman's view of Hollywood: no one really knows anything.

It was blind faith that some people did know better than everyone else that got us into this position. Successive prime ministers have been so in thrall to those who shout loudest - the CEOs, the City rainmakers - that they have not only allowed them to be effectively self-regulating but also self-rewarding. John Major had been a PR for a bank before he became prime minister; Tony Blair became one - at £2.5m a year - after he left.

In times like these, everyone should have a book by their bedside to reach for at three in the morning. If the Bible doesn't work for you, Philip Tetlock's nicely oxymoronic volume Expert Political Judgment might be an alternative. Tetlock's book is based on two decades of research into 284 people who made their living "commenting or offering advice on political and economic trends". He asked them simply to do what they apparently did best: predict what would happen in the world next in answer to specific questions. Would oil prices rise or fall, would there be a boom or a bust, would we go to war? And so on. When the study concluded, in 2003, Tetlock's experts had made 82,361 forecasts and the results were correlated with the facts as they had turned out.

The experts were less accurate in their forecasts than a control group of chimpanzees choosing entirely randomly would have been. Even specialists in particular narrow fields were not significantly more successful than reasonably informed laymen. "We reach the point of diminishing marginal predictive returns for knowledge disconcertingly quickly," Tetlock suggested. "In this age of academic hyperspecialisation, there is no reason for supposing that contributors to top journals - distinguished political scientists, area study specialists, economists and so on - are any better than attentive readers of the New York Times in 'reading' emerging situations."

Further, the more certain the forecaster was, the more likely his judgment would be awry, scientific proof that "the best lack all conviction, while the worst are full of a passionate intensity".

It is, I guess, worth bearing Tetlock in mind when we look ahead to 2009. When we are told that we need to keep shopping for things we don't need in order to save the things we have, for example. Or when Robert Peston sing-songs the implications of the latest global apocalypse. Or when attention cascades. No one knows anything. In some ways, it's a comforting thought. After that, as the man almost said, we have nothing to be anxious about but anxiety itself.