Governments across the world have nationalised parts of the banking system. It may have proven unpalatable, especially in the US, but in economic terms, it makes sense

The debate about George W Bush's initial $800bn "bail-out" plan for the US financial services sector was emotive and so laden with political baggage that the difficulties in getting the package through the Senate and House of Representatives were understandable. There is an inherent paradox in the rationale behind rescuing a "bunch of fat cats" that strikes at the basic tenets of US-style capitalism.

The dangers of invoking the spirit of socialism, state control of the market and nationalisation have been highlighted by Republicans holding to America's tradition of laissez-faire market capitalism. In contrast, Democrats, as well as some Republicans, have pointed out that "Main Street" should not be bailing out Wall Street since it is not the fault of the American people that the problems are now so acute. The argument is that economic measures should be targeted at supporting the hard-working US tax-payers who are feeling the pinch-not at the people who make money out of others' misfortune.

The accompanying series of high-profile nationalisations of banks and insurance companies in the US, the UK and across Europe has only added to the sense of crisis and lack of direction. Here in Britain, for example, nationalisation and state-ownership is associated with everything that was bad about the 1970s: three-day weeks, power cuts and poor quality cars cluttering up the roads.

So why have the authorities in the UK, Europe and the US chosen nationalisation to avert the financial crisis? There are two reasons, both of which can be explained entirely in terms of the economics.
First, one key role of government is to reduce the negative effects of the normal, day-to-day function of "the market": to "ameliorate negative externalities". This is just a way of saying that where there is a market failure, governments should step in to correct it if the effects of that failure are socially undesirable. Large-scale job losses in the City, alongside the collapse of a few banks would create a market correction that may not in itself matter in the short-term, as jobs would come back once the correction has worked through. But the long-term effects on the real economy, in other words our jobs, our standard of living and our incomes, are more substantial. This is why the UK and US governments acted and why other governments around the world have done the same.

The second reason is exactly the reason that governments used to justify nationalisation of coal and steel in the 1950s and Leyland in the 1970s. The global economy has become absolutely dependent on the health of the financial services sector. Not only is it the fuel behind all of the transactions we make on a daily basis, but also for jobs and wealth creation in the economy.

In the alleged words of George W Bush, "If money isn't loosened up, this sucker is going to go down." Nationalisation is no longer about socialism and state control; it is about maintaining the health of the world's economy.