For more than a year consumers and businesses have been watching as the financial news has become ever more alarming. A crisis that began in the markets as a result of excessive risk-taking by the banks has evolved into a credit crunch and a series of traumas for the financial system.

Even a month ago it was possible that the British high street would escape the worst effects of the turmoil on Wall Street. The financial storms of September and early October have changed all that. Too much damage has been done to the banking system on both sides of the Atlantic for the “real” economy to come through unscathed. Even before the collapses and rescues of the past month, mortgage approvals in Britain were showing an unprecedented 70% plunge on a year earlier. Now, and even though Congress finally passed the White House’s $700 billion rescue package on Friday, the credit crunch will bite harder.

Economists are this weekend slashing their growth forecasts. Although we will have to wait until January for confirmation, it seems highly likely that Britain entered recession in the middle of the year and will have met the conditions – two quarters of falling gross domestic product. It has been a long expansion, starting with John Major’s 1992 election victory, but it has come to an end. For many people, unaccustomed to rising business failures, growing unemployment and serious belt-tightening, it will come as a shock.

The task is to prevent a recession turning into a depression. Japan showed in the 1990s how rising prosperity could turn into prolonged slump. Rebuilding a broken banking system takes time. It will require more government action, probably involving taxpayers taking stakes in the banks to provide them with the capital they now lack.

The Bank of England should cut interest rates this week to try to head off a deep recession. Vince Cable, the Liberal Democrats’ Treasury spokesman, says it should abandon its normal caution and cut the Bank rate by two percentage points. That is unlikely but Mervyn King, whose approach throughout the crisis has been overcautious, should give us a half-point cut.

In the end there is only so much that policymakers can do, however much they cut interest rates and however many tens of billions of taxpayer pounds and dollars they throw at the banking system. Britain is staring into the barrel of a recession that could drag on for a long time. Much of Europe has already succumbed, including France and Ireland. The heady days of summer 2007 seem an age ago. It will be a long time before that kind of economic optimism returns.