So now we know: the Government gave the public a "wholly misleading picture" of the safety of their savings. That is the assessment of the Parliamentary Ombudsman after an exhaustive inquiry into Equitable Life's collapse.

Well, blow me down. Who would have believed it? Ministers, best known for squandering public resources, have discovered a commodity with which they prefer to be economical - the truth. Shocking! How long before an official investigation concludes something very similar about Northern Rock, for which Alistair Darling approved a £25 billion state loan and other guarantees worth at least as much again? When the Newcastle-based bank, crippled by a flawed strategy, began sucking in public money last autumn, the Chancellor's message was unambiguous: taxpayers' money is safe. In November, he insisted that the Rock's debt was underpinned by "quality assets", including mortgages.

Given that the cash was being absorbed by a dysfunctional business, his confidence about the likelihood of full repayment seemed strangely at odds with reality. What's more, the housing market had already cracked and the value of the Rock's collateral was starting to slip away.

Not surprisingly, Mr Darling's reassurances and those of his puppet master next door have since morphed, in the style of Animal Farm, into something less certain (some subsidies, it seems, are more equal than others). Even so, as recently as February, when the Government decided to nationalise the Rock, the Chancellor was still looking on the bright side. "When market conditions improve, the value of Northern Rock will grow and therefore the taxpayer will gain," he said. Gain? Wow, there was I thinking that Mr Darling had been driven by political expediency - a desperation to shore up votes in Labour's north-east heartland - but all along he had a cunning plan to outwit professionals and make a profit.

Ah, if only the Grey Fox had been running the Treasury when Equitable Life went under. Who knows, instead of having had their pensions slashed, the members might now be lighting cigars with £10 notes. Or maybe not.

An important difference between Equitable and the Rock is that, whereas the mutual insurer's customers were invited to contribute, taxpayers were compelled to hand over a sum not far short of Britain's annual defence budget to an ex-building society that had become too big for its boots. As Westminster's resident comedian, Vince Cable, pointed out: "This Prime Minister and his Chancellor have invested the equivalent of 30 Millennium Domes in this bank and we don't even have a pop concert to show for it."

The Chancellor's case was that he had acted to protect taxpayers' money and save the banking system from ruin. It sounded noble enough, but didn't bear scrutiny. First, when has taxpayers' money ever been safe with Government? Second, the world would not have ended had the Rock tumbled into administration like any other poorly managed company.

Willem Buiter, a professor at the LSE and a former member of the Bank of England's Monetary Policy Committee, said Northern Rock had no systemic significance: "Its insolvency would not threaten financial stability… Indeed in the longer run, the insolvency of Northern Rock would no doubt enhance the financial stability of the UK banking sector, because it would represent a stark warning against reckless funding."

On the day Gordon Brown moved into Number 10, he promised us a new style of government. And, to be fair, he has delivered something different: an origami administration. Everything it touches folds like rice paper.

The 2p increase in fuel duty, the abolition of the 10p income tax band, the reform of capital gains tax and plans to levy a charge on wealthy foreigners have crumpled in the hands of a Chancellor whose capacity for U-turns suggests he might be better employed as a BSM instructor. Only a brave man, or a fool, would bet against a future Darling embarrassment being a volte-face over the amount taxpayers will claw back from Northern Rock. Had the cash been ploughed into any other leading British bank, hefty writedowns would certainly be required.

HBOS is facing the humiliation of its £4 billion share issue being left with underwriters, because existing investors don't want to add to their holdings. Barclays has lost 60 per cent of its stockmarket value, Royal Bank of Scotland 75 per cent. Bradford & Bingley has passed round the hat for emergency funds, while Alliance & Leicester is fainting into the arms of a Spanish suitor.

Northern Rock's main business was mortgages. It chased market share with aggressive offers that, even in the gold rush of 2006-07, looked ridiculously imprudent. Not until February this year did the bank finally withdraw its "supersize" home loan, 125 per cent of a property's sale price.

Widening faults in the housing market are creating deep holes in many homeowners' finances. The Halifax index is down by 10 per cent since last August, and the trade in property derivatives is signalling that prices have much further to fall, perhaps by up to 20 per cent. Such an outcome would be far more severe than when the roof fell in during the recession of the early 1990s. Worse still, unemployment is rising sharply, with the inevitable effect that some unfortunates will fail to meet their mortgage obligations. Capital Economics, a forecasting group, predicts that the jobless total will reach 2.5 million by the end of 2010, an increase of 900,000. If that were even half right, we should expect a surge in arrears, defaults, repossessions and what the banks call "impairments", ie, irrecoverable loans.

Regular readers will know that this is not a conclusion that I have reached just recently. In May 2003, I wrote in our sister paper, The Sunday Telegraph: "A new study from the Citizens Advice Bureau reveals the extent to which Britain's credit boom threatens to explode in the Government's face… A significant portion [of the 8,000 surveyed] had borrowings that were 'totally unmanageable in proportion to their income'. This problem isn't going to go away, and when interest rates start to rise (they always do at some stage), the social and economic impact will be devastating."

It remains a mystery why, when the CAB was flagging up a crisis, so few at the top of banking and almost nobody in government took notice. There was a conspiracy of silence, for which millions of decent taxpayers, who never lived beyond their means, will have to foot the bill. We will learn more next month, when Northern Rock unveils interim results and an update on the deterioration of its mortgage book.

Whatever the true position, Mr Darling will doubtless try to play down the risk to our £25 billion. As Equitable Life's victims learnt the hard way, when it comes to painting misleading pictures, this Government is an Old Master.



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