As recession bites hard, a more despondent, down-at heel group of people than the debtors at the bankruptcy courts in the Strand would be hard to find. Waiting for their papers were mothers with fractious children, weary old men, an Italian singer, a lorry driver, a decorator, a former City trader, and scores more, all with their stories to tell.

Then astonishingly there was Micky waving at me, still with the studs in his nose and eyebrows, an unexpected old friend. He was in the next-door flat when I lived briefly on the Clapham Park Estate, a man I wrote about in my book Hard Work. Once he was a social worker, but when I met him he'd been out of work for six years following a nervous breakdown. So what brought him here today? He smiled, and shrugged. The same as just about everyone else in that waiting room - credit card debts.

He owed £20,000. How on earth did that happen? There was an overdraft and then some cards, until a company offered to sweep all his debts into one - at an even worse interest rate. The most he'd earned was £12,000 a year, and that was a while back, but he was offered all these cards. Recently he called Provident, the lender of absolutely last resort, looking for a loan just to hold off the threatening letters. Yes indeed, they said - but at 184% APR. That's when he finally gave in and went for bankruptcy. "I got another card through my door this very morning saying I'd been 'pre-selected as suitable for a loan' from yet another company. I couldn't believe it. They're still at it. Nothing's changed."

Others round the room joined in, exchanging stories of the same debt collecting companies. "I haven't opened my front door in months," said the Italian singer who owed £46,000, juggled between five credit cards. The lorry driver had shuttled debts between cards for eight years, full of shame, until rolled-over interest swelled to £65,000; he was paying off £1,500 a month, more than the £300 a week he earned. A care-worn mother with a toddler and a baby was too depressed to speak; her brother said she'd been going through a bad time when she accumulated the £10,000 debt, and it just grew. "God knows how they let her borrow all this!"

Few waiting for bankruptcy papers that day had any assets, property, cars; some had lost their jobs. In most cases there was nothing to repossess, though one woman sectioned under the Mental Health Act risked losing her home in Bow, but the registrar delayed it. If ever there was sub-prime debt, here it was. They might have been devil-may-care good-time spenders, but most had struggled frantically to keep up payments, until debt advisers told them to file for bankruptcy.

Registrars and officers in bankruptcy courts express despairing astonishment at how debt was allowed to bubble out of control in recent years and "on-the-never-never" entered the nation's bloodstream. The Enterprise Act that came into force in 2004 toughened anti-cartel legislation, but also sought to "modernise insolvency law" - a symptom of how Labour fell under the spell of City magicians who said deregulation would let the boom rip. Debt and bankruptcy must not hurt risk-taking, they said. Start-ups must be allowed to fail painlessly, so entrepreneurs can pick themselves up and try again. The act discharged bankrupts after a year instead of three. Debts soared, bankruptcies more than doubled and kept rising.

British law is now so lax there is even bankruptcy tourism, especially from prudent Germany where it takes six years to be discharged. A German car dealer with large debts back home was waiting in court that day: he only had to establish a token business here and British law would wipe out his German debts in a year's time.

One wise judge said there was now no reason why the penniless with nothing to lose shouldn't seize every opportunity the credit industry offered to borrow until they bust - then do it all over again. The banks spread the cost invisibly among the rest of their customers in a secret redistribution. It had suited everyone, fuelling high street spending. Luckily for reckless capitalism, the poor are willing to work hard in essential jobs that don't pay a living wage, so they need to borrow: they are mostly honest and easily shamed by debt collectors. That's why banks go on lending to them, as most move heaven and earth to repay.

But while some drown in credit, a credit drought is killing off others. As the real economy shrinks for the first time in 16 years and shares again plunge alarmingly, ministers promise small businesses protection from going bust due to banks refusing loans. Will it happen? The British Bankers' Association retorted this week that the onus is not on banks to keep businesses afloat. "It seems inevitable some businesses will not survive," it said. Already some 280 small businesses are folding every week. Yesterday I was contacted by Powertech, a thriving solar boiler company that has just landed a string of orders worth £3m, including a contract with Aga/Rayburn to fit all new ranges - the fruition of 10 years of development. With new orders from Canada and the US, it needs to hire staff and pay for containers from China. Yet its bankers of many years are refusing more than a £20,000 overdraft. Without credit they can't fulfil orders, and would be bought out.

We the people own so much of the banking system yet still allow banks to use state funds to fatten up their capital assets, instead of giving good credit where it's desperately needed. How is it that bad credit at toxic rates still isn't firmly controlled? A government that this week had nothing to say about Lloyds TSB paying out bonuses from taxpayers' money seems equally incapable of asserting its authority to make banks lend. After being rescued from certain catastrophe, bankers are as full of hubris as ever; and the government is as eager as ever not to interfere, but to sell off its holdings as fast as it can.

Spam in my inbox yesterday from Churchwood Finance offered: "Refused a loan? Judgements, defaults and blacklisted? No problem! Loans from £500 to £250,000." Meanwhile, here's a small test of Labour's willingness to use its new bank ownership well: will the government see that one of the people's banks lends money to Powertech, part of the green future?



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