They started queuing first thing in the morning. They wanted to get their hard-earned savings out as soon as possible. Northern Rock, Britain's fifth-largest mortgage bank was going bust. It had announced that it could not raise enough funds in the interbank market to finance its mortgage lending or meet its obligations any more. Disaster!

Tens of thousands of savers who had put their money in Northern Rock faced huge losses. As they said in the queues: "We are elderly and this is our life saving," said Sheila Smith, who came with her husband, Arthur, to withdraw all their money from the bank's Moorgate branch in central London. "We can't afford to lose it."

A 61-year-old retired health service consultant from Sidcup was following suit, having spent more than an hour getting into the city after a morning of failed phone calls to his local branch. "I put all my savings in one basket and the best thing to do is to get out of this basket," he said. Michael Ribotham, 74, could not see any point in leaving his money in a bank with such big problems. "I'm not young and don't have a chance to make it back again.''

There were similar stories at a branch in the bank's home of Newcastle upon Tyne, whose football team carries the Northern Rock logo. "I've been thinking about it all night," said 72-year-old pensioner Mary Bowman, who had £38,000 in a Northern Rock Silver Saver account with her retired miner husband. "It's our burial money and everything," she said.

It was no good the government, the Bank of England or so-called experts announcing on the radio and TV that there was no need to panic - deposits were safe. First, the banking industry's so-called deposit insurance only covered the first £2000 of savings and then only 90% of the next £33,000. After that, any savings were not covered and anyway it could take months before getting money back if Northern Rock collapsed.

David Clark, a 61-year-old builder, said he did not believe official assurances about anything financial: "It's just like football managers. Their jobs are guaranteed - then they are sacked the next day."

June Barnes, a special needs guide, and her husband Edward, a retired road worker, left the branch with £500 of their £20,000 savings, the most they could withdraw, and plan to come back every day to do the same. "It's all right people saying don't panic, but at the end of the day you've worked hard for what you have in the bank," said Mrs Barnes.

Many in the queues just did not believe the government. "Tony Blair lied to us about Iraq and many other things. Gordon Brown went along with him - why should we believe these people now?"

The collapse of Northern Rock sums up the mushrooming financial crisis that is spreading across the capitalist world. The last 15 years since the last major economic recession of the early 1990s has seen an expansion of capitalism built on an unprecedented growth in financial credit globally. While annual real production has risen at about 3% a year in the OECD countries, money supply, mortgage and company debt, personal borrowing and the massive so-called derivatives market based on this credit has increased at over 25% a year!

Never has capitalism been so dependent on its financial sector. Never has the financial sector been such a major contributor to profit. But this is what Marx called 'fictitious capital'. The boom of the 1990s and of the last four years or so has not been mainly based on expansion of real production (at least not in the OECD advanced capitalist countries). No, it has been based on huge spending by American and British households financed by a vast increase in debt. Households no longer save anything, they just borrow.

How can they do that? Well, it's because there has been a boom in the paper prices of stocks and shares (which bust in 2000) and above all in housing. Across most of the advanced capitalist world, cheap credit and wild mortgage lending by banks has inspired a massive increase in the price of real estate. Much of the world's value-creating production has been siphoned off by the banking system (mainly based in New York and London) into a Ponzi-like pyramid of credit that fuels an unproductive sector of land and bricks. China and Asia's massive export surpluses have been 'recycled' through the banking system into buying mortgage debt, bonds and shares of American households and companies.

This has been possible because American and British banks have developed 'clever' new ways of spreading the risk of lending. If they lend billions in cheap mortgages, they then take the mortgages and 'batch' them up into debt packages that they sell onto other banks, hedge funds and other financial institutions around the world. They called these new debt instruments 'asset-backed securities' because they were backed by assets (namely mortgages and houses). These people buy them because the interest on them is much higher than anything else and it is safe - isn't it, because everywhere house prices are rocketing and people can afford to make their payments. So risk is spread around and everybody is happy.

Well, not any more. If credit is expanded at geometric rates and the production of real things that add value cannot keep pace, then inflation begins to enter the capitalist system. For years, inflation did not appear because the cheap slave labour of billions of workers in China, India and Latin America kept prices of traded goods low. But that began to stop about a year ago as labour markets tightened in Asia. Also, as more and more money went into the financial sector or into 'services', labour shortages and higher costs appeared in the OECD economies. The central banks of these countries began to hike interest rates to control inflation. Mortgage rates began to rise and the cost of financing homes.

What kicked off the crisis was the collapse of the US homes market. From mid-2005, prices stopped rising at astronomical rates, then slowed sharply and finally by the end of 2006 started to fall. This was particularly bad news for those borrowers who had lied about what they earned or were offered mortgages with no attempt by the banks to check on whether the borrowers had incomes to justify repayments. These were called 'sub-prime' loans (not the best prime one). Only 10% of the US mortgage market was in sub-prime loans but the problem was that the banks had 'batched' all these loans in packages with prime loans and sold them on around the world. So nearly every bank in the world had bought part of these 'junk' loans or asset-backed securities. The trouble was that the asset part disappeared in a puff of smoke. So all the banks were all liable, as sub-prime borrowers started to default on their payments. The world credit crisis began.

The irony is that Northern Rock never lent to American houseowners, never mind the high-risk ones who are now defaulting in droves and bad debts on its British mortgages are close to record lows. Yet it is the first bank to need bailing out since new rules allowing rescues were introduced in 1988. The reason is that Northern Rock was only in the mortgage business because it could borrow money from other banks at very cheap rates to finance mortgage lending. Back in the early 1990s, Northern had been a steady building society based in Newcastle, only lending based on deposits it got from people who put them with it. But then came the property boom and the great 'new ways' of raising credit. Northern turned itself into a bank with shareholders and launched an aggressive strategy of lending cheap to householders. In January this year, the management were being feted by their shareholders for boosting profits and taking the biggest share of new mortgages in Britain - they got awards for being so clever!

Then came the credit crunch. Because house prices were collapsing in the US and mortgages were being defaulted, banks were no longer sure that the all the mortgage debt was worth what they had paid for it. So they stopped buying any more - lots of small funds in this mortgage-backed security business went bust, as did a big US mortgage bank, American Mortgage Securities. Then the America's biggest mortgage lender, Countrywide, announced huge losses and job cuts. The banking world panicked. They stopped lending, even to each other. The crunch spread around the world. European banks that had bought these junk bonds from American banks also went under (IKB and Saxon in the US). Northern depended on borrowing from other banks as its savers in Newcastle and around Britain were not enough to finance its very breakneck pace of lending. Now it could not raise money. After a few weeks of struggle as the interbank loan markets stayed dry and interest rates rocketed, Northern Rock gave up the ghost and asked the Bank of England to bail them out.

The banks may be in the line of fire but the chances are that it will be ordinary working people who will feel the pain: the savers, the home owners as home prices plummet in the UK and of course, the workers in the banks and mortgage lenders who will soon lose their jobs.

Mortgage rates are now rising. The cost of owning a home in Britain will become even more nightmarish. Already, mortgage interest payments are taking up a bigger share of our income - the average is 17.4% - than at any time since the early 1990s housing crash. And the average rate has risen from 4.67% in July 2005 to 6.1%. Any additional rise will further stretch borrowers.

The long-forecast end to Britain's 12-year housing boom is drawing closer. In September, there was a 2.6% drop. A survey by Rightmove, the property website, showed the average asking price in the UK was £235,176; down from £241,474 in August. And the average property sat on the market for 86 days, compared to only 70 in May. The number of properties for sale per estate agent has also risen; from 52 in December to nearly 66 today.

The reaction of the institutions of capitalism and the New Labour government has been nothing short of a joke, if it wasn't so painful for ordinary people. Only two days before the Northern Rock crisis broke, the governor of the Bank of England, Mervyn King, had told a parliamentary committee that there was no way that the Bank would 'bail out' banks and investors who got into trouble because they has invested speculatively and unwisely in sub-prime loans and other risky ventures.

And yet King had to do a somersault when it was clear that Northern Rock was going under and announce it would after all fund Northern. The new Chancellor of Exchequer, Alastair Darling, who took over from Gordon Brown when he became prime minister, had obviously panicked. He demanded that King provide funds immediately to Northern. He realised that thousands of Labour voters would be demanding blood if their savings were forfeited and their mortgages called in. Even more serious, it was clear that if Northern went down, so would a number of other banks with similar balance sheets and there would be the biggest banking crisis since the 1930s. The Bank's actions did not stop the run on the Northern branches. The shares of other banks also tumbled and the cost of borrowing between banks continued to reach extreme levels. Britain's banking system was seizing up.

So late on Monday evening, 17 September, Darling announced (stuttering and stammering his speech, looking like a rabbit caught in the headlights) that all the deposits of Northern Rock savers would be honoured by the government. In effect, the government had nationalised the bank. Also, he was opening up the condition that if other banks go under, their depositors would also be repaid in full. So the whole banking system in Britain was now backed by the taxpayer.

Quite right that hard earned money saved by British people should not be lost because of the casino gambling of the global banking system going wrong. But if deposits are to be saved at the taxpayer's expense, should not ownership of the banks also pass to the people? What could be a more conclusive condemnation of capitalism than the boom and bust cycle in global financial markets? People's money is not safe with capitalists - only a democratically accountable state system can make it so.

And this financial crisis and credit crunch is just the beginning. From here, tightening credit markets and rising interest rates will mean falling profitability for capitalist companies and slowing production, possibly even economic slump, as American, British and European householders have to tighten their belts.

First watch out for serious falls in the profits of the big banks around the world. That will be followed by job cuts throughout the financial sector. And job cuts will mean less income to finance property purchases and mortgages. House prices could plummet.

Never in the history of capitalism has the financial sector been so important to the health of capitalism. In its maturity, capitalism is increasingly no longer a system that raises the productive forces. It is more and more a financial parasite unproductively resting on top of the productive sectors of the global economy (mainly in China, India etc).

That is especially so in Britain, the financial parasite extraordinaire - a giant Switzerland, that sucks in the earnings of other countries (oil-producers in the Middle East and the manufacturers of Asia) and recycles it. British capitalism now makes little itself. Instead it is just giant banker of the world. As such, the British capitalist economy is the most vulnerable to a global financial crisis and any ensuing economic slump. And British workers and their families will suffer more than most.