Already politicians are scrambling to say what they will do to minimise the impact of the merger – but the fact that HBoS was on the verge of imploding from a crisis of confidence speaks volumes about just how powerless they are when faced with the market.

The Labour Government looks especially helpless. Having needlessly bailed out the badly-managed Northern Rock bank with taxpayers' money to ensure confidence and stability in the financial markets, Alistair Darling and Gordon Brown find they achieved no such thing.

Unable itself to afford the £12 billion that Lloyds TSB is paying for HBoS, the Government could not nationalise again and had no option but to waive the usual rules of competition and allow the new superbank to be formed. Whether such a state of affairs persists in, say, ten years' time when the economic climate might allow the Competition Commission to force a sale of some of the operations, only time will tell.

There will be some that will say we are witnessing a failure of capitalism – but such comments would be absurd as well as wrong. Capitalism requires failure to be punished as much as it requires success to be rewarded.

What we are witnessing is the folly of politicians that say they can end boom and bust, that they can control the outcomes of capitalism and that they can buck the market.

Choosing some banks to save and allowing others to go to the wall – be it here or in the United States – risks creating what is now called moral hazard. In other words protecting people or companies from failure will only encourage them to repeat the mistakes believing that they will not suffer any pain or financial loss.

It's one thing to provide insurance schemes to protect the customers of travel companies or banks from financial ruin, but protect the managers of these companies from losing their jobs – especially when they have been trousering all sorts of bonuses and share schemes in the good years – would be a folly we all would pay for later.

The only way to learn the hard lessons of what is good and bad economic policy is for failure to be allowed to happen so that rebirth takes place and fresh investment follows the success stories.

Time for Tony?

Next week I'm off to the Labour Party conference in Manchester – and the week after that to the Conservative conference in Birmingham – speaking at fringe meetings discussing the nanny state and taking in the atmosphere as party hacks consider their respective parties' prospects.

How different it will be compared to a year ago when Gordon Brown had not long been Prime Minister and was expected to call a general election that most thought he would win.

Now a day doesn't pass without more news about how bad the economy is getting, be it inflation, unemployment, house prices, mortgage lending – you name it. When will the economic news start to get better again?

Probably not for another year – by which point Gordon Brown's time will be nearly up and he won't be able to avoid asking the people to give their verdict.

The man who said he had ended boom and bust is no longer looking quite so clever. If Tony Blair offered to come back and lead the Labour Party I think its MPs would have him back in the blink of an eye – who would have thought that last September?

Broadcast aside

Politicians have lots of ideas about how to spend our money, believing that they can make better decisions for us than we can for ourselves. Gordon Brown is especially adept at this arrogant conceit, but David Cameron has yet to show he's really any different. How refreshing then that Nick Clegg should show that politicians can be different – offering to cut our income tax by 4p. That was to be added to a further 2p tartan tax cut in Scotland being offered by the new Scottish Liberal Democrat leader Tavish Scott.

Wow! That's quite a deal they're offering – what a pity for them then that most people in Britain probably never heard about it.

Thanks to first, the resignation of Scotland Office minister David Cairns, then the auction of Gatwick Airport – and now the purchase of Halifax Bank of Scotland by Lloyds TSB – the Liberal Democrat's conference has hardly figured on the BBC news. Even the publication of this year's Guinness Book of Records was given more coverage!