Last Thursday it was Guernsey-based Carlyle Capital Corporation's turn to go belly-up. Carlyle Capital is a spin-off from the Carlyle Group that has George Bush and John Major on its board and has done very well out of the Iraq war. It is a private equity finance company. (See Private equity finance - a new capitalist mutation.) These are privately owned firms that borrow other people's money usually in order to take over other firms and loot their assets. Under capitalism firms do eat each other. Now it can be argued that, without jackals, the veld would be full of wildebeests that had died. Jackals keep the place tidy. But, unless you're New Labour, you wouldn't really praise jackals as wealth creators.

In Britain private equity finance has been driven by a favourable tax regime. SVG's Nicholas Ferguson is a millionaire thanks to private equity finance. He's a rare example of a capitalist with a conscience. He finds it odd that he "pays less tax than his cleaning lady." It is not just odd - it's wrong

As we argued a year ago, private equity finance is a typical product of the overheating stage at the end of a boom. It's part of a financial bubble. And bubbles burst.

Carlyle Capital had assets of $700m. It managed to borrow $21bn, thirty times what its assets were worth. Its main line of business was buying mortgage securities, bits of paper whose assets were based on people's mortgages. That was fine as long as house prices were going up. The bits of paper would be worth more and more. So Carlyle Capital depended for its existence on the house price bubble.

Carlyle was worth $700m last week. Now it's worth nothing, zilch. Now you see it, now you don't. That's what happens when bubbles burst.

On Friday it was Bear Stearns' turn. ‘Bad news Bear's' demise was a bigger hit to the global financial system than Carlyle Corporation. It was the fifth largest bank in the USA. Last week it was worth $140bn, five times as much as Carlyle Capital. This week it has been swallowed up by JP Morgan Chase, pressured to do so by the Fed. Now the Bear's not worth anything. With $11.8bn of capital, Bear succeeded in clocking up $395bn in loans - greater ‘leverage' than Carlyle had managed. It was phantom money.

Bear's specialty was lending to hedge funds. They dealt in obscure financial instruments called Credit Default Swaps. It sounds complicated, but basically hedge funds bet. They bet on what currencies will be doing tomorrow or next year. They bet on what commodities will be playing at. And sometimes they lose. They lost, and Bear Stearns lost too.

Speculator Joe Lewis bought a $860m piece of the Bear when shares were trading at more than $100. Financial commentators kindly described his acquisition as ‘counter-intuitive.' Bonkers is more like it. He's lost the lot.

Ten thousand jobs are to go in the City. It seems the ‘wealth creators' can only create wealth in a rising market when paper wealth is blooming all round through ‘leverage'. What we're witnessing now is called ‘deleveraging', and very painful it is too. Financiers are suffering withdrawal symptoms from taking leave of cloud cuckoo land. Money has been borrowed on the basis that payouts will keep going up forever, and the consciousness has now dawned that they won't.

Hold on to your hats. The American Central Bank, the Fed, is due to meet this week to talk about interest rates. It's odds on they'll cut again. The trouble is, the more they slash rates the more people can smell the fear.

Robert Peston, economics commentator for the BBC, comments,

"As for central banks, they increasingly look not like supermen but seven-stone weaklings.

"They've been reducing official interest rates, but that's done little to cut the cost of credit for most of us or increase its availability, because banks have taken the opportunity to rebuild their profit margins.

"And what about central banks' new willingness to allow banks to swap financial assets of dubious value for hard cash or liquid government bonds?

"Well that may have encouraged lenders to seize dodgy assets from borrowers that are in trouble in order to dump them on a central bank like the New York Fed.

"In other words, central banks may inadvertently be accelerating that fateful deleveraging process."

As of Monday March 17 stock markets are in shock. Later this week the big US banks are set to write down another $3bn in assets - assets that are no longer assets.

Two million households in the USA face repossession of their homes. Repossession is not just heartbreaking for the families involved. It poisons and pollutes the whole housing market.

And over here [in Britain] the Financial Services Authority guesstimates that two thirds of the mortgages taken out over the past two and a half years (with sums like six times household income on offer) are horribly exposed. Capitalist crisis - coming to your local area soon!

• 1929: Can it happen again? by Mick Brooks (March 17, 2008)
• World economy in crisis - The financial panic: where are we now? by Mick Brooks (January 23, 2008)
• Stock market latest: more panic by Mick Brooks (January 23, 2008)
• Panic! by Michael Roberts (January 22, 2008)