A salutary lesson in how not to run a country

Typical: after 300 years Scotland finally elects an aspirational and effective nationalist government and what happens? A global financial catastrophe threatens to clobber the Scottish economy senseless. Just Scotland's luck. It's back to the drawing board.

Well, not quite. But the SNP government can be in no doubt about the seriousness of what has happened in the past few months. The landscape has changed, and changed utterly. The Nationalists rode to power on high employment, high house prices and a sense of optimism that was restoring the nation's battered self-confidence. Now we will see how they cope with national disillusion as Scots discover that houses are not after all a source of free money, that you actually have to make things to have a viable economy, and that, while the state can help, it can't make up for what isn't there.

The idea of turning Scotland into a Celtic Tiger like Ireland looks decidedly sick now that the tiger is dead and its cubs are looking to emigrate because they see no future. Ireland made the terrible mistake of believing a property bubble equated to real wealth. It wasn't alone: the UK made the same mistake on an even greater scale. But Ireland is now faced with the mother of all crashes in a small island. House prices are plummeting, and the Irish banks are effectively bankrupt as their extravagant loans to property speculators face default.

This, though, is as nothing compared to what is happening in Iceland, the Nordic Leopard that tried to buy up Britain's high streets. In the roaring nineties, Iceland became a kind of private equity island from which buccaneering bankers, who would give spivs a bad name, used cheap money to go on a leveraged buy-out binge of big retail names such as Matalan, Debenhams and House of Fraser. They bankrolled entrepreneurs such as Sir Tom Hunter and seized trophy assets like West Ham FC. The Icelanders made Russian oligarchs look prudent. But now that their cheap money has been taken away, the Icelandic banks are collapsing one by one, interest rates and inflation have rocketed above 15%, businesses can't get loans, supermarkets are running short of currency to buy food and people have reportedly resorted to barter to sell houses because of a lack of credit. The Icelandic krona has collapsed. Trade unions are being asked to repatriate their pension funds to save Iceland from bankruptcy.

National insolvency may await Ireland, too. In a state of panic last week the Irish Taoiseach took the astonishing step of guaranteeing all bank deposits without limit. This 400bn gamble seems to have paid off. Greece followed suit, and now, incredibly, Germany has also given a blanket guarantee. Alistair Darling now faces the humiliation of having to adopt Alex Salmond's call to likewise guarantee all British bank deposits. Beggar my neighbour now seems the name of the game throughout the EU. But the reality is that the Irish government has placed the profits of its banks above the welfare of its people by mobilising the entire nation's financial resources in a desperate bid to bolster the share prices of delinquent financial institutions.

This has been a tragedy for Ireland and Iceland, which believed they had transformed themselves from sluggish ruminants into entrepreneurial predators within a generation. The effects will be devastating and long-lasting as the "arc of prosperity" turns into an arc of insolvency. It is also a crisis for what might be called Celtic neoliberalism: the notion that small countries such as Ireland could slash taxes, borrow like there's no tomorrow and go on raiding parties to the big old economies of Europe. Small countries can thrive in the new global economy, but not on hubris alone.

It has been a salutary lesson, too, in not placing all your eggs in one basket case: the banks. Iceland and Ireland thought that they could rely on financial expertise and risk-taking to build what was called "a modern service economy", but which now looks more like a pyramid-selling scheme. Only fools believe you can build an economy on inflated property prices.

It is a lesson Scotland needs to learn as well, because we are likewise too dependent on the banks for our own good. Financial behemoths dominate Scotland. Banks such as HBOS delude themselves that they create wealth by manufacturing exotic "financial products" and generating enormous profits from irresponsible property lending. But all they really do is create more and more debt, which ultimately trashes the real economy. The Royal Bank of Scotland, under Sir Fred "the shred" Goodwin went on a buying binge, lapping up sub-prime loans in America and dodgy European banks such as ABN Amro. It is astonishing that, after the largest rights issue in corporate history and an unprecedented collapse in RBS shares, Sir Fred is still in post, as is Andy Hornby of HBOS. I'm sorry: these are not the people you want anywhere near running a country.

So the SNP needs to learn how to distance itself from the banks and shun the financial pirates who brought Ireland and Iceland to their knees. The Nationalists have already damaged themselves by association, holding up these egregious examples of collective greed as national role models. Yet there are better models which the SNP could look to, of small countries that have tamed their banking tigers.

Both Sweden and Norway had financial crises in the early 1990s. The Scandinavian banks collapsed after - yes, you've guessed it - a credit and property bubble in the 1980s that burst just like ours. Will we never learn? The Norwegian government moved quickly, driving down the shares of the banks to zero, nationalising many and taking an equity stake in the rest. It restructured and recapitalised the banks and then sold them off, so the Norwegian taxpayers didn't lose out and so the bankers didn't get bailed out. It was the reverse of what the Irish have done, which is to hand unlimited taxpayers money as collateral to the very bankers whose irresponsibility brought the country to ruin.

There has been relatively little discussion of the Norwegian response to banking meltdown, perhaps because it carries a hard lesson: you have to destroy the bad banks before you can rebuild good ones. Bailing out the existing banks is folly, as is basing a national economic policy on institutions that have little financial wisdom and even less moral integrity.

It is understandable that the First Minister, Alex Salmond, has, like his Labour predecessors, been bigging up Scotland's banks as national champions: they employ a lot of people, after all. But it is a devil's embrace that could destroy his party and destroy the country. If independence were to happen, it cannot be on the terms set by the banks. As Thomas Jefferson observed, if you let them anywhere near the seat of power, "the banks will, first by inflation, then by deflation, deprive the people of all property until their children wake up homeless".