In his second day of semi-annual assessment of the economy on Capitol Hill, Mr Bernanke explained that the decline in home prices is causing a broader set of problems than the end of the technology bubble.

Comparing the 2001 slowdown to the economy's current woes, he said: "In fact the effects of the stock market declines were primarily on investments. In this case, consumers are taking the brunt of the effects."

Mr Bernanke also believes the Fed is in a more difficult position to respond now that it was in 2001.

He would be unwise to repeat it this year.

His long boom is now heading for a messy end with a slowing economy, rapidly weakening consumer and business confidence, a collapsing asset bubble in the housing market and a big hole in the budget.

So far these problems seem remote from most families. There is a feeling as on those late, sultry summer days where there is blue sky overhead and cricket is being played; but there are wickedly black clouds billowing up.

Until the rain falls the Government will not get a soaking. But wise people are looking for shelter.

A lot of pundits are positioning themselves to be wise after the event. But I have long warned Gordon Brown that unbalanced growth led by consumer spending based on borrowing was not sustainable because it did not reflect any underlying improvement in the fundamentals of productivity growth and innovation. I warned him of "record levels of personal debt which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level". That was five years ago.

Since then debt and house prices have inflated enormously to levels which, in relation to income, are now the most extreme in the developed world. The bubble is now bursting. Forward markets tell us that house prices are likely to fall 10pc on average this year. Serious people anticipate a 30pc to 40pc correction over the next few years.

The economy is slowing with recession a real possibility. The only glimmer of light at present is the stimulus to manufacturing from the - unplanned - devaluation of sterling.

We can see already that households are spending less as they try to rebuild their balance sheets. As growing numbers see their (paper) wealth depreciate, and many discover negative equity, there is less willingness to use equity release to maintain spending.

As the economic slowdown affects earnings growing numbers will fail to maintain debt service and we shall see mounting repossessions - already in evidence - depressing the housing market further.

Even those tempted to borrow are unable to as lenders re-price risk and tighten lending criteria. Those stuck with recent 125pc, Northern Rock, Together mortgages will not be able to refinance them.

We can see now in the United States where we shall be in six months time. But, unlike the US, we have little or no scope for macroeconomic stimulus. Interest rates cannot be cut aggressively because of inflation fears.

There is no scope for a fiscal stimulus either since the Government is at or beyond the limit of its self-imposed deficit and debt rules. The best option would be a tax neutral redistributive tax package which cuts basic rate income tax financed by taxes on the capital of the very wealthy.

But even if a macroeconomic stimulus were possible it could be of doubtful relevance to asset deflation. Is there anything the Government can or should do about a collapsing housing market?

The market has to correct itself. An adjustment may even be socially progressive if it restores affordability. The Government should certainly not acquire, as in the US, household mortgage liabilities. It already owns enough via Northern Rock. I worry about the pressure from mortgage lenders for a government bail-out in the form of state support for mortgage payments. There are, however, several sensible steps the Government can take.

First, those individuals facing potential financial difficulty and over-indebtedness must have access to decent impartial, generic advice, and not be left to be chewed alive by the financial vultures who will descend on them.

The Government has been particularly dilatory - I was told almost a decade ago that action was immediate. And, by all accounts, the Thoresen Report is being emasculated by the vested interests. The Government should back a rapid rollout via the CAB network jointly financed by the industry - through the FSA levy - and the state.

Second, it is important to avoid regulatory overkill. But the unregulated predatory lenders - the sale and leaseback merchants and the consumer credit companies who take second charge mortgages - must be brought under mortgage regulation.

Third, there must be intervention to stop a vortex developing of repossession, subsequent homelessness and fire sales of property. Before court proceedings are allowed, debtors and creditors should pass through a gateway of arbitration during which the debtors have access to independent advice.

A key element in the arbitration process would be the availability of a part rent, part buy, option in which the bank acquires a share of the equity in lieu of full payment.

The more responsible lenders already look at such possibilities; the cowboys act as free riders, which is why a voluntary approach may be insufficient.

Finally, prevention is better than cure. Big asset bubbles are dangerous and monetary policymakers have to be able to counter them not, as now, watch passively while they grow, then burst.

Interest rates should respond to measures of inflation which incorporate house prices, enabling interest rates to rise more and sooner in a boom and fall in a slump. A further step is to have active, counter cyclical management of reserve assets, building on a cyclical dimension to the implementation of the Basle rules.

I argued for this concept several years ago and Charles Goodhart and Avinash Persaud have now set out a specific and practical proposal.

The Government - like the lending industry - has been in a state of denial about these problems for too long. Unless it gets to grips with them, its already tarnished reputation for economic competence will be trashed beyond repair.

Vince Cable is Liberal Democrat Deputy Leader and Shadow Chancellor