Only two years ago the retiring governor of the Reserve Bank, Ian MacFarlane, was concerned about over-confidence in the Australian economy. That, to say the least, is no longer a concern.

With more than $US4trillion of market value erased from global stocks this week, that feeling of ''irrational exuberance'' that lingered in Australia for so long has disappeared.

The steady diet of bad news, particularly from the United States, has been hammering down the previously buoyant mood of a country enjoying a prolonged resources boom.

The collapse of giant investment banks Lehman Brothers and Bear Stearns, the US Government takeover of mortgage finance companies Fannie May and Freddie Mac, the UK Government takeover of Northern Rock, the distressed selling of Merrill Lynch, the US Federal Reserve rescue of the world's largest insurer, American Insurance Group, have all sent shockwaves through markets.

The global fallout has rocked European and Asian markets, with the Australian stock market also taking a pounding.

The prevailing mood is one of fear and apprehension, with most people wondering, ''What next?''

The truth is that no-one knows for certain, as financial markets are inherently unpredictable, but we can make some broad observations.

It's important here to distinguish between the Australian economy, which has been quite resilient, and other countries around the world which are struggling.

The latest quarterly growth shows Australia grew by 0.3 per cent, while many other countries went backwards Japan -0.6, Germany -0.5, France -0.3, Italy -0.3, and the UK zero growth.

Respected economist at the Australian National University Professor Warwick McKibbin, who also currently sits on the Reserve Bank board, says there is no reason for Australia not to come through this reasonably well.

''Australia is in very good shape right across the board to handle this, partly because of the policies of the previous government getting rid of government debt, partly because of the reforms of the government before that, and the previous government, in making the economy more flexible.''

Treasury and the Reserve Bank believe that the Australian economy will continue to grow, tempered by external events.

Australia's chief financial regulator declared this week that ''Australian deposit-taking and insurance companies supervised by APRA are well-capitalised, profitable, and well-regulated, and are weathering the turmoil well''.

And as Treasurer Wayne Swan pointed out this week, Australia's largest four banks are among only 12 of the world's top 100 banks with an AA credit rating or more.

The Reserve Bank Governor, Glenn Stevens, said this week that our financial system was ''weathering the storm well'', but in a big-picture speech to the Australian Institute of Company Directors on Wednesday he had a number of interesting things to say about broader economic trends.

He signalled the end of the long debt binge, asking whether ''the long period of gearing up by households might now be approaching an end'', ushering in a new era of more modest household spending coupled with greater saving.

He pointed to the rapid growth in household debt from a level of 50 per cent in the early 1990s to be currently 160 per cent of household income. This needed to be seen in line with a rise in assets from 460per cent of income in 1990 to over 800per cent at the end of 2007.

Overall the ratio of debt to assets rose from less than 10 per cent in 1990 to about 18per cent in 2008, with housing debt to housing assets reaching about 27 per cent.

The governor said that growth in debt had eased recently and that ''there is also a good chance that households will for some time seek to consolidate their debt, grow their consumption spending at a pace closer to income, and perhaps look to save more of their income than in the recent past.''

While household borrowings had been the big financial story of the past 15 years, Stevens said, ''There are some developments that suggest the balance sheets of governments might well be expected to expand a good deal.''

He cited the US Government bailouts of Freddie Mae, Freddie Mac and AIG as well as the UK Government's takeover of Northern Rock as examples of a possible trend where the higher cost of capital might lead to a greater government role.

The governor also pointed to governments taking a greater role in infrastructure financing in the face of aversion to these assets by private investors.

The unprecedented actions by US and UK authorities in financial markets have led some to ask whether there has been a fundamental shift in the attitude of governments and regulators to intervention in the market.

Strong free-marketeers such as US Secretary of Treasury Hank Paulson and Chairman of the Federal Reserve Ben Bernanke have seemingly undergone road-to-Damascus conversions to the power of the state.

''The [AIG] move represents the largest lurch toward socialism that this country has ever seen,'' the president of Euro Pacific Capital, Peter Schiff, said this week in a piece of breathless hyperbole.

Democrat Congressman Barney Frank said Bernanke ''can make any loan he wants to under any terms to any entity or individual in America that he thinks is economically justified.''

''I asked the chairman if he had $85billion to bestow in this way. He said 'I have $800 billion'.''

But while the sudden emergence of large-scale government intervention in the financial marketplace has been eye-popping, it is not clear whether it represents, as governor Stevens seems to think, a harbinger of things to come, or whether it merely represents a specific response to a particular crisis.

Harvard professor and a former chief economist at the IMF Kenneth Rogoff, has estimated that to firewall the US economy against further market instability would take about another $US1-2trillion.

''A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending,'' he said.

The de facto nationalisation of various banks would appear to be a specific response to a particular event, with no life beyond the current crisis, but there are some straws in the wind of a new willingness of governments to embrace a tougher regulatory approach.

Incumbent governments in both the US and Britain are coming under increasing political pressure over their financial market policies.

The era of so-called unregulated finance, according to critics, has led to the current crisis, and both George Bush in the US and Gordon Brown in the UK are associated with those policies.

Both John McCain and Barack Obama are running on ''change'' platforms with pledges to address the current regulatory regime, while Gordon Brown is coming under increasing pressure from his own party to turn to embrace a more left, interventionist approach.

The political dynamic is impelling governments to take action to deal with the crises. When the need to ''do something'' can hardly mean less regulation or do nothing, the only alternative is more regulation.

In the case of the US, better regulation may improve the situation whereby systemic risk can arise from poorly regulated financial structures. The US could learn from Australia's superior regulatory arrangements in this respect.

The immediate imperative, though, is for governments and authorities to instill confidence in the system.

Confidence levels in Australia, according to a recent Organisation for

Economic Cooperation and

Development survey, have slumped in the past year more than in most other developed countries. And we have a resources boom that others don't.

Professor Warwick McKibbin says that ''the biggest problem to get is a loss of confidence''.

''It's really up to everybody involved at the political level to be talking up the economy, and I think there have been mistakes made in the past 12 months, without naming anyone in particular.''

The Coalition has been accusing the Government of damaging public confidence through its rhetoric earlier in the year that ''the inflation genie is out of the bottle'', saying that this jolted people into an unnecessary panic about the state of the economy.

The Government has since been accusing the Coalition of talking down the economy by highlighting negative news on growth and employment.

One person who clearly recognised the vital role of confidence in a capitalist system was former US President Franklin Delano Roosevelt, who said in his 1933 inaugural address in the midst of the Great Depression, ''The only thing we have to fear is fear itself.''

It is as true now as it was then.