I HAVE worked as an economist for 35 years, and even I have great difficulty in understanding how a mortgage lending crisis in the US could bring about the demise of the Bank of Scotland, billion-pound losses by the Royal Bank of Scotland and the collapse of many other financial institutions in the UK and US.

What therefore can the ordinary person think, particularly those whose pensions and savings are threatened, and who watch the value of their houses fall daily? Here are a few of my views, from a European perspective.

At the beginning, the financial crisis appeared to be confined to the US. Then it spread to the UK, initially via the collapse of the Northern Rock building society and then to the long-established banks such as RBS and HBOS, and most recently the Bradford and Bingley building society.

In the last few days the German, Dutch and Irish governments have been forced to bail out some of their banks, and, as I write, there is an emergency summit in Paris of European leaders to try to agree on an EU-wide bailout package and related measures. Agreement on an EU-wide bailout is very unlikely, however.

I have no doubt that there are three main reasons for the financial crisis: irresponsible mortgage lending; widespread growth of complex financial instruments; and weak regulation by financial regulators.

Many US and UK institutions lent money to people to buy houses on the assumption that house prices would continue to rise rapidly and that the mortgage repayments could therefore be secured against the higher values. When house prices began to fall, the bubble burst.

The problems were disguised by the growth of incredibly complex and highly leveraged financial instruments, such as collateralised debt obligations (CDO) and credit swaps. In simple terms, the mortgages were repackaged and sold on to other financial institutions at vastly inflated prices.

Many of the dubious US mortgages ended up in the UK and elsewhere. The Scottish banks have had to write off billions as bad debts. This week it was revealed that the US insurer AIG had written $300 billion in credit protection for European banks, and there have been other examples over the last few weeks involving the likes of Lehman Brothers and Morgan Stanley.

I believe that many of these financial instruments were just a form of gambling. I bet on my football team Inverness and a few others every Saturday but I do so with my own money, and in modest amounts. The "spivs and speculators" - to borrow Alex Salmond's description - have been gambling billions ... but with other people's money, and very possibly your savings and mine. If their bets paid off they have received tens of millions in bonuses. If their bets lost, all they lost were their bonuses.

And the bets have clearly lost, as illustrated by the $700bn bailout package in the US and similar bailouts in the UK and other European countries.

I put a lot of the blame on the financial regulators who failed to perform their duties and allowed these dubious financial instruments to spread uncontrolled. In the US the main regulators are the Federal Reserve Bank and the Treasury, and in the UK the Financial Services Authority and the Treasury. Heads must surely roll at all of these bodies.

The two governments must also share some of the blame. Few politicians on either side of the Atlantic have come out of the crisis with reputations enhanced.

It seems to me that some of the European regulators have been even more lax than our own. The Irish government, for example, has been forced to provide £300bn of guarantees for deposits in six banks and building societies; Germany has had to provide a 35bn loan package for Hypo Real Estate; and the Dutch government has had to take over the assets of Fortis in a 17bn deal.

What are the economic implications of these bailouts? It seems generally agreed that massive and urgent action was required in each of the countries affected, because their economies are in freefall. The banks have reduced their lending to businesses drastically and consumer confidence and spending have fallen, partly because of the declines in house values.

The Euro-area economy is forecast to grow by just 1.3% this year and 0.9% in 2009; the UK forecasts are 1.2% and 0.6%; and the US 1.6% and 1.3%. These do not imply recessions but the rates are very low by recent standards.

The injection of money into the economies affected should help to stem the declines and boost growth. How successful that will be will depend to a large extent on the form of the bailouts.

Unfortunately, I am not impressed by what is happening, particularly with the $700bn package in the US. One of the key problems is that the banks and other financial institutions became undercapitalised, because of the highly leveraged loans. The regulators disgracefully allowed that to happen.

One of the main objectives of the bailout packages should therefore be to increase the capital - and therefore stability - of all the affected institutions, through a mixture of equity and deposits. That does not seem to be happening. Loans from governments are just short-term medicine and may allow the crises to recur in the future.

I doubt if the summit will reach agreement on EU-wide solutions. I have sympathy with the objective because one bad apple can ultimately ruin all, but the practical issues involved are immense.

The financial systems and housing markets vary enormously. Germany, for example, has a very low level of home ownership. It is a very difficult time for the European Monetary Union and the European Central Bank (ECB), and I honestly do not know how they will come out of the crisis.

It is very difficult for individual economies to respond when constrained by a common currency and single exchange rate. The ECB actually increased interest rates in July, to widespread opposition from member states who wanted a cut to boost their struggling economies.

Some people have suggested that the crisis will actually lead to more European integration by showing that individual governments, such as in the UK, cannot solve the financial problems on their own. I very much doubt that but we'll have to wait and see.

The European Commission and ECB need to take action which succeeds in demonstrating that there are European-wide solutions.

Tony Mackay is the managing director of economists Mackay Consultants