You may not have noticed it if you get most of your economic information from media headlines, but there were some pretty important events in the world economy last week - certainly more important than the Pre-Budget Report and fatuous arguments about public borrowing and taxes under the next-government-but-one in post-2015 Britain.

Share prices on Wall Street enjoyed their biggest five-day gain since the 25 per cent one-week surge that ended the 1932 bear market; US mortgage costs fell by the largest amount in living memory; and the traditional start of holiday sales was much stronger than expected, with one Wal-Mart employee tragically killed in a rush of shoppers at the Thanksgiving sales.

In Britain, sterling jumped by almost 4 per cent against the euro and the pace of house price declines diminished significantly in October, while Selfridges and PizzaExpress, two high street brands more important (and better managed) than Woolworths, MFI or Curry's, announced record profits.

Although this could easily turn out to be another false dawn, it is worth asking what contributed to last week's tentative signs of financial stabilisation. The answer is, for once, very clear. The rally in global stock markets and the rebound in currencies perceived as relatively risky, such as sterling, began on the afternoon of Friday, November 21, within minutes of a carefully placed leak that Barack Obama was about to announce his new Treasury team. By the time that the announcement was made on Monday the details were already known - Timothy Geithner, the under-secretary for international affairs in the Clinton Administration, would be the new Treasury Secretary; Larry Summers, Treasury Secretary under President Clinton, would be the new chairman of the National Economic Council and the principal economic policymaker in the White House; and Paul Volcker, the towering Fed chairman who had successfully steered the world economy through the crises of the 1970s and 1980s, would head a new financial stability forum. At last, it seemed, the US economy would be put under “adult supervision” by competent economists with a deep understanding of financial markets and long experience of crisis management, instead of being run by the sort of bankers and businessmen who had caused much of the trouble in the first place and had little understanding of macroeconomics.

In normal circumstances, the market rally that followed the leaked Obama appointments might have been a case of “buy on the rumour, sell on the news”. But by the time the announcements were made, the markets had something even more substantial to celebrate: a series of radical new policy decisions, sensationally at odds with the Bush Administration policies that had been largely responsible for the financial meltdown. There were four such announcements last week: a surprisingly generous and shareholder-friendly bailout for Citigroup; the direct purchase by the Fed of almost $1trillion (£650billion) of mortgage bonds, consumer loans and other securitised assets; a firm promise from the President-elect that General Motors, Ford and Chrysler would not be allowed to collapse; and a somewhat vaguer promise from Mr Obama that he would expand government spending and borrowing without any arbitrary limits, to create 2.5 million new jobs.

While the promises on job creation and the car industry were the ones that attracted most public attention - and provoked media arguments about deficit spending comparable to the sterile debate in Britain after the PBR - they were not the most important announcements. The decisions that really mattered were about Citigroup and the Fed.

The new economic team's decision that the Fed could refinance essentially the whole of the US mortgage and consumer credit market immediately triggered an unprecedented drop of up to a point in long-term mortgage rates to 5.5 per cent. Just as importantly, the Fed's willingness to offer an unlimited backstop to the mortgage market instantly increased the supply of new lending. Before the week was over, anecdotal evidence suggested a flood of new applications for mortgage refinancing, many of them including equity withdrawal, some of which will doubtless flow into consumer spending. Even more importantly, the Fed's decision directly contradicted the surprise announcement by Henry Paulson, the outgoing Treasury Secretary, a week earlier that he would not use government money to buy up mortgage loans. Mr Paulson's announcement had, predictably, triggered a collapse in financial markets and bank shares, since he himself had argued only a month earlier that mortgage purchases were absolutely essential to restore financial stability to the US.

A few weeks ago, a second U-turn in two weeks on this issue might have inspired even more market panic and confusion. This time, investors took the sensible view that the Government was finally doing the right thing - and, better still, that Mr Paulson had effectively ceded decision-making to Mr Geithner and Mr Summers.

The rescue of Citigroup gave an even more encouraging indication of how rapidly economic power was being transferred to the new regime. Everybody knew that Citigroup, until recently the world's biggest and most important financial institution, was “too big to fail” and would, therefore, be rescued by the Government. But the terms of Monday's rescue came as a big, and very encouraging, surprise. Instead of wiping out Citi's shareholders, as in the Fannie Mae and AIG “rescues”, which were actually expropriations in all but name, the Treasury and the Fed offered the company unlimited support on very generous terms. The details of the package are of limited economic importance, but the upshot was: Citi's shares more than doubled in the three days after the package was announced - a spectacular contrast to the 90 per cent collapse in the shares of Fannie Mae and AIG immediately after their “rescues” under the previous Treasury regime. The reason for this very different performance was not the risk taken on by the Government, since in all three cases the Treasury accepted essentially unlimited liability for losses on the loans made by the companies involved. It lay in the price exacted from shareholders in exchange for these guarantees.

In the case of Fannie Mae, Mr Paulson took the view that the shareholders in any financial institution needing temporary support from the Government should not just be penalised, but more or less wiped out as the price of such support. This message was reinforced a week later by the rescue of AIG on identically punitive terms. As a result of these two expropriative “rescues”, shareholders in banks and insurance companies all over the world quite sensibly concluded that their investments could be wiped out at any time with a stroke of Mr Paulson's pen - since the decision on whether a bank could be declared “insufficiently” solvent and therefore in need of support from the Government was also essentially at the Treasury's discretion. Not surprisingly, the share prices of all banks in America collapsed - and banks in other countries quickly followed, since governments such as Britain's expressed enthusiastic approval for the US Treasury's expropriations. As a result, the entire global financial system quickly found itself on the brink of collapse. This was the process I described at the time as “Henry Paulson's Doomsday Machine” - and it was put on hold only by the bank recapitalisations initiated by Gordon Brown in Britain.

The only way to stop the Doomsday Machine completely was to come up with a new formula for government financial support that would reward and encourage private shareholders in banks and insurance companies, instead of wiping them out. By replacing the incompetent Mr Paulson and creating a new shareholder-friendly financial model for future bank bailouts, the Obama economic team may finally have done this. If this turns out to be true, then private investment should soon start to flow back into financial institutions - and last week really will mark an important turning point.

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