In the fading days of summer, Britain witnessed the first bank run since Victorian times. Hundreds of people queued outside branches of Northern Rock to reclaim their savings, pulling out more than £2bn over a weekend. The government protested that the financial system was safe, the economy strong. But nobody was listening.

The failure of Northern Rock ended Gordon Brown’s brief honeymoon as prime minister. It struck a blow to London’s reputation as a “light-touch” financial centre rivalling New York. Mervyn King, governor of the Bank of England, saw his stock fall sharply, too.

Northern Rock’s demise also signalled a deep shift in market sentiment. After a decade of cheap money, the terms of credit had tightened dramatically. And, as Warren Buffett, the wise old investor from Omaha, remarked: “It’s only when the tide goes out that you discover who’s been swimming naked.”

Wall Street’s finest were among those first exposed. Stan O’Neal, the sharecropper’s son and CEO of Merrill Lynch, was forced to step down – albeit with a $150m severance package. Chuck Prince, Citigroup’s boss, departed on marginally less generous terms. Prince had earlier told investors that while the music was still playing, Citi was still dancing, one of the more memorable (and short-sighted) business sound bites of the year.

In 2007, the music finally stopped for Tony Blair and Jacques Chirac, two of Europe’s longest-serving leaders; and ended abruptly for three individuals with an enviable sense of stagecraft: Luciano Pavarotti, Norman Mailer and Marcel Marceau. It was a year of political transition in Britain and France, though the rupture with the past was more evident in France with Nicolas Sarkozy’s election. Brown’s decision to call off a snap election in autumn earned him a new nickname (“Bottler Brown”), to a resurgent Tory opposition’s delight.

Overall, economics trumped politics in 2007. The credit squeeze looked increasingly like a seismic event on a par with the Asian financial crisis of 1997-98. The roots of the squeeze lay partly in the excess liquidity provided by central banks, which is why Alan Greenspan’s saintly reputation came under scrutiny, despite a neatly timed memoir of his 19 years at the Fed, entitled The Age of Turbulence. The deregulation of the financial markets also played a big role. New laws in the 1990s broke down Depression-era barriers between commercial lending and securities trading, and allowed financial institutions to lay off risk, while increasing exponentially their capacity to trade with their own capital.

Investment banks, notably Goldman Sachs, profited mightily from deregulation. Private equity firms also exploited benign credit conditions. The huge returns made by partners stoked the politics of envy on both sides of the Atlantic. Blackstone’s co-founder, Steve Schwarzman, threw the party of the year in Manhattan, ahead of his firm’s initial public offering. But when the era of cheap money ended, private equity no longer looked so smart. Banks, too, failed to grasp the extent of their liabilities, especially in the category known as subprime, or “trailer-park”, mortgages for risky borrowers.

The exposure to subprime loans extended from Miami to Saxony to Norway’s Arctic circle. Britain’s high-street banks were also hit hard. Estimates ranged from $300bn to $900bn of dodgy debt, parked in cleverly packaged debt instruments known as collateralised debt obligations (CDOs). Conventional wisdom was turned upside down: hitherto it had been assumed that spreading risk was better than concentrating it in a few financial institutions. Now the “poison” was so widespread that every bank was presumed to be contaminated, undermining confidence in the financial system.

The credit squeeze was, of course, another facet of globalisation. This year, we had many sober reminders of our mutual interdependence. Al Gore won a Nobel prize (in addition to his Oscar) for his campaign against global warming, a consolation of sorts for losing the cliffhanger US presidential election in 2000. Floods in Britain and Mexico as well as pollution in China (watch out for the burgeoning scandal of the Three Gorges Dam) provided further warnings of environmental catastrophe.

Our joined-up world also proceeded apace with the growth of social networks on the internet. Web historians will look back on 2007 as the year of Facebook, the site invented by Mark Zuckerberg, a twentysomething former Harvard graduate. He sold a stake to Microsoft which valued the three-year-old business at an eye-popping $15bn. Rupert Murdoch’s MySpace came in second to Facebook, though the media tycoon pulled off a coup by snapping up Dow Jones, publisher of The Wall Street Journal, albeit at a high price.

Elsewhere, many parts of the world looked depressingly familiar. Rape and famine in Sudan. A brutal military crackdown in Burma. Ethnic violence in the West Bank, now extended to the ruling Fatah and the Islamist Hamas, rather than simply Israel. Emergency military rule in Pakistan. Ethnic violence in the Serb enclave of Kosovo, where the west went to war in 1999 to protect an Albanian majority now hellbent on independence. A resurgence of the Taliban in Afghanistan, where hard-pressed British forces engaged in the heaviest fighting since the Korean war.

In Iraq, a bleak picture looked marginally more encouraging by year end. George W. Bush’s “surge”, led by the charismatic commander David Petraeus, rocked back al-Qaeda insurgents. US casualties, rising at a fearsome rate earlier in the year, stabilised. The Americans will draw down forces next year, but a pull-out seems several years away. If internal security looks a little more hopeful, the political vacuum appears as large as ever, as the Shia, Sunni and Kurds remain mired in factional infighting. Another destabilising factor is neighbouring Iran, whose president Mahmoud Ahmadi-Nejad breathed fire and brimstone as he asserted his country’s right to join the nuclear club.

In 2007, the balance of power tilted further away from American hegemony. The decline of the dollar symbolised a new order in the making, in which resource-rich powers (Iran, Russia, Venezuela) championed illiberal democracy, often at the expense of the west. The ascent of resource-hungry China confirmed the trend. Yet the outlook for democracy is not uniformally bleak. Oil-rich enclaves in the Gulf, notably Abu Dhabi, displayed a more tolerant face of Islam, eschewing the radical fundamentalism of Osama bin Laden and his vision of a medieval caliphate.

There were obvious winners and losers in 2007. Who can forget the forlorn face of Steve McClaren, umbrella in hand, watching the England football team lose (again) to Croatia at the newly refurbished Wembley stadium? Amy Winehouse, the sulphurous singer from north London, sank into drug-fuelled oblivion. Conrad Black, the fallen newspaper magnate, is facing six-and-a-half years in jail after being convicted of stealing money from shareholders.

The winners stand out, too. A plucky English rugby team came close to snatching victory at the World Cup. The Red Sox baseball squad triumphed (again) at the World Series. But my team pick of the year was the Terracotta Army, on show at the British Museum. These life-sized clay soldiers from ancient China took London by storm, a tribute to the First Emperor’s skill in combining mass production with exquisite art. A rare talent – and a noble goal for us all in 2008.

Lionel Barber is editor of the FT