What are the scenarios (or how bad could it get)?

Recession.
As recently as the summer of 2008, most of the commentators of economics were speculating that the chances of the UK economy falling in to recession (technically, 2 consecutive quarters of negative growth) in the near future were about 50/50.
Today, the question is not whether there will be a recession but how deep will it be and how long will it last?
The recent actions to pump (taxpayers) money in to the system and cut interest rates weren’t designed to avoid a recession but to reduce its severity and to prevent some even more serious consequences.

Stagflation.
That’s high unemployment AND high inflation.
On the face of it, the chances of inflation running out of control seem remote. Today the rate of inflation is historically low compared to the 20%+ rates of the early/mid 1970’s. Economic slowdown should depress demand and therefore depress prices. The price of oil has also fallen back dramatically recently. However, the government’s abandonment of its borrowing rules in addition to the huge extra amounts it has had to borrow to pump in to the banking system has increased the risk of inflation rising again. There may come a time when the government could resort to printing more money (Mugabe economics). The more money that’s printed, the less it’s worth, the less it buys. This in turn could delay the economic recovery.

Tax rises/Public Spending Cuts.
As an alternative to printing more money the government (because it can’t borrow for ever) will be forced to balance the books by raising taxes and/or cutting spending.
Tax increases could lead to loss of competitiveness, spending cuts to decay in the infrastructure. Both these things will have a long term detrimental effect on the economic well being of the country.
It’s possible the government may be forced to cut welfare (or let inflation erode the value of social security payments). This of course will lead to real hardship for many people.

A lot depends on how much of the governments ‘investment’ in the banks is returned to the taxpayer. The Prime Minister and the Chancellor would have you believe that in time the taxpayer will get it all back + more. But if it’s such a one way bet it beggars the question as to why the money couldn’t be found in the private sector.

At best we can hope for a short lived recession, government coffers being bolstered by a decent return on the investment of tax payer’s money followed by a strong recovery and a financial sector behaving in a much more responsible manner.

At worst we can look forward to high unemployment, high inflation, massive cuts in public services, real social hardship and a few living the high life based on the misery of the many. Attendant with this would come high rates of crime, social tensions and the rise of political extremism.