This week's financial crisis marks the end of an epoch

Only rarely is there a palpable public mood swing in Britain; the Winter of Discontent in 1978-9 was one; this is another
Larry Elliott, economics editor guardian.co.uk, Friday September 19 2008 14:52 BST Article historyThis was the week the world changed. It started with the US authorities trying to rescue Lehman Brothers. It ended with the US taxpayer preparing to pick up the tab for the mistakes of Wall Street's elite. It started with the prime minister sipping cocktails with financiers in Canary Wharf.

It ended with the government slapping a ban on short-selling and Gordon Brown pledging to clean up the City. Britain's biggest lender was rescued and the Chinese government lined up to take a 49% stake in Morgan Stanley, one of the last US investment banks left after a week of carnage. Ben Bernanke, the chairman of the Federal Reserve and Hank Paulson, the Goldman Sachs tycoon who became US Treasury secretary, have done more for socialism in the past seven days than anybody since Marx and Engels.

Over and above the extraordinary individual events, there was the capitulation of the prevailing economic model. History will show that the great experiment with financial deregulation lasted from the first post-war oil shock in 1973 to the third oil shock in 2008.

Between those years the constraints on capital that were imposed after the Great Depression were whittled away, leaving a world of easy credit, complex financial instruments, stratospheric salaries and supine regulators. Like a spoiled child, what big finance wanted big finance got. This week saw the arrival on the scene of Supernanny; big finance now faces a long spell on the naughty step.

The revenge of Middle Britain

The changed mood is evident from the media backlash against hedge funds and short-sellers. One headline this week screamed: "Don't let the spivs destroy Britain". It appeared not in the Socialist Worker but in the Daily Express. For Middle Britain, the traders who bragged about their £1,000 bottles of Krug have now become as loathed as the bolshie shop stewards of the 1970s. Only rarely is there a palpable public mood swing in Britain; the Winter of Discontent in 1978-9 was one; this is another.

Brown caught that mood. Having cosied up to the City for more than a decade, the prime minister has belatedly rediscovered his party's social democratic roots. Labour, it seems, no longer believes that the market is king. It no longer assumes that the "masters of the universe" have all the answers. For the first time in living memory it has ceased cringing and sent out the message that finance should be the servant of the people and not vice versa. Let's not get carried away. The new spirit of interventionism remains cautious and cramped, and it was forced on the government by events. But the small print of the Lloyds TSB merger with HBOS included, at the government's insistence, a commitment to helping first-time buyers get access to the mortgage ladder and to safeguarding jobs in Scotland. Such meddling with commercial decisions was off limits until Tuesday this week.

There is no need for caution. The financial system is broken and it was significant today that markets rallied after the smack of firm government. Many of the more thoughtful people working in the markets know that deregulation has led to anarchy not freedom, and that boundaries need to be set. It remains to be seen, however, whether the plan by the US authorities to buy-up all the toxic mortgage-backed derivatives at a knock-down price will have the desired results - an improvement in bank balance sheets, the restoration of market confidence and the resumption of more normal patterns of lending.

As far Paulson and Bernanke are concerned, it is worth a try. Culturally, America is fixated by memories of the Great Depression and when, by Thursday night, it appeared that Goldman Sachs could itself fall victim to the market turmoil, the US treasury and the Fed were starting to conjure up lurid images of dole queues and soup kitchens. The emergency action to shore up the financial system was necessary, perhaps inevitable, but the reality is that it won't save either the US or the UK from recession. What's at stake is just how deep and long those downturns will be. In the meantime, the shift in the economic balance of power leaves the US at the mercy of China's willingness to keep financing its debts.

So how to mark the end of an epoch? In 1976, Jim Callaghan was the undertaker for the post-war social democratic order when he said: "We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that option no longer exists." On Tuesday, the prime minister should stand up and say: "We used to think you could borrow your way out of a recession and increase employment by increasing debt and setting the City free. I tell you in all candour that option no longer exists". It would bring the house down.