A Chill Wind

For as long as I can remember, there have been those on the left who have responded to every tremor in the financial markets by saying that we are witnessing a crisis of capitalism. Invariably, within a week or two the crisis abates and capitalism goes on to fight another day.

The events of the last year may prove to be just another wobble. It may be that within a year or two, the credit crunch will be but a distant memory and parents will have to do a Google search when their children ask: "Mummy, what was the sub-prime mortgage crisis all about?"

That, though, is not the way it looks and feels at the moment. And that's not just because financial gurus like George Soros have joined the usual suspects in saying that this is the biggest financial shock since the 1930s.

Nor is it even that the crisis has claimed some big scalps - Bear Stearns in the US, Northern Rock in the UK. What's different this time is that the financial collapses that were hitherto confined to the fringes of the developed world have burrowed their way right to the core of the system - the US and the UK. And, by doing so, they have exposed the limitations of a model that encourages the sort of herd mentality that leads to regular speculative bubbles.

The financial markets don't see it this way, of course. They believe that their strength and size make them indispensable and that the jobs and wealth they create give them a special place in the running of the economy. And up to a point, they are right. Policymakers think the big banks of Wall Street and the City are too big to fail. That's why Bear Stearns and Northern Rock were - contrary to free-market ideology - bailed out when they ran into serious trouble.

The closest historical parallel is with the trade union movement in Britain at the time of the winter of discontent. There were three phases to the crisis. In the first, the prevailing model - of deals between the government and the unions to bring inflation under control - broke down. There was a series of strikes, not by any means all the fault of the unions, that led to rubbish that was uncollected and - in one case - bodies left unburied.

The second phase of the crisis was that the unions found themselves unloved, even hated, by large chunks of the population. System failure created the political conditions in which reform was made possible. In the third phase, the government of Margaret Thatcher responded with a series of reforms that curbed the power of trade unions.

We are currently in phase two of this process. Quite clearly, there has been a system failure. The past year has been financial capital's winter of discontent; nothing is moving in some markets; those running the show appear to believe that there is one rule for them and another rule for everybody else.

Ordinary people are being inconvenienced through more expensive and scarcer mortgages; the pricking of the property bubble pumped up by easy credit in the past has pushed an increasing number into negative equity. Unsurprisingly, the public is not impressed; indeed, there is considerable disgust at the way in which the big cheeses of the City first demanded that they government got off their backs, then after messing things up so spectacularly demanded handouts from the taxpayer.

The interesting question is whether there will now be an attempt to bring the City to heel in the way that Thatcher tamed the unions in the 1980s. There does not, in all honesty, appear to be any sign of this happening, even though there is a strong case for doing so.

Why? Not because those in favor of reform want a world with financial markets or that they want to stifle innovation through the dead hand of the state. No, the reason is that there is a difference - a very big difference - between freedom and licence. And if we give the financial markets license to act as they will, the crisis of the past year is what inevitably results. It's not just that we need protection from the excesses of the market (although we do), but also that the market - like a spoilt child - needs protection from itself.

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