We’re in a new era now, but Labour haven’t noticed

Come back Alistair Darling, all is forgiven. When the chancellor suggested a fortnight ago that this could be the greatest economic crisis for 60 years he was widely attacked for being alarmist. Now it's beginning to look like an understatement, as passengers are stranded at airports, house prices plunge, more banks collapse and Britain slides into recession with the rest of the industrialised world.

A year on from the nationalisation of Northern Rock and the foundations of capitalism seem to be crumbling in the very epicentre of the free market: Wall Street. Another huge financial institution, Lehman Brothers, is going under as I write. Last week, the US government effectively nationalised the huge mortgage companies, Fannie Mae and Freddie Mac, which between them account for half of all mortgages in America - over $5 trillion worth. This is the biggest state takeover in history, and makes the nationalisation of industrial firms like British Leyland and British Steel in the 1960s and 70s look like an exercise in municipal subcontracting.

It is also the most astonishing economic U-turn of modern times, a reversal of the freewheeling market ethos Wall Street has always lived by. The very people who used to rail against regulation are now begging the state to come to their rescue, to save them from themselves. Western economies are being transformed into a centralised system run by a financial oligarchy - the handful of banks still "too big to fail". And they are using public money as collateral. As the New York economist, Nouriel Roubini, put it last week: "Comrades Bush, Paulson Treasury secretary and Bernanke chairman of the Federal Reserve welcome you to the USSRA: The United Socialist State Republic of America". It's socialism for the banks: communism for the well off.

Politicians and most economists say there is no alternative; that firms like Fannie Mae cannot be allowed to go bankrupt in case the entire financial system collapses. Perhaps. But if this transfer of financial liability to the state is inevitable, then surely it should be handled in an open and democratic manner, not least to ensure the public interest is protected. There has to be a quid pro quo: transparency and accountability; a curb on profiteering; a more responsible attitude to lending; a limit on the self-enrichment of executives. Never has there been a better opportunity to strike a new social contract between private capital and the people.

Labour are failing to make this case. As they prepare for their conference in Manchester this week, there is pessimism verging on defeatism in the party, a loss of moral purpose. But why? Looking at the wreckage wrought by unrestrained greed during the boom years, this should be a great time for a social democratic party like Labour - an opportunity to reaffirm its fundamental values. The people who should be on the defensive are the free-market Conservatives and their friends in the City who have brought us to this state thanks to their bonus culture and predatory lending. All those neo-liberal nostrums about the evils of government intervention have been swept aside as financiers fall over themselves to get state subsidies.

A student of history like Gordon Brown could learn from the example of US president Franklin D Roosevelt. In the 1930s, the situation was similar, with falling house prices, weak stock markets and bank failures. Roosevelt turned it to his advantage by using his leverage to introduce policies that benefited ordinary people, taxed the rich and restructured the US economy so it was based on productive industry instead of stock market speculation and property bubbles.

It was called the New Deal, and Gordon Brown borrowed the title for his job-creation programme in 1997 - which was financed by a windfall tax on the privatised utility companies. Unfortunately, he is not prepared to revisit his own early radicalism and impose a new windfall tax on the energy firms which have again been making exorbitant profits at public expense by increasing domestic fuel bills by over 30%. The E.On executive, Mark Owen-Lloyd, set a new benchmark for callous indifference last week when he joked that a harsh winter "would mean more money for us".

Brown said he would not resort to "short-term gimmicks" in the energy crisis, so has resorted instead to a long-term gimmick, proposing loft insulation as a solution to fuel poverty. This won't even cost the energy firms much because they can set most of it against their corporation tax. Why is Labour so afraid of taking a stand against these people? Is it still afraid of being seen as anti-business? Is the Daily Mail, which supported a windfall tax, anti-business?

Labour would do well to remember Roosevelt's words: "we have nothing to fear but fear itself". The British economy needs to be rebalanced so it is less reliant on house prices and financial services and more on making things that can be sold abroad. Manufacturing has dwindled to 14% of GDP. This needs to be reversed. Brown could revive the construction industry by restoring council house building, which it practically invented. Councils have hundreds of thousands of families waiting on their lists and thousands of builders and tradesmen are being thrown on the dole.

Instead, Brown is spending public money on schemes to stop house prices falling to levels at which people can afford to buy them again. This is futile. The government should do nothing to impede the correction. Houses are still overvalued by around 30% and the sooner prices fall to historic levels of around three times average earnings, the sooner we will have a stable housing market, instead of one pumped up by cheap credit and liar loans.

There are other areas in which Labour is not making sense - pay restraint, for one. The mantra is that wages must be held down to stop inflation getting out of control. Well, what must be obvious to the most blinkered union basher is that inflation has got out of control without any help from wages. Pay cuts will not stop inflation, but they will stop people buying in the shops. In Japan, the government has just called on businesses there to start increasing wages to revive consumer demand. Even America has been handing out tax rebates.

But Gordon Brown seems stuck in the Thatcherite 1980s and has failed to notice the profound changes brought about by the credit crunch and its aftermath. We really are in a different era. And the irony is that it should be Labour's era. It will assuredly not be Gordon Brown's.

Source: Sunday Herald