We are witnessing the death of a paradigm. As is usual at moments of mourning, the new reality is being met by denial, resistance and anger from the initiators and defenders of the old faith.
It would be parochial to think recent events expose only flaws in the banking sector - micro-flaws - and the outcome will be a mere tinkering with the financial system. The dominant economic theory of the past 20 years - a theory that put liberty before equality, gave markets more power than states, and saw risk as a public good that shouldn't be restrained - is now defunct. The laissez-faire capitalism embraced by the US and the UK some 20 years ago and foisted on the poorest countries of the world by the World Bank and IMF has had its day.
This does not mean all versions of capitalism are now redundant. But that the Anglo-American version, which actively decoupled the economy from social justice, must be buried; and the public will not tolerate its resuscitation.
Now that the cracks are so evident, jobs are in peril and household wealth is collapsing, the public is angry - and not just at bankers. We are beginning to see a fundamental outrage at the whole interconnected mess of a system: at energy companies who record massive profits, yet allow pensioners to struggle to stay warm in winter; at CEOs who can earn up to a 1,000 times the salary of their average worker; and soon, any day now, at those politicians who allowed this to happen.
The public recognises it has the moral right and authority to condemn the ideology that resulted in this. It is a fundamental change.
Smart politicians will recognise that this is a tectonic shift - a change in the balance of power from high finance and big corporations to the people - and will seek to build political capital from it. We are all socialists now, it seems. John McCain, David Cameron and Gordon Brown attack bankers' irresponsible behaviour and salaries, and call for state intervention in the financial markets.
But these calls will not get them elected or re-elected if they are addressed only to the banking sector. The financial crisis was a manifestation of a fundamentally flawed way of thinking that will hurt real people as the world enters a global recession. It will hurt not only those in the countries that preached the paradigm, but also those in countries that did not. The poorest nations will experience the double whammy of having had to deregulate, privatise and open up their markets to be eligible for aid money, and now see the pledges not met. This is the first full crisis of globalisation, a recognition that in a tightly interconnected world, one country's troubles become each and every one's. It is the first collective "lose lose".
The smartest politicians at President Bush's economic summit will be those who are not only willing to differentiate themselves from the laissez-faire past, but willing to hijack the meeting and turn it into a transparent exchange of ideas about what kind of world we want. They will be those who are not looking for a quick fix, but are capable of dismantling their prior assumptions about which ideas and theories to embrace and which to reject.
The smartest politicians will be those who understand that when the facts stop fitting the world-view, they must remake the world-view, not recreate the facts. In that process, they must draw lessons from the past 20 years. No more "one size fits all" economic prescriptions. Countries have to have the freedom to determine their economic policies to meet their own needs. And the myth that "a rising tide lifts all boats" must be jettisoned. It was never true. Social mobility in the UK has barely improved in 40 years. In the US, a quarter of the wealth is in the hands of just 14,000 families.
The next phase of capitalism will combine policies of localisation with an understanding that there are problems we share - such as carbon-dioxide emissions - that cannot be tackled alone. And it will actively seek to redefine what is valuable, so children growing up today do not make the mistakes of this generation in confusing success with the ability to purchase another pair of Nikes or a Gucci bag.
