When the Queen visited the LSE last November, she asked the assembled experts why no-one had seen the economic crash coming. The question was accepted as representing the insight of an intelligent but disinterested observer, and the British Academy has set about trying to answer it. (The fact that the questioner is also head of state might also have something to do with it.)
The first response from the British Academy was published on 22 July 2009, (read it here, along with a reply by Federal Union here) and it is careful to note that some people in fact did predict the crash. No-one, however, saw exactly when it would happen and how bad it would be. Indeed, there appears not to be a recognition even now of how bad it was.
It is widely understood to be the worst crisis in the financial system in two generations, but without government intervention last autumn it would have been the final crash the financial system would have experienced. It would have been terminal for capitalist finance as we currently know it.
Some banks crashed because they had made too many bad loans or recklessly bad investments. They are now bankrupt or taken over. But solvency is only one of two characteristics that banks depend on. The other is liquidity, and all the other banks would have failed that one. So many banks were going insolvent that the entire banking system was paralysed with fear. And paralysis itself is enough to kill a bank.
Resolute and rapid action by governments poured new capital into some banks to stop them going insolvent and provided liquidity for many more to save them, too. Those people who say that capitalism and government are fundamental opposites might pause to reflect on that fact.
The fall of the Berlin Wall in 1989 and the collapse of the Soviet Union two years later not only discredited communist economics as such but led democratic socialist parties in the west to rethink their positions and strategies, too. While clearly not subscribing to the denial of democracy and human rights inherent in the communist system, there were nevertheless clear parallels in their economic thought which democratic socialism was forced to confront.
The collapse of the banking system last autumn was, in its own way, just as a severe demonstration of the failure of market fundamentalism as the fall of the Berlin Wall was of communism. A system of economics that had been held out as perfect and unimproveable collapsed under its own contradictions. It relied on its sworn enemy for even the last vestiges of survival. The mystery is why the equivalents on the right of the democratic socialist parties have not been forced to go through a comparable rethink.
There are various conclusions that federalists might draw from what has happened. The renewed interest in the work of John Maynard Keynes (for example, see an article by George Irvin on EUobserver here) is one aspect of this. Acknowledgement of the continuing shift in the global balance of power away from America and towards China is another.
But any future policy has to start from the realisation of just what an enormous crisis has occurred. Things will not go back to normal, whatever “normal” was.