Margareta Pagano: Don't blame Mrs T for today's fractured Britain

The City was shaken up under Margaret Thatcher but she would not have tolerated the bonuses, credit bubbles and bailouts

The only time I have seen grown men quiver as though they were teenage boys waiting for Rihanna to arrive was the day Mrs Thatcher came to lunch.

Her voice came first, demanding to know as she climbed the crooked stairs to the tiny dining-room at the top of Green's wine bar whether anyone had heard the result of Pat Buchanan's challenge to George Bush. Looking sheepish, none of the guests present, which included the late Lord King of British Airways and Sir Michael Richardson of NM Rothschild, two other top bankers as well as three of us from my newspaper's City office, had a clue; this was before the BlackBerry.

Her question was a triumph in itself; by the asking, she showed she was as plugged in as ever to the political mindset, even though this was some four years after she had been swept from power. The bankers and industrialists made up for their ignorance with their adoration – Lord King offering to fly her wherever she wanted, while Sir Michael, the financier who handled her government's privatisation sell-offs, couldn't help but genuflect each time she spoke.

The conversation over lunch soon turned to the economy, and as you might expect, the former prime minister was horrified when told that forecasts out that morning were predicting a rise in the PSBR to £40bn – loose change by today's standards.

But Mrs T's sharpest derision was reserved for the bankers present, whom she chided for allowing too much credit and lending; from personal loans to credit cards to mortgages. Even though it was her government that shook up the City with Big Bang and allowed building societies and banks to compete with one another, lax lending and sky-high salaries were anathema to her philosophy.

Indeed, the worst critique being made about Mrs T's legacy is blaming her for the financial crash. You can see why such misconceptions are being made by her opponents, as deregulating the UK's financial markets started with Big Bang. But to say she is responsible is a lazy analysis and wrong: like trying to blame Alexander Fleming, who discovered penicillin, for the misuse and overuse of antibiotics today.

Shaking up the City in the 1980s wasn't just about getting rid of restrictive practices, but essential to the life-blood of the wider economy. The old-style jobbing and broking partnerships weren't providing the capital for industry; capital controls were starving the country of investment; and high income tax was driving talent overseas. If there are regrets, it is that so many British firms sold their souls to the American banks – but that's greed rather than deregulation. Sadly, the UK's brokers and banks failed to create serious competitors to firms like Goldman Sachs, and when they did, they made a Horlicks of it. Barclays tried it, led by an American, and look what happened.

If people are playing the blame game, then the fuse was lit in the early 2000s, with the light touch regulation of the Financial Services Authority under Tony Blair and Gordon Brown. It was in 2001 that the Halifax and the Bank of Scotland decided to merge, with such disastrous consequences, and as late as 2007 that Fred Goodwin of Royal Bank of Scotland made his ambitious bid to buy ABN Amro. Neither of the bids should have been allowed to go through by the competition authorities or the FSA.

By then, what had started out as Labour's City prawn cocktail offensive to show the business world that the party had changed had turned into a gunboat raid. Mr Brown and Ed Balls were as gung-ho as any red-blooded free marketers to gobble up the tax take being laid by the City's golden goose to pernicious effect; corporatism took over from enterprise.

Who knows whether a Conservative government would have stopped these mergers or spotted and halted the credit bubble blowing up. But it's unlikely that Mrs Thatcher would have tolerated the taxpayer propping up the banks or the bonuses still being paid to bankers; her Grantham puritanism would have made mincemeat of Bob Diamond's bonus pot.

But there were big mistakes under Thatcher too. Although manufacturing output grew, productivity rose and the labour market became more flexible, there was not enough effort put into helping find work for the miners who were losing their jobs or factories closing. Privatisation didn't deliver the wider share ownership that was hoped for, and the trickle-down effect that the Hayek-schooled economists believed would come from lower taxes and supply-side reforms has remained elusive. Wealth is more concentrated than ever.

Now, after the crash, we are stuck with big government, big banks that don't want to lend to SMEs, too much power concentrated in the hands of big business, and a public that is alienated from the political process. As the Tory MP George Freeman said last Thursday in a provocative speech at Ely cathedral, in the shadow of Cromwell's home, the UK is suffering from a crisis of disconnection which cannot be solved by either the Left's "spend more" or the Right's "slash the state" sterile philosophies. Instead, Freeman calls for a more fundamental shake-up to bring about wider share ownership, whether through mutuals or co-operatives, locally funded projects like building new railways with regional bonds, as well as new forms of local finance. He draws as much from the old left as well as Burke's "little platoons".

Once the more divisive myths around Thatcher's legacy settle, let's hope her death will lead to a more nuanced debate about the sort of modern political economy we want; one in which enterprise is fairly rewarded and the fruits of labour are more evenly distributed. It's what the coalition promised, but isn't doing enough to promote.