Steve Richards: The rules have changed. But have our politicians noticed?

This bail-out has turned the world on its head. The next election will be the last fought on the primacy of markets

The huge sums paid out to save the American mortgage groups Fannie Mae and Freddie Mac are staggering. The changed assumptions that lie behind the government intervention are even more significant, challenging the orthodoxy that has shaped economic and social policy here and in the United States for nearly three decades.

In the same way that Gordon Brown struggles to come to terms with the ideological and political implications of nationalising a bank, the right-wing US administration cannot quite accept what is happening either. Only two months ago, the Treasury Secretary, Hank Paulson, stated that Fannie and Freddie could continue as private companies, echoing Mr Brown's desperate determination to find a private buyer for Northern Rock. Even now the Prime Minister cannot bring himself to accept that Northern Rock is nationalised, preferring the term "temporary public ownership". Similarly in the US, Mr Paulson does not use the dreaded word. But that is what has happened. We are witnessing what could become the biggest state bail-out of the lot.

As a result, the world is turned on its head. Yesterday, on the BBC's Today programme a leading figure from Goldman Sachs hailed the nationalisation. When John Humphrys pointed out this was not exactly an example of capitalism working with light touch regulation, he replied without any hesitation that "the government has a duty to intervene in such circumstances". What a change from the screams of disapproval when governments have sought to regulate more actively in the past.

The leap is complete with the news that it is the depositors who will be protected and not the shareholders. Here is another cultural contrast with so many assumptions that have shaped policy here and in the US. To take one example of many when Tony Blair summoned Railtrack to explain its dire performance, the baffled company's executives explained to him that they were accountable to their shareholders and not the passengers or the government. After that exchange, even defensive New Labour made a tentative attempt to address the structure of the railways.

From a political perspective, we are living through the mirror image of the 1970s. Then leaders from both main parties were trapped by the assumptions that had shaped their political upbringings. They could not change, even though they could see what was happening in front of their eyes. For noble reasons, Tory and Labour British politicians brought up in the recession of the 1930s would not tolerate the idea of even short-term high unemployment. They intervened to prevent job losses soaring even though their interventions brought about bigger problems. When the pivotal industries of that era looked as if they were going to go bust, they moved to save them. The corporatist consensus endured well beyond its natural life.

In the 1970s something bigger was going on which, in the end, brutally challenged previous assumptions. Britain was competing weakly against countries that were far more productive and efficient. In order to flourish, it had to change rather than subsidise the inefficiencies, but the political parties did not get the message for a long time. In the mid 1970s Labour scraped a couple of election victories and continued to make the same miscalculations as Edward Heath had done. Only towards the end of that period did Jim Callaghan and others recognise the need to change.

Now politicians are trapped by the assumptions they formed in the 1980s when Thatcherism was rampant. David Cameron and George Osborne were the most passionate opponents of the nationalisation of Northern Rock and assumed wrongly that they would benefit politically when the deed was done. Mr Brown also feared that the Conservatives would make hay. He was wrong too. So far, Mr Cameron's brilliant insight as a leader is to recognise that far from being a threat, Tony Blair vindicated much that his party believes in. With a single leap, he freed the Conservatives from the introspective nightmares of the previous decade and threw Labour into disarray. In particular, Mr Cameron did not make the fatal mistake of his predecessors, projecting Mr Blair as a reckless leftie and moving well to the right of him.

The astute move has enabled the Conservatives to come to terms with what has happened since 1997, a significant move forward. But the important re-positioning does not make them prepared in any way for the new challenges intimidating governments around the world and causing even ardent republican right wingers to act in ways they would never have dreamt of doing not so long ago. The politics of the Blair era pre-dates the market failures of the credit crunch.

Ironically, one of those who wrote perceptively about the relationship between governments and markets is Gordon Brown. He gave a lecture on the theme during Labour's second term, daring to state that markets do not work always in the delivery of public services. But he stated the obvious when the unfettered free market orthodoxy was at its most overwhelming and all hell let loose. He does not make many references to the speech these days.

As it turns out, Mr Brown was being typically cautious. Imagine if in that speech he'd added that the mortgage market was dangerously flawed and required massive government intervention, including the nationalisation of banks. He would have been dismissed as so old Labour that Mr Blair would have been able to carry out his occasional fantasy and sack him. Yet this is what has happened. Banks and building societies are being nationalised amidst cries across the political spectrum for much tougher government regulation.

In Britain the next election will be the last to be fought on the politics of the mid 1990s, in which there will be an outdated consensus on the primacy of markets and the need for government to keep out of the way. Similarly, in 1974, the two elections of that year focussed on arguments over who could intervene more successfully as if the failed interventions of the previous Tory government did not raise questions about whether this was the appropriate response. The elections of that year did not address a changing world. The one here conducted by politicians trapped by their own pasts will probably be the same.

Over the next few weeks, during the party conference season, you will read and hear a lot about who is up and who is down in British politics. When I come to think of it, you will read much on the theme in this column. But the long-term future belongs to the politician and party that come to terms with the ending of one global era and the beginning of another, one in which a new relationship will be required between governments and markets, subtler than the flawed models from either the 1970s or the 1980s.

Who realises how big the change is and has the vision to address it? Whoever that person happens to be will dominate British politics as Clement Attlee did in 1945 and Margaret Thatcher managed to do after 1979.

s.richards@independent.co.uk