We are witnessing the final collapse of the fantasy on which New Labour built its social policies. With the revelations about Barclays staff lying to fix the LIBOR rate, and that they and other banks mis-sold insurance against interest rate rises to small and medium-sized businesses, the idea that equality and justice could be built on the greed of City financiers has been decisively blown away.
As Chancellor of the Exchequer and Prime Minister, Gordon Brown, an avid student of the latest economic orthodoxy, praised the City for its outstanding contribution to prosperity, jobs and tax revenues. He believed that the declining employment levels and earnings of ordinary workers could be bolstered in a fragmented labour market on the back of this success. As the majority of working families with children had their wages subsidised by tax credits, and those claimung benefits were herded into low-paid part-time work under threat of losing eligibility to claim, Tony Blair was arguing for this new marriage of efficiency and equity.
Growing inequality was not an issue, he maintained, as long as the least advantaged citizens could be nudged above the poverty line. Our international comparative advantage lay in financial services, and we should consolidate this, for the sake of our whole population.
Even before the scandal broke, the crash had exposed this as a daydream. In the boom years, our banks owned 10 per cent of global financial assets, and made 10 per cent of global profits. Today they own the same proportion, and earn 5 per cent of profits worldwide.
Contrast this with Chinese banks, which now earn 30 per cent of global profits. So much for the UK as the world's financial hub, and China as a mere assembly line for its manufactured products.
The Tories never fully swallowed this fantasy or idealised the City, perhaps partly because it was some of their school friends who were inventing these fiddles. But they too favoured light regulation. Now they have to find ways to clean up the cesspit.
And they are no closer to finding an alternative direction for the economy. More even than New Labour, they rely on compelling benefits claimants to accept work which makes them no better off. And they are compromised by their close relationship with A4e as the chief instrument of the Work Programme. It placed only 30 per cent of its clientele in jobs lasting more than 3 months last year, and is being investigated for systematic fraud and malpractice.
At least Ed Miliband is indicating a renunciation of New Labour's City links, and has given Jon Cruddas a leading role in policy development. That is much-needed good news.