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Here inside the Pittsburgh G20 Summit it feels like being there at the birth of a postmodernist medieval empire.

The leaders are cosseted somewhere; occasionally a politician pops out to answer questions he wants to answer; to journalists he wants to brief. The press sits here like a kind of giant global version of China's Xinhua news agency - "what is the great leader doing today?"

As I'm writing a woman from Eurovision has announced urgently, "Roll now! Camera spray of Russian delegation!" - causing 27 broadcasting technicians to hit the record button on a feed of pictures entirely controlled by the organisers, of a totally insignificant event.

We are protected by some of the most lethal force ever assembled. We saw the first use, as far as I can tell in any democratic country, of a sonic blaster. This can cause fatal aneurisms and damage your hearing.

In the Youtube footage of it a large number of people close to it are not rioters but cyclists and pedestrians.

Add to that the complete overlap of anti-terror and crowd-control policing, so that the whole city is silent except for sirens and the barking of police dogs, and you get a near complete dystopia.

What's being achieved here is significant - not for any specific policy but for the fact that the G20 will be turned into a permanent and "premier" body for managing the world economy.

The IMF will be reformed to allow greater representation for China - although there will be no specifics here because the Europeans who will lose their seats are wrangling about it.

The G20 will have a board and permanent apparatus. Given that the anti-globalisation left hates the IMF/World Bank, and the pro-market right has seen itself turfed out of IMF decision making as well, there will probably not be many mourners for the old system, where the G7 or G8 countries claimed decision making power and the IMF/WB were seen as extensions of US foreign policy.

However, we should probably consider what we are losing as tactical management of the world economy moves to an ad-hoc body like the G20.

Whatever the faults of the system put in place at Bretton Woods in 1944 it had two positive attributes. First it was created by democracies that had just defeated fascism and were now faced with a strengthened Stalinist bloc. Second, as the product of a Treaty, it had the power to sanction.

The IMF could and did instruct countries, famously including Britain, to get their public finances in order, and it could bail them out (Of course no-one is suggesting the IMF cannot do this in future, in fact it will be more flexible in its ability to do this because of reforms achieved so far.)

The G20, by contrast, has to work through consensus instead of sanction. And around the table, with a theoretically equal voice, are a giant Communist dictatorship (China); an undemocratic monarchy (Saudi Arabia) and a country whose banking system was bust eight years ago (Argentina) and an energy giant prone to holding small neighbours hostage over gas supplies (Russia).

Now the solidification of the G20 is only one moment in the long reform and reconstruction of the post-War economic order. But it's symbolic. Bit by bit the world is moving from an order based on treaty and formal sanction to one based on consensus, horse-trading and the diffusion of power.

If you think the move from G8 to G20 is irrelevant consider this: last year, when Russia clashed with Georgia, there was talk of the west suspending Russia's membership of the G8 in reprisal. If the world economic order is, in future, to be guaranteed by consensus - what are the chances of 19 governments getting together to suspend or expel a miscreant? Zero - unless globalisation begins to fall apart and countries opt for overt protectionism.

We're finding - in economics as well as diplomacy - that multilateralism is a grubby business: you scrap your missile defence shield, I place sanctions on your enemy; you give me extra votes at the IMF, I give you a binding carbon emissions target at Copenhagen. This is what's really being done this week, at the UN General Assembly and in Pittsburgh.

The G20 has indeed achieved something in the ten months since it moved from being a finance ministers' meeting to a leaders' summit. Co-ordinated fiscal and monetary stimulus prevented a Third Depression; and however minimal the attempts to co-ordinate financial regulation, isolate tax havens etc are real.

But it faces questions about its democratic legitimacy - with implications close to home as well as globally.

I've just asked Alistair Darling, for example, whether any country at the G20 is arguing -as the British Conservatives do - for a fiscal tightening in 2010, and whether the commitment to expansion made here would be binding on a future government.

He ridiculed the Tories, painting them as seriously at odds with the rest of the world, ignoring the rest of the question. I tried to ask him again: does Britain's commitment bind the Tories? Obviously it cannot - but herein lays the problem. Mr Darling's aide cut me off before I could repeat this awkward question.

So welcome to the world according to the G20. It's hard to know how the leaders will measure success but one yardstick would be if there comes a time when they do not have to be aggressively protected by a ring of steel, Kevlar and violent sound.

Here's the executive summary of what I think is going on at the UN today. Obama's speech was a sustained attempt to reinforce America's new, multilateralist stance. He acknowledged that frustration with unilateral action had created a "pervasive anti-Americanism" that is getting in the way of united action. He acknowledge also that the USA had pursued democracy selectively in the past. That whole part of his speech was pitched at the level of principle and designed to change the mood music.

Then, almost in realtime, we are getting an applied demonstration of what that means in practice. Obama signalled a review of the USA's nuclear posture. This plus the withdrawal of the planned missile defence shield in East Europe now seems to have prompted the Russians to reciprocate - one member of President Medvedev's team signalling to the press that there will be movement on sanctions against Iran if the IAEA provides evidence to base it on. Right now there is a foreign ministers' meeting going on to discuss what international pressure the UN might place on Iran over nuclear weapons.

Then, a second demonstration of what it means to build alliances with people you don't like: Muammar Gaddafi delivers a long and rambling speech, calling for the UN to be relocated, and calling the Security Council the "Terror Council", complaining about jetlag also. But Gaddafi is now "one of our" dictators and is being tolerated.

There was a third striking aspect of Obama's speech. He omitted any mention of the Taliban, outlining the mission in Afghanistan thus:

"We have set a clear and focused goal: to work with all members of this body to disrupt, dismantle, and defeat al Qaeda and its extremist allies - a network that has killed thousands of people of many faiths and nations, and that plotted to blow up this very building. In Afghanistan and Pakistan, we - and many nations here - are helping those governments develop the capacity to take the lead in this effort, while working to advance opportunity and security for their people."

The background to this is a growing debate within the US administration over Afghan strategy. At the weekend the leaked McCrystal report showed Obama is being advised to boost troop numbers, accepting initial higher casualties, or face possible defeat in Afghanistan. Today it emerged there is another option being considered: abandoning counterinsurgency versus the Taliban in favour of a targeted anti-terror campaign against Al Qaeda, based partially in Pakistan.

Obama, we are told, wants to take his time rethinking Afghan strategy; the US media is interpreting this as a victory for Vice President Joe Biden, who has been pushing for a switch of focus to Al Qaeda, not the Taliban.

Obviously now we are in a world of multilateral diplomacy, it will be interesting to hear what America's NATO partners contribute to this rethink, particularly those who have advocated long-term military involvement on the ground in Afghanistan, in order to rebuild democracy and safeguard women's rights and generally achieve nation-building.

Downtown Pittsburgh feels sleepy, even as thousands of diplomats and journalists turn up, like migrating Wildebeest, ready to stampede across the Allegheny and into town.

Sammy's Corned Beef joint full of seasoned barstool sitters, Hemingway's student bar - like a Methodist youth club with beer, even the nameless joint at the corner of a street with nameless wraith-like drug users hanging around just at the edge of the neon glow. The whole mid-western urban idyll is about to be broken by the arrival of the G20 herd.

There are so many answers being promoted this week you could be forgiven for asking "er, what was the question?"

It is only Tuesday and already a heavily hyped Middle East peace agreement has turned into a grouchy photo op.

Next Hu Jin-Tao announced a series of measures on climate change, hailed as China assuming "leadership" on global warming, but not very clearly taking the world towards a comprehensive agreement in Copenhagen.

In fact. not doing anything other than promising to grow carbon emissions less fast than the Chinese economy.

On top of that we now have Gordon Brown advising the Chinese on how to rebalance their economy. I look forward to reciprocal advice from President Hu on how we should rebalance ours.

So what's really going on? The dominant theme in all these narratives is the need for reciprocal, mutual and therefore multilateral action in the face of strategic problems in the world - climate change, poverty, trade, bank regulation, nuclear proliferation and Middle East peace.

Actually, the sheer volume of horse trading in the run up to this summit shows you these are all linked issues.

If there is one problem that recurs in all these initiatives it is this: the failure of the USA to adjust to a world order that is rapidly changing.

In economics, the Anglo Saxon model's prestige is battered. On climate change, action in the USA - after years of no action - is seen as the key to forward movement.

On trade, well the President signed the last G20 agreement - a moratorium on new protectionist measures - then placed new controls on Chinese tyres.

In the last few days I've been finding out just how hard it will be for President Obama to sell any multilateral action agreed at the G20 to the American people.

First there is the domestic right-wing backlash: it started over the bailouts, moved on to the fiscal stimulus and is now focused on healthcare reform.

From Washington's K-street this can look like the Republicans fragmenting, their popular base getting emotional and ruining the party's chances of forming a moderate electoral alliance at the next election.

But in Pittsburgh it does not look that way.

Obama's radical right-wing opponents are creating an emotional narrative which is becoming a dominant theme on the US news networks. It is, in the pop-psychology parlance, giving people "permission" to get angry about a lot of other things.

As a result the G20 will face a new kind of protester this week: conservatives who wish the G20 would stop doing things and who see multilateral action as a potential threat to American sovereignty.

Second there is the fragmentation of the electoral coalition that brought Obama to power.

He is trying to hold it all together - delivering an under-reported speech to the US trade unions last week clearly designed to boost his radical credentials there.

I've been meeting steel industry workers from Clairton, the setting for Michael Cimino's emblematic Nam-era film, The Deer Hunter. They are in no mood to accept multilateralism either on trade or carbon emissions. They want more trade barriers to protect jobs.

As one put it: "Our plant has a raised a cancer hazard. You get up, go to work, pay your taxes and wonder all the time am I going to live very long after I retire. Will I get leukaemia? And all so that some other country can come along and dump a bunch of cheap steel onto our market?"

The workers I spoke to want any deal on carbon emissions explicitly linked to forcing producers in the developing world to raise environmental standards.

"They will fail," predicted one, triumphantly.

Third, crossing the electoral divide, is race. I keep asking people whether the issues like healthcare and tax and bailouts risk tearing America apart. The surprising thing is the number who say: "It's torn apart already, always was".

And when I probe further what they mean is over race.

Whether Jimmy Carter is right or not over the heckling of Obama, the wider fact remains that people are increasingly prepared to talk about a racial divide opening.

Add to that an incredible emotionalism. Okay, Brits are reserved. To me all US television looks needlessly emotional. But laying aside cultural differences there is a lot of emotion on US TV already and now you've got political movements, above all from the right, prepared to make politics more about emotion than it was.

Then, in a different reality, you get the patrician narrative. The reserved, statesmanlike politicians on the Hill; their reflections in the grey-hair-hosted political talk shows and the finely crafted statements of corporate leaders.

And then, below that, at the level of grass roots, you get a preparedness to emote, shout and scream. One right-wing activist - holding profound small-state and decentralising beliefs himself - complained to me off camera that too many people on all sides are beginning to fantasise about some kind of "showdown" in America, in which all the values of self reliance, states' rights and the right to use 9mm ammunition will combine into some kind of cathartic moment.

"People almost seem to want this to happen," he confided to me, genuinely worried.

Now all this is only "noise", and for the politicians noises off.

But I think in the USA, there is definitely an intensifying cultural conflict that is not reflected in the news but actually mediated via the news. People of different political persuasions increasingly live inside self-constructed media bubbles.

The strong standpoint taken by Fox - refusing to show the president's speech and in turn getting itself boycotted in Obama's latest round of Sunday interviews - countered by the recent rise of MSNBC, with its liberal ranters throwing invective at Obama's opponents.

This is the America I've traversed in the process of writing this. I'm in New York now, inside the UN building. Once the UN symbolised multilateralism, but the global crisis has forced the world's leaders to improvise something more useful for tactical intervention.

The explicit dream of politicians in Europe and America is that the G20 becomes a more permanent horse-trading forum, a kind of insecurity council, with a remit to try and forge deals beyond economic growth and trade.

The whole situation is a product of the grand, spatial forces that are shaping the world: the weakening of American power and the crisis of neo-liberalism, the rise of China, global warming.

What I'm watching - and what's about to descend on the residents of Pittsburgh - is a kind of rolling maul of the world's politicians trying to cope with this power vacuum and improvise new ways of dealing with it.

And outside the calm, air-conditioned UN - almost archaic-looking now, with its fifties era furniture and its media centre with only enough power points for a world where computers don't exist - outside this time capsule there is just this palpable emotionalism, for and against the American President, rising in intensity and leading who knows where?

TONIGHT: Watch my report from Clairton, Pennsylvania - how the real life steelworkers and Nam veterans from the town where the Deer Hunter was set see the G20.

I've been going through the rushes we shot in New York on the day Lehman collapsed, in advance of tonight's programme - a special edition of Newsnight exploring what's changed as a result of the financial meltdown.

It was a surreal day and one of the most surreal moments happened on the stroke of 9am, when a nemesis figure arrived at Lehman's front door in the form of a large man with a beard and a red flag. Only his light-sensitive spectacles spoiled the Karl Marx likeness. He shocked the cops and earpiece-toting security guards by launching into an f-word-laden diatribe along these lines:

"F--- Lehman; f--- AIG, f--- Merill Lynch. Capitalism is doomed. They want us, the working people, to pay for the crisis. Our parents told us about the Depression - they want us to relive the Depression. They want that for us. Hell, no!"

When approached by reporters requesting his last name for the record he responded, after a moment's thought, with a snort: "What's your last name?" Not Hollywood central casting, nor Thomas Pynchon blowing deep and surreal could have invented such a figure nor placed him in such a place at such a time.

Yet the amazing thing about the crisis, one year on, is that he was substantially wrong. Many on the left - and for that matter the ideological right - assumed that the predominantly neo-liberal governments of the G7 countries would let the recession rip, let the banks fail and foist the cost of the crisis onto the population in the form of job cuts, bankruptcies and falling incomes.

They thought this because they had strong evidence to go on. In the early 1980s, the policy response to economic downturn could be summed up by John Major's later catchphrase: "If it isn't hurting, it isn't working." Both in Britain and the US governments crafted policies that would exaggerate the effects of recession: raising taxes, raising interest rates, letting the "lame ducks" of industry go to the wall.

For the old there was, too, the memory of 1929, when the US authorities, in deference to the market, simply let the financial collapse take its toll in the hope that it would "liquidate" all that was inefficient and leave the system stronger.

This time around it's been different. The state has rescued the market. Banks in Britain, the US and beyond have been half-nationalised. Taxpayers' money to the tune of $5 trillion worldwide has been used to replace collapsing demand from the private sector. The G20 leaders have congratulated themselves on the record, and in writing, for "avoiding the mistakes of the 1930s".

From the get-go this response has confused and alienated those who believe markets should be allowed to work untrammelled. The demonstrations, e-mail campaigns etc against the bailouts in the US, which have spilled over now into anti-tax tea parties and protests against state-run healthcare, are evidence of this.

But the bailouts have also confused and alienated the left. Instead of a collapse scenario there is now, at worst, a 10-year stagnation and quite possibly - for the most state-led economies like Brazil and China - rapid resurgence.

"They" - the man with a red flag meant the powerful ruling elite of the Western countries - it turns out, did not "want us to re-live the Depression". In fact they more or less spontaneously swung to the opposite position: they threw away the rule book in order to avoid having to impose the cost of crisis on their own populations in the here and now (though as we will see, the cost will be borne later).

The question historians will ask is "why?" - and how will that change the world?

In the first place the answer is because the free-market wing of US economics did, in its own way, learn the lessons of 1929. The left has long scoffed at Milton Friedman for trying to reduce the cause of capitalism's epoch changing Depression to a simple mistake of central bank policy.

But the result of Friedman's views becoming orthodox was that, on the eve of crisis, an academic steeped in them was at the helm of the central bank and determined not to repeat the mistakes of 1929. In 2004 Ben Bernanke told Friedman and co-author Anna Schwarz, at Friedman's 90th birthday party:

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

That is what was at stake on the morning of Wednesday 17 of September, when Bernanke and Hank Paulson realised they were facing financial collapse on a scale that would dwarf Lehman and AIG, and a Depression that would start on or around the following Monday when the ATM machines stopped dispensing cash and giant private firms stopped issuing pay cheques.

So the first part of the answer is that freemarket economics, it turns out, contains sophisticated, if rusty, counterbalances to the doctrine that the market is always right. The freemarketeers had long pondered what they would do in the case of another 1929 - Bernanke famously postulating the concept of dropping money from a helicopter. And they did it.

Of course that does not solve the ideological crisis for free-market economics. As Alan Greenspan famously admitted, it's broken - above all the assertion that the best regulator is the market itself. He told Congress on 23 September last year:

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself especially, are in a state of shocked disbelief... I made a mistake in presuming that the self interest of banks and others was such that they were best capable of protecting their own shareholders."

But better and more sophisticated economic theory is only one reason for the turn to state intervention. For some reason most of the world's governing parties and politicians either did not want to impose austerity, or thought they could not get away with it.

I think the reasons for this are the most interesting question arising for historians, and I hope they're being pondered by somebody reading this in 2109 (obviously in a subterranean bubble protected from the collapsing ecosphere) in a better position to know the answers. Something in the spirit of the age made it impossible to justify unleashing market-led destruction of businesses, jobs and lives.

It think this comes down to three things.

First, technology. We might moan about the collapse of representative democracy but we do live in an age of networked communications: that is, the old model of information flowing from the centre outwards is dead.

Just as the story of Tolkien's Lord of the Rings becomes impossible if you give Frodo a cellphone, so many of the great political impositions of the 20th Century would have been impossible with networked comms. That's why the Chinese and North Korean governments are so hostile to the internet and SMS. Unpopular policies have become quite difficult to impose: you have to manufacture consent and you have to control the information flow.

Second, the demise of deference. The populations of the West are not greatly content even with central banks printing money, slashing interest rates and governments handing out large dollops of cash to keep unspectacular small firms afloat. Any attempt to do what the red flag man anticipated - that is to foist pay cuts, job losses, givebacks of work conditions etc over a short period of time - would have provoked resistance. The one country where it became unavoidable - Latvia - went from Swedish-style apathy to violent rioting within weeks and was only stabilised by external intervention.

Third, there is this sense that - even if something was deeply wrong within the financial system - the real-world economy was not broken and did not need fixing with a dose of Depression. Those who remember the 1980s will know that the pro-cyclical (ie crisis worsening) measures adopted by governments were rationalised by the need to drive out inefficient businesses and archaic labour practices: Fleet Street printers, legendarily clocking on with the assumed name of Mickey Mouse to draw an extra salary, with the connivance of managers; British Leyland shop stewards who could bring the entire factory to a standstill by ringing a bell etc.

There is no sense now that the real-world economy is beset by labour strife or inefficiency, and that has been a major factor conditioning the response of those in power. However it is beset by debt and we are probably kidding ourselves that there is not a deep malaise out there in a world where cappucino cafes rise while real wages fall.

The result of all this, one year on, is an ideological hiatus. Free-market capitalism did not behave as its red flag waving critics thought it would. Indeed, it did not even behave in a way its supporters assumed it would. It found - pun intended - a "third way".

It adopted - reluctantly and with many false starts - Keynesian measures. It printed money and it threw taxpayers' money at demand and the state now owns large parts of the banking system. Because of all these highly abnormal things, which cannot be easily filmed, illustrated or directly experienced, the average Joanna and Joe actually experiences life going on as normal.

That, for me, is the answer to the question: why has there not been an intellectual revolution in response to all this?

But remember we're only about a quarter of the way through the crisis. Because all state intervention does is transfer the pain from the present to the future, and from the private sector to the public sector.

Already this is creating disquiet because of the rapid revival of investment banking. JP Morgan analysts show that 50-60% of all bank profits are being generated from high-risk activity right now. That, at root, is why the bankers and hedge fund bosses will be walking away with giant bonuses at Christmas, even as the jobless totals rise.

But it will get scratchier. In states that cannot afford massive deficits there will be austerity. That's why the UK debate on cuts, when and where they'll be made etc has hardly started. In states that can afford the spending spree - above all America with its deficit and China with its habitual surplus - the decision to resolve the crisis in the public sector rather than the private lays the basis for a dangerous clash of interests in the mid-decade.

Does America devalue its own debt and bankrupt China in the process, provoking a trade war, or not? That's a question I hope will be answered within a decade rather than a century, and hopefully with a benign outcome.

On top of all this, the fact is that the "real world" economy, for all its vibrancy, was based on something unsustainable - that is, the constant expansion of cheap credit. Whether it's the lifestyle celebrated in Friends or the one depicted in The Wire, it was all based on easy money that is not going to be available in the same amounts going forward.

So, at the end of it all, we've got an anomaly: state capitalism and Keynesian solutions enacted by politicians and advisers who would prefer the free market and who don't buy Keynes' core assertion that capitalism is inherently unstable.

Will this lead to a wider intellectual revolution as it did in the 1930s? We'll be discussing this tonight on Newsnight.

Some believe it's just a matter of time. In the 1930s the crisis signalled a fairly rapid swing in ideology, away from the market and individualism and towards not the state but also social programmes based on redistribution and solidarity.

But we tend to foreshorten the timescale. The policy revolution took four years and a US presidential election. The revolution in economics took seven years - with Keynes publishing the General Theory only in 1936. And in literature 15 years lie between the creation of Jay Gatsby and the creation of Tom Joad. So it might just be timescale.

But there's another view. The most trenchant critics of capitalism, in the anti-globalisation movement, have been going round for quite some time now propagating the slogan "One No; Many Yeses". That insistence on fragmentation and diversity rather than a single doctrine was actually born out of experience too.

In the 1930s sociologists noted the emergence of what they called the "authoritarian rebel" - the "party soldier" of the left and right, the Hollywood gangster, the brooding cartoon anti-hero.

Many on today's left, scarred by the experience of Soviet communism, are determined not to repeat the experience of the authoritarian rebel. In addition, they regard the issue of state versus market as secondary to saving the planet. That's not to deny there are some, like the man with the red flag, who hold a traditional leftist critique of capitalism. The question - and they are certainly asking it themselves - is why that view has not gained more popularity in response to the crisis.

For all these reasons, it may not just be that we're experiencing an ideological time-lag. The failure of a new narrative to emerge may have deeper roots. Technology has fractured the whole concept of dominant narratives; the anticapitalist movement has rejected a dominant narrative in favour of many competing ones; and for many the battleground has moved from the terrain of the economy to the ecosphere, altering the very concept of left and right.

That's how it looks a year after the explosion: mind you, it would have looked very different in October 1930 to how it looked in October 1933.

We'll be exploring all this with a cast of thinkers, strategists, idealists and bankers tonight on Newsnight at 2230. Pile into the debate right here, in the comments section...

"What caused it was not something that happened in Britain... I think everybody understands, even the Americans now say, this is a global problem that started in America..."

That's how Prime Minister Gordon Brown explained the origin of the banking meltdown that began this time last year. It certainly did start in America: the subprime mortgage fiasco; the mis-pricing of risk; misregulation and then the policy decisions that led to the collapse of Lehman Brothers; all these originated in the US - so why was it Britain's banking system that came closest to collapse?

The government was forced to take massive public stakes in HBOS, RBS and Bradford & Bingley. Then, a manufacturing sector that had been booming saw output fall, as the business cliche for once accurately describes, "off a cliff". I spoke to one Midlands metal component maker whose turnover halved in November. Suddenly a workforce used to near full employment faced short time, wage cuts, a wave of closures. Unemployment is heading for three million.

Britain's problem was this: it has the most globalised finance system in the world and some of the lightest regulation. The banks that collapsed here were not investment banks - they were high street banks that had been sucked into the world of risk.
With no discouragement from the politicians

The impulse of the policy elite was to sort things out the old way. Mervyn King, who had resisted any talk of recession within the MPC, finally agreed to cut interest rates. Fred Goodwin walked away with a giant pension. Mr Brown talked Lloyds into saving HBOS. Instead HBOS sank Lloyds. Interest rates neared zero. The Goodwin pension deal outraged millions of people.

How did Britain change as a result? There are several layers to the answer - some quite visceral. Roger Bootle, MD of the consultancy Capital Economics tells me:

"I think the month after collapse of Lehman was an absolutely seminal period - it will affect politics for decades. Like 1992 - it was an absolutely shattering experience physically and mentally - I am quite sure the policy establishment will never be same again."

That policy establishment - the regulators, ministers, top civil servants and let's be frank journalists who surround them - saw their worldview blown away in the weeks between Lehman and the British bailout.

Only by tearing up textbooks did they find solutions. In March:

The taxpayer guaranteed £680bn of bad bank debt
The bank of England started printing money; £175bn to date with more to come.

The state had saved the market. But something fundamental had been lost. We used to call it "prudence".

I stood and watched the physically shaken lords of capital come and go in Downing Street on the week of the bailout. At the time it seemed like the end of an era. But the real game changer was the day Chancellor Alistair Darling had to stand up and admit Britain's public finances were shot for a decade.

Bootle says: "The effects of fiscal hole going to be devastating - before politics was all about using the proceeds of growth. That's out of the window now. The issue is about how fast and the balance between tax rises and spending cuts. The politicians will be incredibly constrained."

It's been recognised as the death knell of neo-liberalism, but the meltdown also signalled the end of the deal at the heart of so called Third Way politics. The deal was: the state would grow in size; the finance sector would be left alone to make money - and pay the tax bill. Now, the Treasury believes the economy has permanently lost 5% of its capacity. The fiscal crisis is structural. It will last a decade.

The public finances have skidded out of control and over the summer it got worse.
Britain is now on track for a £175bn budget deficit this year. By 2017 the government will be making £90bn a year in cuts or tax rises, just to pay for the impact of last year's banking crisis. And this huge deficit holds big risks: Britain's triple A credit rating looks shaky. And recovery is not assured.

Economist Graham Turner, who predicted the credit crunch tells me:

"The big fear is that what we've done is we ramp up the budget deficit to extreme levels to not seen in the 1930s - so we haven't done the Keynesian thing: if you just allow budget deficit run to extreme levels, and you don't address the underlying problem of private debt, you get what happened in Japan - public sector debt soared and they never got a recovery."

But the bank crisis and the fiscal crisis are only half the story. Because, on the ground, after 60 quarters of growth, there are parts of Britain that look poor, are poor - and given a squeeze on benefits and rising unemployment - the prospects for such places are bleaker still

By the end of our longest post-war economic upturn one out of six households in Britain are without work; £390bn pounds had been spent on welfare benefits; and the prison population was 23,000 higher at the end than the beginning. Britain had become hugely unequal - and all this in the good times.

Britain now faces a strategic question: where will growth come from, how big should the finance sector be? The new bank regulator said much of what the City does may be socially useless; and its size may be preventing Britain's economy from finding a role in the 21st Century economy. When the regulator of the City asks questions like this you get a sense of what a massive shock - financially, politically and ideologically Britain suffered a year ago.

For the best part of two decades, in the Anglo-Saxon countries, growth has been driven by credit. In the US this has been almost a pure trade-off with wages: American median male hourly wages were lower in 2007, in real terms, than they were in 1972; the amount of debt in the economy 2.5 times higher.

In the UK there has been a third factor, standing between this wage stagnation and credit growth: wages at the bottom have been stabilised around the minimum wage; but large numbers of people are in the benefit and tax credit system. The state has been the guarantor of incomes for the poorest families, and employs around 40% of the workforce. Graham Turner explains the dilemma:

"We've been squeezing wages and allowing credit to be the main driver of economic growth: take away credit and where are we going to get a sustainable recovery? I can't see where its coming from at the moment."

In the boom Britain's financial centre at Canary Wharf became the physical symbol of our future: post-industrial, global, cool Britannia. But Britannia waived the rules - and now that whole future is the subject of intense uncertainty.

* Tonight on Newsnight, Robert Peston explores the Lehman collapse and speaks to key decision makers in that crisis. Tomorrow, in a special edition to mark the anniversary of Lehman we'll be throwing the story forward - how will the world change, and what's happened to the critics of freemarket capitalism? Â鶹ԼÅÄ TWO 2230.

It's a big day for politicians to craft their evasions about what public services they're going to cut. Conservative leader David Cameron has just made a speech promising to cut £120m from the cost of politics - slashing MPs' pay and allowances, quangos and the like. He admitted it was a pinprick though in relation to the £175bn deficit we expect by the end of financial year 2009-10.

Chacellor Alistair Darling has just delivered a 5,000-word lecture about the future of public services. The word "cutting" is used 11 times - mainly in the context of "cutting costs" but not services.

Mr Darling's speech is a signal that Labour is moving to a new line of defence over public spending cuts. Until the summer its line was that the Tories will cut, Labour will invest through the downturn.

But there has been an argument inside the government that this just was not washing - the Labour party could attack the Conservatives better if they admit there need to be cuts, but paint the Conservatives as enthusiastic cutters and themselves as the human face of cuts.

Now the language has changed - not towards concreteness, but towards "cutting costs". To me that means cutting spending and in political terms, as nice as they try to put it, it is fraught with danger for Labour's leaders.

From Mr Darling's speech it is clear what that human face will be - the smiling mousachioed visage of Clement Attlee was called to mind on numerous occasions. The "humanity" of James Callaghan, himself forced to slash spending after the International Monetary Fund (IMF) bailed out the British government in 1976, was repeatedly invoked.

Even Nye Bevan ("a Welsh hero" according to Mr Darling who did not evoke Nye by name to the South Wales Chamber of Commerce) got a look in.

Naturally there are going to be a lot of Callaghan namechecks in a Callaghan Lecture, but for some reason Mr Darling did not choose to make any great exploration of what actually happened when Callaghan and Dennis Healey slashed public spending.

History records the Winter of Discontent as the denouement - but there were three years of strife, decay and decline between the two events. Those of us who were around at the time remember that it tore the heart out of the Labour party and its affiliated unions.

To get a flavour of the time have a look at from 1976:

"I do not pretend that the process of agreeing how the necessary reduction in previously planned expenditure would be achieved was a pleasant or an easy one. It never is. But I would claim that the government have done all that can be done to observe the priorities to which they committed themselves at the last General Election," he said.

There's a lot in the argument similar to the way Labour is talking now. Mr Healey talks a lot about "levelling off" public spending - that is a nominal freeze and a real terms cut because of inflation. He speaks too about a philosophical difference with the Conservatives over the cuts. Labour, Mr Healey assured backbenchers, would do the least damage to public services and act more in line with the party's core principles.

Later, in his autobiography, Mr Healy explained what happened in practice:

"Politically, by far the most difficult part of my ordeal was the continual reduction of public spending; almost all of the spending cuts ran against the Labour Party's principles, and many also ran against our campaign promises."

This is the problem you have if you are Labour chancellor and you have to cut spending. Up to now most of the commentary has tended to focus on what it would do to Britain's triple-A credit rating if Mr Darling fails to make the cuts.

Now, as Labour signals a mixture of cuts, privatisation and "public service reform" it is worth asking what it would do to the party itself. What will Labour's rank and file activists make of its leaders if they ever get around to concretising this into a series of actions in government? As I recall, in the late 1970s, it was close to mincemeat.

To push against the crisis or let it rip; to borrow and spend or balance the books - these are questions that will shape the outcome of the financial crisis - and the next election.

Looming over the debate is the shadow of a 20th Century giant: John Maynard Keynes.

I've been reading Robert Skidelsky's new book "Keynes - The Return of the Master" and it's an eye-opener. Skidelsky's three volume biography of Keynes was a landmark of the last decade and his latest book takes a completely unexpected turn.

Instead of a potted biography it is mainly a deep-Keynesian polemic against the freemarket economics that led up to this crisis, and the market-guided policy responses, and the failure of mainstream economics including the so-called New Keynesianism that emerged once the doctrine went mainstream in the 1960s.

It also contains a highly coherent account of the events of September-April, all the clearer for his decision to stop reading the newspapers while he was writing it. If you're doing Economics at GCSE or A-Level, this one chapter is a good reason to read the book.

We've got Lord Skidelsky on Newsnight tonight to discuss what Keynes might have done in this crisis; how he would have judged those who're using his tactics but still don't agree with his strategy and philosophy. He'll be facing one of his critics - my old opposite number and now venture capitalist Liam Halligan.

What is certain is that Keynes is back - in policy if not in philosophy. The quantitative easing strategy adopted here and in America was first advocated by Keynes in 1932; using the state spending to boost demand - well that's been done to a the tune of five trillion dollars worldwide. In the space of 12 months, all over the world, state rescued the market.

At the end of the 1920s economists believed capitalism was inherently stable; markets inherently efficient; recessions necessary. Then came the Depression: US GDP halved, the stock market lost 80% of its value; one if four of the workforce was unemployed.

Keynes concluded capitalism was unstable and needed state intervention to make it stable. Keynes went on not just to write a general theory of unstable capitalism, but to prescribe remedies that actually worked, and quickly.

Keynes was an economist who refused to believe that past data predicts the future; he based his theories on uncertainty and his prescriptions on morality. On the eve of last year's meltdown had almost no followers in Wall Street and few in academia. Mind you there are a few more now...