ECONOMIC MELTDOWN, PART 2: An essay by Ian Bell

AS the soundtrack to the definitive disaster movie echoes around the planet, a low background whine can be detected. We heard it first from the American think-tanks and right-wing talk shows as the Bush administration took charge of half the nation's mortgages before proceeding to pour $700 billion into Wall Street's toxic waste dump. We heard it again in Britain last week when the government offered taxpayers' cash for the carcass of the banking industry.

"Socialism," they said, appalled, "state intervention, part-(deep breath) nationalisation." A low blow had been struck against the immutable harmonies of the free market. The reeling ghost of the misrepresented Adam Smith, with all his philosophical goods and chattels, was being taken into public care.

Well, not quite. To be partly nationalised is a bit like being partly pregnant. Preference shares and "strings" or not, Gordon Brown and Alistair Darling do not propose to take day-to-day control of the banks in exchange for our £50bn. It would send "the wrong signals". It is not their place. Why not?

Those who persist in regarding the Brown-Darling intervention as heresy have a problem. The government has said, in effect: "Here's our best shot. If you don't like it, show us what you've got." The truth, even as Barclays persists with the delusion it can recapitalise privately, is that the evangels of the free market have nothing. Zilch. There are no tricks left in their box.

Back in the early days of New Labour, Will Hutton, journalist and guru, declared capitalism "the only game in town". Not any more. That game is a bust. At best it will survive only to be altered out of all recognition. Capitalism is enduring one of its periodic crises, perhaps its worst ever, and the markets appear incapable of "sorting themselves out". Equally, the stern notion that all failing enterprises must be allowed to go to the wall stands revealed - though you can still find diehards who disagree - as insane.

Some things cannot be allowed to fail. Such is the new - in fact, very old - wisdom. A decent, functioning society rests on certain pillars. So long as money survives as a means of exchange its circulatory organisation will remain an essential support. And as recent weeks have demonstrated, it is certainly far too important to be left to bankers and their shameless notions of personal entitlement. An era has drawn to a close. The big City bang has ended in a whimper.

Gordon Brown has stared into the abyss. George W Bush, stunned and stammering, has peered over the precipice. If the banking system goes down, entire countries will follow, with millions of jobs, businesses, homes and families. The disaster movie has REM playing over the credits: it's the end of the world as we know it. And no-one feels fine.

The last intellectual defences of the free market purists are as puerile now as their "free market solutions". Worried Darling's £50bn will "dilute your stake" - lose you money - in RBS or HBOS? So would you rather lose the lot? As the Footsie circles the drain, the choice, increasingly, is between a part-nationalised bank, no bank at all, or - let this raise a cold sweat - full state control.

It's not complicated. Only governments can raise taxes and print money. Bundling dodgy debt off the balance sheet or bumping up mortgage arrangement fees won't cover it this time. In the credit markets, the banks have begun to feel as civilians have long felt: they don't trust bankers. The people who will not lend you money won't lend to one another: there's your crisis. And if they don't trust one another, why should anyone trust them tomorrow, or next week, or next month? This is not a "crisis of confidence": this is a rational appreciation of the fact an edifice has been built upon fictions. Enter the state.

As represented by Brown and Darling, it enters with reluctance. These are men clinging to the belief a piece of jargon - "recapitalisation" - can conceal the truth, moral and political, of their unavoidable actions. The public interest and public ownership are connected. Who'd have thought? So the nation nationalises.

Half a trillion pounds of public money may be at stake. It may not work. The application of the Treasury's (borrowed) WD40 may fail to restart the seized engine of fictive (borrowed) prosperity that is the debt market. It may not be enough to let the common man experience the final comedy, wherein the banks graciously allow him to borrow back his own tax money. On the Labour back-benches last week, nevertheless, the mood was plain: this is what it's all about.

It is, too. The great financial centres of the world have emerged from their own fairy tales. They do not exist in a universe of their own, with self-made rules and self-invented rights. They possess a single, weakening spell: save us from ourselves, or it will be the worse for you. This happens when you allow hocus pocus, and its cousin mumbo jumbo, a grip on the real world.

Older Labour MPs remember another formula. It was in Labour's constitution, before being sacrificed on the altar of Tony Blair's electability. It promised to secure "for workers by hand and by brain" the full "fruits of their industry". The key, though no Labour leader believed it, was "the common ownership of the means of production, distribution and exchange". The people were to take control of "the commanding heights of the economy", banks included. Even as rhetoric, the pledge last saw daylight in 1983, in a manifesto still characterised as a suicide note.

Times change, capitalism does not. Recently there has been a lot of talk of globalisation, and of the Great Crash of 1929. Commentators have struggled to distinguish between the parallels and the differences. This time, governments have decided that banks must not be allowed to fail because of a little thing like free market dogma, as happened eight decades ago. This time, too, we have Brown invoking global solutions for a globalised age.

But the contagion spread around the world in 1929 much, give or take a few computers, as it has done in 2008: the panic, its causes, and the mechanisms for the dissemination of fear and confusion have not changed. In a sense, they cannot change: terror follows the trade routes. Equally, another truth persists: when capitalism fails, only governments remain.

This offends the purists, of course. At the hint of state intervention they bewail the loss of incentives, risk-taking, managerial genius. You must presume they are talking of the species of genius that contrived the current mess, and the suicidal behaviour that required only "light touch" (none to speak of) regulation. But the heart of the objection to even half-hearted nationalisation is this: it gets in the way of making money. Impose a wider, collective interest on a narrow elite and the elite will employ every means, from political interference to the threat of flight, at its disposal.

No doubt the prime minister tells himself his £500bn offer to the banks is the biggest public-private partnership of them all. In fact it is, or ought to be, a template. Why do governments nationalise? They do so, without hesitation, when a country is at war, and under threat. They do so, very occasionally, out of ideological conviction and a belief in real social ownership. In British history, however, and most particularly in the context of the post-war Attlee government, they have done so for a pragmatic reason. Some things are too important, universally necessary, to be left to blokes in braces looking for a quick profit.

Most people could make the list. Water, energy, transport, communications: should these fail a society ceases to function. Banks, as we have just remembered, fall into the same category, but banks have a double nature, a peculiarity neither the tepid socialist nor the avid free marketeer can accommodate easily. Banks are fundamental to the collective good on the one hand, yet the symbols and drivers of economic individualism on the other.

To imagine nationalisation you have to re-imagine banking, and money itself. The ability of a single country to do such a thing is questionable. The ability of any country to avoid thinking of such a thing is, in the present circumstances, inconceivable. Last week, Will Hutton was arguing that a run on the banks is already in train. He was probably correct. Yet a collapse cannot be contemplated. Darling and Brown say that they will do "whatever is necessary". A tip: we are approaching the point at which only one "whatever" will be possible.

The dogma of the past quarter century is no longer a guide to anything. Conspicuously, David Cameron and his Tories offered no objection to the proposed state purchase of bank shares last week. Like their friends in the City, they had no alternative. Besides, history is instructive. Rail nationalisation, for example, was espoused by a certain notable Conservative long before Labour got around to it just after the war. Winston Churchill was demanding state ownership as far back as the 1920s.

Nationalisation, they say, "distorts the markets". Anyone observing the markets last week might view the possibility with equanimity. Nationalisation, we are told, is inefficient. Which yardstick for the efficient distribution of capital are they employing on Wall Street and in the City these days? Capitalism is thrown into crisis every seven to 10 years. Once in a while, when the plates shift and the pent-up contradictions find an outlet, there is a tsunami. Here it is.

All we need to know now is the number of bank shares the government will be forced in the end to buy, and what they will do with these restored possessions. In our name, and in the name of sanity.