The current credit crisis has certainly unnerved policy makers even if few of our business associates seem ruffled.  For most of us, it is business as usual.  Our only concern is that the Federal Reserve fails to manage the US economy sufficiently to avoid a severe recession that spreads to Europe. 

Our professional interest, as always, is in the politics that affect business.  What is clear is that the Bank of England has been brow-beaten into a u-turn - by depositors whose panic threatened to drift from Northern Rock to similar building societies, by bankers who feared a cataclysmic fall in confidence at a time of maximum vulnerability in the commercial paper market, by regulators who worry existentially about investors as a category far more than the smooth working of the system as a whole, by politicians who remember the ERM debacle as ending their rival's hegemony (and see a similar debacle today as ending theirs) and by European central bankers whose innate corporatism tends to mitigate those fears of 'moral hazard' that have driven the Anglo-Saxon system to date.

Let the economists worry about whether Mervyn King was right and then wrong - or was wrong all along.  Let the conspiracy theorists note that Northern Rock's North Eastern base just happens to be rather central to New Labour's elite.  Our interest is what the political consequences of this panic may be - not only panic by grey-haired petit-bourgeois but by men of eminence.  We are reminded that the Government did not offer assistance to low-income Farepak savers last year when their small but vital sums dissipated over night - nor has the great underfunded pensions issue been solved. Yet to avoid a panic in the credit market, Her Majesty's Government gave an open-ended commitment to depositors which now sits on the record as an effective guarantee to anyone who has capital in a recognised institution at the potential expense of everyone who does not.  

All taxpayers, with or without free capital, are thus guaranteeing the interests of just one set of citizens.  The question arises where will this preparedness to guarantee stop.  If interest rates rise and homeowners can no longer carry the debt what happens if the numbers trapped in that position starts to grow to politically significant proportions? And why not protect small savers in Christmas Clubs or people who pay deposits to companies that then crash (we've lost money that way) or pensioners who are not going to get what they believe they were promised? And why not protect those uneducated low income families encouraged into excessive debt by banks and credit card suppliers?

In reality, the Government promise has been restricted to depositors caught up in a panic that threatens the system as a whole but it shows us that the financial system can no longer be regarded as operating as distinctly from politics as it has been since the Thatcher Revolution in the early 1980s.  In this latest political cycle, in which Gordon Brown's 1997 decision to give the Bank of England its independence was a defining moment, the working assumption has been that the economic system would operate entirely outside of politics.  The state would only be regulator or referee, treating all citizen-individuals as equals within their relevant category as investors, employees, directors of limited liability companies or customers. 

Within this system, technocrats would ensure fair play and entrepreneurs would innovate.  Wealth and prosperity would constantly grow with globalisation.  Adjustments, such as the Russian default or the Asian and Latin American crises, were simply the birth pangs of a new and increasingly stable order, based on innovation, that was unprecedented.  This was our old friend the 'end of history'.  Free markets would 'trickle down' wealth, not fast enough perhaps to deal with mass global poverty but fast enough to create a global middle class with a stake in the system.  This would prove the basis for a future of never-ending progress that would include the ignorant, seething masses of the third world - at least, in theory.

Mervyn King, by telling (originally) a House of Commons Treasury Committee that any intervention by his Bank would create the potential for an even bigger credit crisis in the future, was absolutely right in terms of the theory and the practice of capitalism - and absolutely wrong in terms of the practice of politics.  The point of the free market is that it 'jerks'.  Schumpeter called this the 'creative destruction' implicit within capitalism.  As some rise, others fall, often into dire straits.  While Southern England did well on innovation in the 1930s, unemployment grew chronic in Jarrow.  Lives will get ruined but the free market ideologue, even when he starves as a loser in the game, will say - much as a Leninist might about the eggs to be broken in order to create the omelette of industrial development - that, over time and on balance, long term economic good will triumph over short term social evil.

By changing his mind over intervention and by endorsing the Chancellor's support for depositors, Mervyn King has now unintentionally set a first psychological limit to the now 23-year old progress of free market ideology - and in its heartland of all places, the City of London.  The State and the practitioners of politics, in a panic, have had to re-assert their power, albeit briefly and in constrained circumstances, over economics.  From a free market ideologist's perspective, no good can come of this.  And such an ideologue would be right - but only from their perspective.  It has to be said that life is much more than economics. 

Once interventions have 'bent' the market, questions then start to arise over the precise equity of such decisions and about the appropriate use of State power within a system that operates as a blind watchmaker, not one designing the best of all possible worlds but (like evolution in nature) moving forward according to an internal and inhumane logic all of its own. 

Once misplaced popular faith in the free market as 'de facto' intelligent design has gone, ever more interventions are demanded ever more forcefully by special interests or by political powers able to force the pace.  And there is no greater special interest than the mass of the electorate speaking for its own interest.   After all, we intervene in nature, why not in the market.  We rejected 'survival of the fittest' when it underpinned the Nazi experiment and it may be that acceptance of 'creative destruction' will go so the same way if the destruction threatens us with an economic holocaust.  Those who call for pure free market theory are in danger of becoming like those who called for a pure eugenics - theoretically right within the system they hold to but terribly wrong when it comes to the consequences.  Indeed, right theory becomes, at a certain point, inhuman ...

The market's own adjustments to politics, in the light of new expectations of intervention, is likely to force through more intervention.  Without a quick and brutal re-assertion that the decisions over the last week were a 'mistake' (which then raises even more serious issues of trust within a severely weakened political system that has less legitimacy than we would like), then the 'mistakes' are likely to be interpreted as wise decisions that may and will be repeated.  And so it goes. 

Our prediction is that, once this crisis is over, the various authorities involved will work very hard to put the genie back in the bottle.  They will argue that they have only used a reserve power that will probably not be needed for another 140 years.  They will use other means, mostly regulatory, to constrain the market in minor ways that limit the chances of another crisis.  They may consider formalising the guarantee that they have given to depositors through legislation that limits the degree of liability to the political process, reinforcing moral hazard while limiting its effects in practice.  They will reassert their confidence in a 'reformed' free market system. And, of course, they may well be right.

But there is still this nagging suspicion that the failure of any major British political party to question (given the existing guarantees on the first £30,000 or so of deposits which should have been ample for most small depositors) whether guaranteeing the funds of the relatively wealthy was either equitable or wise suggests that it is now conceivable politically to chip away at the assumption that the market will rule in all cases and absolutely.  When it comes to the fundamental interests of the British middle classes, theory goes out of the window.  Stanley Baldwin would have understood this rule of British politics.

But don't expect a resurgence of socialism or corporatism (although an odd form of liberalised corporatism in the interests of the French middle classes seems to be exciting the Sarkozy circle).  Do expect special interests of the middling sort to get a mite more aggressive about Government intervention to protect their positions even where these conflict with the general good.  And certainly expect less willingness amongst those who benefited most from the Thatcher Revolution to be fobbed off with free market theory when they decide it no longer suits them ...