The free-marketers can cry all they like, the credit crunch means capitalism will change its shape once again

Let the cry ring out, "we're all Socialists now". That thought has been running through my head for a week or so now, and while it's a little flippant it reflects a remarkable few weeks that has undoubtedly changed the course of capitalism for some years to come. Given the markets' plunge overnight and today, the governments look to have more work to do yet.

In the whirl of 24-hour news it can be hard to distinguish the newsworthy and dramatic from the truly historic. The government interventions of recent weeks, most significantly in the US, but also across Europe to now include Germany, are the news events that only happen on a handful of occasions in a life time; they're events that actually send the march of history in a new direction.

Governments worldwide - led by the determinedly free-market Bush administration no less - have nationalised banks or played match-maker in takeover deals that should leave us gaping. The American government now, to all intents and purposes, owns the world's largest mortgage companies (Freddie Mac and Frannie Mae) and the world's largest insurance company (AIG). The British government finds itself the proud owner of the banks Northern Rock and Bradford & Bingley. Several western European countries now own stakes in the banks Fortis and Dexia and are dishing out money to banks left, right and centre; while the Iceland government has a 75 percent shareholding of local bank Glitnir.  Gordon Brown is thinking about buying into any number of banks. Then there have been all the regulatory changes, such as the outlawing of short-selling, and the world's richest man, Warren Buffett, demanding that taxes be increased for him and others in the top wealth bracket. These are days that change the times.

The invisible hand of the market is now there for all to see, and it's being controlled by governments, not the private sector. Free-marketers who have wheedled and lobbied so hard to wrestle free of the nanny state are now clinging to her apron strings. Well, some of them. Others, such as venture capitalist Bill Perkins, are still fighting the fight for deregulation. He paid $140,000 for a full-pgae ad in the New York Times last week, depicting President George Bush, treasury Secretary Henry Paulson and Federal Reserve Board chair Ben Bernanke as "The New Communists", trampling on the graves of private enterprise and capitalism.

More, however, are somewhat humbled by events. As leading New Zealand economist Brian Easton puts it, "I'd say most of those in the financial sector would be totally humiliated by the current cock-up, were they not running so scared".

"I doubt this will kill capitalism," Easton told me, "but it will change it". Bernard Hickey, of interest.co.nz agrees, pointing out that the intention is to eventually sell these banks and other financial institutions back into private hands. But, he adds, "it will be the catalyst for heavy new regulation and potentially some sort of global banking authority."

The metaphor that leaps to mind involves Doctor Who. When the centuries-old Doctor dies in the science fiction series, he simply morphs into another embodiment of himself. Same old Doctor, but a new face and some new characteristics.

So it will be with capitalism, morphing from the free-free market we've known for the past generation into something more like the capitalism that emerged from the misery of the early 1930s and lasted through to the 1970s. We're not in a depression now, as Eleanor pointed out on Pundit yesterday, but the current financial crisis requires government intervention along the lines of Franklin D. Roosevelt's New Deal. As a newly elected president in 1932, Roosevelt famously spent his first hundred days in office ramming through a barrage of new laws that put government front and centre in the economy and strict limits on the money markets. (Contrasting presidents, it's interesting to note that FDR got his Emergency Banking Bill through the House and Senate in a single day without a written copy. George W Bush had to pork and plead for over a week to get his bill passed).

Around the world, and here in New Zealand, much of the regulation born of that era was stripped away through the 1980s and 90s, derided as cumbersome and too restrictive. Whether called Reaganomics, Rogernomics or Thatcherite, the policies deregulated national economies and then deregulated them some more.

What we're witnessing now is the twilight of that era. The pendulum is beginning to swing back and it will almost certainly carve out a new list of regulations as it moves. Banks will take a more cautious approach, for a while at least; governments will only have to point to late 2008 to justify a tighter hand on the tiller; and voters will demand security over profit.

Most people in developed countries may not understand the complex machinations of the finance markets, but they've been made all too aware that it's not just rich people gambling their own money; our whole economy is on the table while the market players place their bets. We may eventually forget that truth again, as we had until the past few months. Somewhere down the road we may get too heavy-handed, justifying some push-back from the markets. But my guess is that for a while at least most voters in capitalist democracies are likely to give short shrift to the trickle-down merchants. Step forward, President Obama.

The New Deal and the first Labour government's policies here in New Zealand laid the foundation for decades of prosperity. Globalization will make the job more complicated this time, but the recent willingness of governments' to eject ideology in the face of need is encouraging.

Let's hope that whoever holds the Treasury benches in this country after the election shows the same good sense. I'll write more on the political repercussions of all this in the next day or two.