Three months before Gordon Brown became prime minister, journalists asked Peter Mandelson whether he expected the new premier to sack him. ‘I don’t know whether this is going to come as a disappointment to him,’ replied the EU trade commissioner, ‘but he can’t actually fire me.’

Many had, rather more accurately, speculated that Brown might exercise his power not to reappoint Mandelson for a second term. Rather fewer, however, had predicted that the prime minister would recall Britain’s man in Brussels early in order to appoint him to the cabinet. But in a month when New Labour effectively nationalised a number of the country’s leading high street banks, anything, it seems, is suddenly possible.

And it has certainly been a baptism of fire for the new business secretary, now placed on the frontline of the government’s attempt to fend off the economic storm battering the country. But to whom does Mandelson attribute the blame for the credit crunch? ‘The banks and the regulators, in that order,’ he responds. While the crisis may have originated in the United States, banks in Britain showed ‘a lack of prudence, lack of proper risk management. People were not thinking beyond the immediate opportunities that they thought they identified in the financial products derived from the US subprime market.’

The business secretary is, however, swift to dismiss the Tories’ claims that the government was asleep at the switches: ‘I don’t see how you could attribute blame to the government. No, it’s fine to use hindsight … but nobody foresaw the endemic effect of this virus once it had entered the financial system and certainly once the analysis has been done and the policy options thought through we were ahead of the curve, as others internationally have acknowledged.’

Some on the left, on the other hand, see the roots of the crisis in what they allege to be New Labour’s love affair with ‘untrammelled free markets’, a charge with which Mandelson is also having no truck. ‘I think there’s a danger that some see the financial and banking crisis as an opportunity to resurrect the 1983 party manifesto. It’s not going to happen. We’ve all moved on, [and] more than anything, the public is not going to be interested in that … I don’t believe what’s happened is a market failure in the financial sector, I believe it’s a regulatory failure,’ he suggests. Indeed, for the business secretary, New Labour’s basic premise – ‘markets wherever possible, government intervention wherever necessary’ – remains unaffected and any attempt ‘to convert into a theology that, because mistakes of regulation and personal behaviour have been made in one sector of the economy, you should reject the entire market system is absurd.’

But while he dismisses the idea that ‘the era of big government is back’, Mandelson argues for ‘new forms of governance … smart, decentralised in many respects, but also internationalised’. And, as the recession begins to bite and unemployment rises, he pledges the government to ‘invest money, effort and energy in helping people find their next job, while recognising that we can’t necessarily save their last one’.

The events of the past month have also recast the political landscape. ‘Because we’ve been in power for over 10 years, people inevitably think that we’re in the final stages of office’, Mandelson argues, ‘then along comes a real, major national crisis and people think, “hold on, thank goodness the people in power know what to do”. So our lease on office is being extended.’ The government has thus found itself with an opportunity to ‘recreate an empathy between the electorate and the government so that the public feel we are in touch again and they invite us back into their lives,’ he suggests.

Mandelson is convinced, though, that Labour also has to prove to the country that ‘we are again genuine agents of change, that we … haven’t run out of ideas and radicalism, and that we are regenerating ourselves and embarking on a fresh political project to bring change … to the country.’ If the party is capable of doing so, he suggests, it ‘stands a very good chance not just of extending our lease but of renewing it too’.

The business secretary thus warns against a ‘safety-first’ approach in which Labour simply bets on a restoration of its reputation for economic competence in order to win re-election. ‘We cannot wait for the next election to produce some major policy sparks and reignite interest in us and our future agenda,’ he cautions.

Instead, he urges a focus on three areas. First, social mobility where Labour needs to provide ‘new ladders for working-class youngsters to climb, taking advantage of the growing aspiration of … parents for their children to go to university.’ Second, the party also needs to outline a vision for ‘the jobs of the future … regearing our economy and our sources of employment to match the opportunities the changing global economy is going to offer’. Finally, Mandelson advocates ‘further individualisation of our public services’. In education and health, particularly, he argues, Labour needs to give ‘real meaning to people power, parent power [and] patient power’.

Nonetheless, historical precedent suggests that governments which have fallen as far behind the opposition as Labour has this year rarely win re-election. ‘My political experience,’ Mandelson responds, ‘tells me that the next election is one that we can win, rather than one we have already lost. And I think that reality is dawning, first and foremost on the Conservatives, judging by the hangdog expression on many of their faces; it’s yet to fully dawn on our own party.’

But if Labour’s fortunes suddenly seem rather different than they were just a few weeks ago, that must be equally true for Mandelson, unexpectedly returning to the old department – albeit now in its new guise – which he quit as trade and industry secretary nearly a decade ago? ‘I do feel that I’ve come home in a number of senses … Home to this department [which] has a real symbolism for me and I know it has for the civil servants who were, I think, sorry to lose me in the first place. I’ve come home from Brussels. And I’ve come home to my political family from which I became estranged, not through my own choice,’ he suggests.

But does not the return of the prodigal son risk making this ‘political family’ rather more dysfunctional than some believe it already is? Mandelson acknowledges that ‘we’ve been through a bit of an unhappy period but we’ve rediscovered ourselves: as a party, a government [and] a political family. When times get tough, families have to pull together and that’s what I feel I’m playing my part in doing.’

Will the Labour party – which, Tony Blair once famously remarked, would only be truly transformed once it had ‘learned to love Peter’ – return the affection the business secretary seems so keen to lavish upon it? Mandelson readily admits that he is not ‘universally loved in the party’, which he attributes to being ‘uncompromising’ during the 1980s and 1990s in his belief that the ‘cause of reform [and] change in the party needed to prevail … [But] sometimes people felt that I not only wanted New Labour to prevail but also to triumph over our party critics.’

The ‘pretty high octane cocktail’ which fuels the strong feelings he provokes is also, he believes, a reflection of the fact that, ‘the Tories hate me, for perfectly understandable reasons from their point of view, and some in the press are vindictive as well as eager to have fun at the expense of anyone they can set up to do so.’

Does the dislike he seems to trigger get Mandelson down? ‘Yes, occasionally,’ he says. ‘But does it stop me doing what I need to do on the other hand? No. I’ve always taken a fairly black and white view of right policies and wrong policies, the right approach and the wrong approach, the right people and the wrong people. If I had my time again, would I have been a bit more careful in how I translated all that? Yes. But, fundamentally, would I have done anything different? No.’