The financial crisis is a crisis of New Labour and the Third Way. The party’s poll ratings, the German elections and before that the European elections show that it is social democracy that is carrying the can for a crisis in high finance. The stark differences of national context across the European left preclude a grand unified theory. Nevertheless, the shared experience of failure suggests that there is something about the kind of left that emerged in Europe over the past two decades, and for which we were the most shining exemplar, that voters want to punish. It may be tempting to focus instead on issues such as electoral reform and Tory-bashing, but parties in as much trouble as we are only move on once they begin confronting their uncomfortable truths. The New Labour ‘golden age’ did not just coincide with an unsustainable credit boom – it was dependent on it, ideologically and economically. We have to confront this while at the same time not regress to the pre-Blairite Dark Ages.

It is a testament to Gordon Brown’s decency that he can’t pull off intellectual dishonesty. I think we all cringed a little when he said in his conference speech that ‘what failed was the Conservative idea that the markets always self-correct and never self-destruct.’ That idea has been as much a pillar on the centre-left as the centre-right for the past 15 years. It was the Darwinian mutation that saved the left from extinction following the winter of discontent and Thatcherism. The Third Way’s twin promise of free-market-generated prosperity and social justice was our path to power and also exported well – albeit in different degrees of intensity – to the rest of Europe by tapping into the post-Cold-War desire for reconciliation and transcendence of the ideological divides that had polarised the continent. It was the defining political ideology of its age. However, if the idea that we were shaking off the dichotomies of the past was central to the Third Way, it was also central to seducing us into believing that what was a textbook property boom was in fact a brave new world of unending growth. The political mantra of an alternative to right and left was echoed in the economic sphere by the belief that we had gone beyond the era of boom and bust. The old rules were thought not to apply.

The impression that the Third Way was delivering its promises was the product of the low interest rates and low inflation growth of a boom that it suited our short-term interests not to diagnose, let alone prevent. It kept together during the noughties the rare but formidable alliance of big business, the public sector and middle and lower class opinion on which New Labour relied. It allowed City profits to soar and for public spending and borrowing growth to outpace economic expansion. The boom also masked the failure of that increased spending to translate into a significant improvement in social mobility. The easy accessibility of credit enabled people to finance aspirational lifestyles, creating a perception of material affluence that allowed both the government and the public to shrug off study after study showing that social mobility in Britain was grinding to a halt.

New Labour can succeed at the ballot box with one of its two pillars of social justice and economic growth being illusory, but not with both. This is the situation that we are in now. The collapse of the credit market and public finances means that there is no longer anything between voters and recognition that they are trapped into the economic stratum into which they were born. You can track this epiphany by looking at a recent survey by LSE/Sutton Trust that showed that over the past year the number of people who think that people in the UK have the opportunity to get ahead has plummeted from 53% to 38%. People feel that the promise of New Labour was a sham for which no contrition has been shown. For as long as they think that, our fortunes will languish.

The recent experience of European Social Democrats tells us that we must resist the temptation to revert to the unreconstructed left. The German SPD lost the election because no one believed its pledge for full employment. The French PS is the ultimate Ghost of Labour Future – a narrow, bony rump representing only the Civil Service and the larger unions. Presenting rag-bags of uncosted policy initiatives will get us nowhere. We also need to guard against rolling back our commitment to choice and competition in public services if we are to restore our reputation for management of the public finances, the key to the centre ground. Recent decisions to shelve the sale of Royal Mail and to give existing NHS service providers preferred status in tender competitions were regressive. However, stating that only underlines our quandary: we renounce the pro-business centre ground at our peril, but it was a relationship to business that has been discredited.

New Labour is good at squaring circles. It should be possible to put the case for bold and intelligent reform of the dysfunctional financial sector without marching off into an anti-capitalist wilderness. At the moment, we are doing the opposite – bringing in easily-evaded, tickbox regulation while at the same time indulging in crass anti-capitalist rhetoric. Despite the banker-bashing and fighting talk about ‘the failure of right-wing fundamentalism’ what we are actually putting forward in terms of reform – including the gestures on bonuses – hasn’t really got to grips with the biggest long-term problem thrown up by the crisis, the banks that are too big to fail. Policies such as ‘living wills’ for banks and increased capital requirements are fine as far as they go, but they also imply a resignation that the TBTFs (Too Big To Fails) are a fact of life. This timidity seems hard to justify when there is pretty much a consensus among economists that this has to be tackled, with John Kay in the FT leading calls for the imposition of a ‘firewall’ between banks’ retail deposits and their ‘casino’ activities. Tackling the TBTFs would not only be in the national interest but would also represent an opportunity to nuance rather than jettison New Labour’s trademark support of free enterprise. It would demonstrate how state intervention can be the enabler of the competitiveness and transparency that a functioning free market requires but does not always generate itself. We would be championing the free market without appearing to be in the thrall of the City.

Regrettably, George Osborne, in the policies that he unveiled in July, came closer – cynically and without meaningful commitment, but closer nevertheless – to advocating bolder banking reforms than we have. The more we allow the Tories to make these kinds of raids on what should be our territory, the less force we can put behind what should be our strongest argument of all, that the Conservative party would be more susceptible to the City’s emotional blackmail than an older and wiser New Labour.

The conference was nice but it must not delude us into thinking that voting reform, Tory-bashing and hostels for teenage mothers will be enough to deliver the election. We have to get to the heart of the matter: our failure even to try to rein in a credit boom that it suited us at the time to let rip and our current failure to take the kind of action that would stop it from happening again. In the aftermath of such failure, it may be tempting to question whether the movement is worth salvaging at all. I think it is. Whatever the errors of our young movement, New Labour still represents that most profoundly humane belief of all – that through our agency and ingenuity there are no interests that are so opposed as to be irreconcilable and that future generations can be freed from the conflicts that once tore Europe apart.