The first brought us the gem that was central planning; and the second, the wondrous neoliberal economics that has reigned over the last 25 years. Despite opposite locations on the ideological spectrum, both approaches were united at a metaphysical level by the Platonic paradigm that there is one ideal straitjacket into which you can cram all actually existing economies.

We all know where central planning and the elimination of the market brought the Soviet Union and eastern Europe. Over the last few decades, we have witnessed how the holy trinity of radical liberalization, deregulation and privatization has increased the numbers of people living in absolute poverty, redistributed income towards the rich and reduced global economic growth per year in the 1980-2000 period by more than half of what it was during the 1960-80 period. Despite claims to the contrary, what we have had under the reign of unfettered market processes is not Schumpeterian creative destruction, but long-term stagnation combined with periodic destabilization.

The current financial crisis that may lead to what the former Federal Reserve chairman, Alan Greenspan, describes as possibly the “world’s worst economic crisis since the second world war” provides a cautionary tale of what happens if you eliminate all effective controls on the market. The housing bubble is but the latest of some 100 financial crises that have swiftly followed one another ever since Depression-era capital controls began to be lifted during the Thatcher-Reagan years. Owing to the devastating impact of uncontrolled gyrations and permutations of speculative capital, there were calls for capital controls and a return to strong financial regulation following the Asian financial crisis in 1997 and the craze of the late 1990s. The first event led to the economic collapse of all the so-called Asian tiger economies that did not impose capital controls, the second to the wiping out of $7 trillion in investor wealth and the US recession of 2001.

Instead of heeding these calls, Washington caved in to Wall Street’s insistence on private sector “self-surveillance” and “self policing”. Instead of stronger monitoring and regulation of sophisticated financial instruments such as derivatives,, governments meekly agreed to leave this to market players who were supposed to have access to complex quantitative computer models that would undertake sophisticated risk assessment.

Instead of busting the housing bubble by decisively raising interest rates, Mr Greenspan simply stood by, as he did during the mania, and allowed another bubble to grow and grow. Instead of pushing Mr Greenspan to prick the bubble, the then US Council of Economic Advisers chairman, Ben Bernanke, provided his guru with technocratic cover and attributed the rise in US housing prices to “strong economic fundamentals” instead of speculative mania. Both Mr Greenspan and Mr Bernanke disregarded the overwhelming evidence that, as the economist Dean Baker put it a few years ago, when the bubble was taking off, “Like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, likely will face serious hardship.”

What happened to self-policing? When it came to risk assessment of derivatives such as collateralized debt obligations (CDOs) and structured investment vehicles (SIVs), the process collapsed almost completely, with the most sophisticated quantitative risk models left in the dust as risk was priced according to one simple rule by the sellers of securities: underestimate the real risk and pass it on to the suckers down the line.

What happens when you leave the market unregulated is best described by the Wall Street Journal’s summary of the report of the meeting of the Group of Seven’s Financial Stability Forum in Tokyo in early February: “[T]here is plenty of blame to go around for the financial chaos: The US subprime mortgage market was marked by poor underwriting standards and ‘some fraudulent practices.' Investors didn't carry out sufficient due diligence when they bought mortgage-backed securities. Banks and other firms managed their financial risks poorly and failed to disclose to the public the dangers on and off their balance sheets. Credit-rating companies did an inadequate job of evaluating the risk of complex securities. And the financial institutions compensated employees in ways that encouraged excessive risk-taking and insufficient regard to long-term risks.”

In other words, a bloody mess.

With the global economy on the brink of a deep recession, citizens in the developed and developing worlds have had their fill of doctrinaire policymakers from the far left and the far right imposing their fundamentalist views on them. Just as they were disillusioned with central planning, they have had enough of government inaction as speculative capital triggered permanent instability and redistributed the national income towards a small minority of market players. They want the market to be subjected to the discipline of the public interest. We are now entering what the great Hungarian economist Karl Polanyi described as the second phase of the “double movement” under capitalism: an era following a period of uncontrolled market gyrations when, forced by a civil society that is up in arms, governments again intervene, this time to stabilise the economy, bring about a just income distribution, eliminate poverty and—a critical goal in this era of global warming—promote environmental sustainability.