“I should have saved my pennies like when I was just a kid, my piggy bank lasted longer than the bankers ever did” – a line taken from the Credit Crunch Anthem, one of a number You Tube offerings ranging from the brilliant to the naff, to be sung to the tune of ‘Candle in the Wind’. 

It’s my birthday weekend, and one of my nicest birthday presents is that the thing I studied at University – economics - suddenly matters again.  The public policy rule book is being torn up, the failure of business and policy as usual, so wittily exposed by these You Tube offerings, has resulted in a rush to revisit old texts which have been gathering dust.  Suddenly, the policy consensus has shattered, golden rules of ‘prudence’ have been set aside, and John Maynard must be gazing down, with some bemusement and perhaps pride.

Here are a few key pointers to the way in which the policy landscape is being reshaped around us – drawing on the BBC’s (other) outstanding economics commentator, Robert Peston (I’ve sung Paul Mason’s praises enough for the time being).

1.       For the last 20 years or so industrial policy has been as an afterthought.  I’ve been banging on about this for a while now, and it’s good to see others arguing the case:

On Monday, the chancellor will admit, by implication, that the government's industrial policy of the past decade has been something of a disaster. Actually to call it an industrial policy is a bit misleading - but what I mean is the Treasury's celebration over many years of the UK's growing economic dependence on the City of London and financial services.  

Peston supports this argument by reminding us that the City contributed around a third of our economic growth in the recent past and about 10% of total output; that the slump in the City has knocked around £40bn from annual tax revenues; that the City in general is being forced by regulators to become a place where fewer risks are taken which means ‘fewer risky deals, less risky lending, also means much smaller banks and City firms, much less employment, much smaller revenues, and much diminished tax payments.’

2.       The institutional landscape of the post-war economic era is fundamentally changing - the bailout by US authorities of Citigroup another nail in the coffin of the old order.   The scale and implications of this bailout could easily be missed because of the focus in the UK on recent policy announcements. 

The Citigroup bail out emphasises what we have been arguing elsewhere on this website, in calling for a fundamental rethink in the way we think about how business and finance should be regulated - but also in warning against knee-jerk and simplistic solutions which will have unintended consequences and make the situation worse.

The end of Citigroup's cherished commercial freedom, its long swaggering history of bestriding the globe as a banking giant.  This proudest of US banks has been humbled: the rescue is about as close to nationalisation as it's possible to get without the state taking 100% ownership. And the deal is likely to presage a massive shrinking of its international operations, so that it eventually becomes a smaller, simpler operation, more suited to our newly sober age.

Peston notes that until recently Citi was the biggest bank in the world and even today its assets are not far off the size of Britain's economic output; that it has been undermined by its hugeness and global reach, which made it difficult to manage; and that ‘it has near-fatal exposure to the shattered US housing and commercial property markets’.

The deal that has been struck includes the US Treasury and the Federal Deposit Insurance Corporation absorbing a proportion of future losses on $306bn of ‘dodgy’ mortgages and mortgage-backed securities; the US central bank, the Federal Reserve, is providing a "backstop" borrowing facility, just in case other creditors lose confidence and pull out their funds; and the US Treasury will inject $20bn of new capital into the bank in exchange for preferred stock. On top of all of that, the US authorities will receive a further $7bn of preferred stock by way of a fee and warrants to buy ordinary shares; and there will be prohibitions on all but token dividend payments on the ordinary shares and controls on executive compensation.

3.       Taxpayers may soon be financing car purchases to prop up the motor industry in the UK, Europe and USA – who would have thought that hands outs might once again be in?!

In the UK, major manufacturers want to borrow from taxpayers, since they can't borrow easily from banks or on wholesale markets – so they’ve requested access to the Bank of England's special liquidity scheme which allows banks to swap mortgage-backed securities for Treasury bills (which can be turned into cash).

‘The motor makers want to exchange bonds or securities backed by car loans for Treasury bills - which would help them provide finance to those who might still want to buy a car, in spite of the inclement economic weather’, Peston explains.

If you're shocked by the thought that we as taxpayers may soon be financing car purchases, don't be.   

Peston cites that on 11 November VW said it was trying to exchange securitised car loans for £2.2bn from the European Central Bank (see my note, "The Rising Taxpayer Burden").  And in the US, the Federal Reserve is providing short term loans to all manner of big companies, including motor manufacturers, by buying up their commercial paper.

Governments and central banks all over the world are standing in for dysfunctional financial markets and providing financial support to large but humbled private-sector businesses, Peston concludes.  Who would have thought …

4.       And finally, it’s back to the future in terms of the massive rise in public sector debt and the change in tax incentives – from 2011/12 the top 2% of earners will pay more tax.

This Labour government has ditched the cornerstone of Thatcherism, which is that those on highest earnings will create wealth for the benefit of all of us if they're allowed to keep as much as possible of their respective incomes.

Given that public-sector borrowing in 2010 and 2011 is expected to be equivalent to well over 8% of our economic output, the key issue becomes how to reduce borrowing from 2010 in order to restore the credit-worthiness of the UK and thereby maintain confidence in sterling (see Friday's note "Taxes to fall and then rise").

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These are profound, once-in-a-generation changes not merely in policy but in the foundations which have informed policy for past decades.  They are being driven not merely by the scale of events but by the unfolding understanding of the scale of the crisis we are facing, its unique nature and the conviction that traditional policy prescriptions will be wholly inadequate.

This does not mean, however, that we can be confident that they will work – although they may well ensure that the situation will not be as bad as it would otherwise have been, the truth of which of course we can never know.

And they are founded on a return to the founders of modern Economics, and a growing desire to understand what they actually said – rather than simply what it is reported or commonly understood that they said.

My colleague Arthur Probert recently commented that Smith, Marx and Keynes have all been misunderstood, or at the very least misapplied:

• Smith's invisible hand was embedded in a theory of moral sentiments, Probert reflects – a view strongly endorsed by Pavan Sukhdev, who oft laments the narrow characterisation of the ‘father’ of economics;
  
• Marx's (via Drucker) insights on ownership by the people are at least partially realised by the (institutional) shareholders that workers through their unions so often complain about, Probert comments – and it is this context that our call for a true understanding of the importance of Stewardship as the organising concept for the behaviours of Tomorrow’s Owners now needs to be appreciated;
  
• Keynes' may be more misapplied, than misunderstood, given that his perscriptions require politicians to tighten the belt (to create a surplus), challenges Probert -  time will tell whether the current Government’s policy will pass this test. 

So Economics is back – the abiding fear being that we may well need a new Economics for the challenges of our time, to meet the challenges of globalisation, the extraordinary complexity of financial instruments, the collapse of confidence in current financial institutions, and sustainability. 

For this Economist at least, it’s good to see that there’s a return to the 'dismal science' – and a suspicion that the imperative of sustainability requires a realignment of value in exchange and value in use, which means that demand management techniques, welcome as they are, which do not also drive the creation of Tomorrow’s Green Economy will end up at best partially successful. 

We see this battleground in Industrial policy being fought out in America with major motor manufacturers lobbying Washington for massive short-term subsidies, in a rerun of the UK in the 1970s.

We need to be clear about the shape of the real economy that we want to see in the future, to be confident of the utility of the techniques and theories of economics that we employ to get us out of the situation we now find ourselves in.