Andreas Whittam Smith: A crash that has changed the world? Far from it

The new conventional thinking conjured up straight after the Wall Street crash last week is that life will never be the same again. But hang on. There would have been no opportunity for a vast financial bubble to develop and then burst had there not been enormous volumes of foreign-owned funds parked in the United States and Britain. This will not change.

The cash that has been flooding into Wall Street and the City for the past decade has come from the unspent savings of fast-growing Asian economies, China in the lead. These countries may slow down a bit now, but they will go on piling up funds for which there is a lack of investment opportunities within their own borders. Their sovereign wealth funds will still go hunting in Western markets.

In turn, the Asian appetite for oil and raw materials and for foodstuffs to improve the diets of their citizens will not suddenly be switched off because of what happened last week. Oil-exporting countries and other raw material suppliers, in satisfying these needs, will also themselves continue to build up billions of unspendable dollars and euros that will be placed with Western financial institutions or put directly into Western markets. The owners of these riches will be more cautious but the money will still be there.

Nor would the great credit splurge have taken place had not permanent low inflation brought with it low interest rates. This won't change, either. For some years to come, globalisation will exert a downward pressure on the prices of goods and services. More industrial processes will be switched from expensive Western factories to the workshops of Asia.

The outsourcing of back-office functions to English-speaking India, for example, is not likely to come to a halt any day soon. And if inflation stays low, then interest rates will also be subdued. As a result, financial institutions will continue to feel the temptation to add cheap borrowed funds to their own capital in the investments that they make.

When we have finished wringing our hands as conventional wisdom instructs, let us note that until very recently we had been beneficiaries on a grand scale of these conditions. We enjoyed a long period of economic growth. Employment rose to high levels. Many families were able to buy their own homes whose parents had had no such chance. In the United States, the land of sub-prime mortgages, levels of home ownership shot up.

Of course part of the explanation for what happened last week is closer to home – the deregulation of financial markets. This was begun in the 1980s by President Reagan and Mrs Thatcher and has proceeded very far.

In the United States, commercial banks and investment banks had been penned into narrow spheres of operation and these limits were removed. In London, the distinction between principal and agent was blurred, fixed commission rates were abolished, and building societies, all once safe, sound and dull, were allowed to become glamorous banks quoted on the stock exchange.

Northern Rock had been a building society for 150 years before it gave up its mutual status in 1997, and the Halifax for even longer before it yoked itself to the insignificant Bank of Scotland in 2001. And while the prudential regulation of banks wasn't abolished, it became, shall we say, minimalist.

It is now accepted that financial deregulation was badly done in Britain as well as in the United States, and indeed it was. But let us again pause and consider. It was part of a broader movement that is going to continue – the development of the "enabling" or the "market" state.

The objective is to maximise opportunities for individual citizens – hence, to take one example, the British emphasis on helping single mothers back to work. The enabling state privatises or semi-privatises activities that were hitherto the sole responsibility of government. It is in this spirit, for instance, that New Labour has given individual hospitals more scope to manage their own affairs as "Foundation Trusts".

The enabling or market state also tries to make representative government more responsible to consumers and so we get the emphasis by successive prime ministers on "delivery". I don't see the chaos on Wall Street and in the City as bringing this trend to an end. Financial regulations may well become tough, but in due course the notion of "enabling" will again exert its influence even in the City.

High finance has been humiliated. Its power and influence will shrink for the time being. But otherwise life will go on much as it was doing the week before last.