George Osborne: Labour is in denial over its role in this financial crisis

The Labour Party seems to have developed a collective amnesia about its responsibility for the current financial crisis. Listen to delegates on the Conference floor and Ministers in fringe meetings, and the loudest cheers go to those who play to the crowd by attacking the way the City is regulated. They seem to forget that it was their Prime Minister who created that system 10 years ago.

But the real prize for memory loss must go to Ed Balls. On Monday he said that those who had advocated "light touch regulation" had been, in his words, "routed". This is the same Ed Balls who as Chief Economic Adviser to the Treasury for eight years boasted about the "light touch" regime of City regulation he had designed. This is also the same Ed Balls who then as City Minister called for "a light touch approach at the global and EU level". The star player of Labour's football team has scored a spectacular own-goal.

This desperate lurch to the left may be red meat to the activists, but it is not a sensible way to address the very real problems we face with our system of regulation and the financial crisis now before us. We need to take a cool, calm look at what has gone wrong and work out how to solve it.

The symptoms are clear and were played out on the dealing floors of the City, and the TV screens of every family, last week. Speculative raids on sound companies. Markets either in a state of paralysis or unprecedented volatility. Runs on banking stocks and the near failure of Britain's largest mortgage lenders.

There has been a whiff of Schadenfreude about the fate of spectacularly well paid Lehman bankers, but spare a thought for the thousands of hard-working people who go to work in their local HBOS branch or call centre, who aren't paid huge sums and now fear for their job.

Like any sickness, we need to treat these symptoms that have caused such misery. I believe we should act swiftly to reassure depositors that their savings are safe, which is why I have offered Alistair Darling bi-partisan support for raising the level of deposit protection to £50,000 and ensuring it can be swiftly paid out. The current system of protection did not command confidence over Northern Rock, but still remains in place over a year after we saw queues on our high street.

The tripartite system of regulation created by Gordon Brown clearly needs to be overhauled. I think we need to give the Bank of England much greater powers to watch over the markets and seize control of financial institutions that are about to fail. Both at home, and internationally, we should look at new counter-cyclical capital adequacy rules.

In other words, we should require banks to put aside more capital in good years so they are better prepared when the cycle turns down. I also think we need, as the Chairman of HSBC said recently, the regulators to look at the structure of City bonuses to make sure they aren't encouraging irresponsible risk-taking.

The idea that the Conservative Party is afraid or unwilling to tackle these issues because of "our friends in the City" is ludicrous. Remember which party was prepared to stand up and say that the non-domiciles in the City needed to pay a fairer share in tax. Not New Labour, too bedazzled by big money to do anything in the 10 years they sat in the Treasury; it was David Cameron and the modern Conservative Party.

Protecting depositors and fixing the broken regulatory system are important steps we need to take to try to restore stability to the financial markets. However, in end these are symptoms of a much bigger problem that has much deeper root causes. For a decade Britain allowed an economy to be built on debt at every level: personal debt, corporate debt, banking debt and government debt.

When you hear Gordon Brown say that we are better prepared than other countries to face the current problems consider these three facts. First, our average household debt is higher than any other country in the G7. Second, our house prices went up faster than house prices in America. Third, we enter this downturn with the highest budget deficit in the developed world and higher net debt than when Labour came to office. Gordon Brown simply refuses to even recognise the debt problem exists.

Until we face up to need to wean our economy, our banking system and our government off unsustainable levels of debt, then we will not solve the root cause of the instability our economy is now exposed to.

The writer is the Shadow Chancellor of the Exchequer