Ten years ago this weekend, frantic efforts were being made to save one of the biggest banks in the world. When chancellor Alistair Darling overruled Barclays’ supreme stupidity in considering the takeover of the stricken Lehman Brothers investment bank – the extent and complexity of its debts would have brought down both it and probably the British banking system – the die was cast. Lehman collapsed and the shockwaves are still felt to this day.

Suddenly, the proud buccaneers of high finance were exposed as “sapient nincompoops”, as the great economic commentator Walter Bagehot described the senior executives of Overend, Gurney & Co in the wake of its collapse 150 years earlier. All the assumptions made by a generation of free-market economists, conservative politicians and the financial establishment were shown to be ideological tosh propagated by today’s nincompoops.

Yes, markets could and did make vast, earth-shaking mistakes. Yes, shareholders were so disengaged from the companies in which they invested they, in effect, allowed ownerless banks to be run to create gargantuan, dynastic fortunes for their managers, assuming risks on a scale they did not themselves understand. Yes, the financial system had become a complex interrelated network no stronger than its weakest link – which was very weak.

The bill for all these mistakes would be picked up by wider society, with perpetrators suffering nothing – nationalising losses and privatising gain. The whole effect was to transmute capitalism into a system of value extraction rather than value creation, with knock-on effects that depressed wages and contractualised work into short-term and zero-hour contracts. The financial system, based in London and New York, had become damnable – the nightmare of our times.

The cumulative costs of this have become so large they can scarcely be comprehended. The total cost across the west of recapitalising bust banks, offering guarantees and making good disappeared liquidity is estimated at $14tn. The recession that followed was the deepest since the 1930s, with the slowest subsequent recovery. Worse, conservative politicians – most successfully in Britain – succeeded in pinning the blame not on the architects and operators of modern finance but on the excesses of the state, the rationale for “austerity”.

Facebook Twitter Pinterest As chancellor, George Osborne used the 2008 crisis to justify austerity budgets. Photograph: Hannah McKay/PA

High government spending, alleged chancellor George Osborne and prime minister David Cameron, had caused the government budget deficit to balloon. Wrong. Rather, the deficit was caused by collapsing tax revenues during a monumental recession. The same nincompoopery that had created modern finance now proclaimed that the stock of public debt – despite it being proportionally higher for most of the previous three centuries and at times of higher interest rates – represented an existential threat. In the UK, public spending per head on services will have fallen by a quarter by 2020 as a result of the consequent spending cuts – tax increases could not be countenanced – with what remains of Britain’s social contract ripped apart. The distress and disaffection helped to fuel the margin that won the referendum for Leave.

As profound was the rupturing of the Faustian bargain between finance and society that had defined the 30 years up to 2008. The bankers made their fortunes, but wider society was offered boundless credit and booming property prices. Companies did not have to create value through innovation, investment and export; instead, they could ride the credit boom. The result: an overblown, featherbedded service sector delivering ungrounded productivity growth.

Post 2008, the wounded system has been unable to deliver at the same pace, although it tries. The illusory productivity has stagnated; and trust in value-extracting business and capitalism, which continues to displace risk on to the shoulders of ordinary people, has fallen to new lows. Small wonder that Jeremy Corbyn did so well in the 2017 general election.

Too little has been learned; too little has changed. Even the limited reforms set in train since 2010 have not been fully implemented. Worse, the essential amoral bargain remains in place. Finance can do more or less what it likes, with pay beyond the dreams of avarice for what Lord Adair Turner, former chair of the Financial Services Authority, calls activity that is no better than a system of wealth transference. It is zero-sum: nothing worthwhile is taking place. Yet, if it collapses, be sure that governments will be asked to step in again.

Finance can do more or less as it likes, but if it collapses, be sure that governments will be asked to step in again

The risks are downplayed. Surely it could not happen again when regulators are more alert and bankers have been required to provide more of their own capital as a cushion against mistakes? Yet just a cursory glance at the markets shows how febrile they are, how exposed to violent movements, how illusory is their much-vaunted liquidity – and how rich the pickings remain for those prepared to take the risks.

Note, also, how shaky are the foundations of the new wave of financial products offering “risk diversification”, notably exchange trading funds (ETF). We live in a world in which the price of US Treasury bonds – a market of multi-trillion dollars – can move 10% in 10 minutes. What was bewildering in 2008 was how, as a result of computerised algorithmic buy and sell instructions, everybody had diversified in the same way – so everybody became simultaneous buyers and sellers. That is even more acute today.

All that is required is for, say, Turkey or Italy to default on their debts, an ETF to become distressed, or a sequence of Chinese banks to fail (all too imaginable) and the impact would radiate across the network as it did in 2008. Banks carry far too little capital to insulate themselves from the shocks – and governments, again, would have to step in.

Capitalism as it is could not survive. Trump’s America would not collaborate in underwriting a global bailout as the US did in 2008. The trend towards deglobalisation and trade protection would accelerate. Brexit Britain, outside the EU and with a huge financial sector, would be devastated. We must urgently minimise risk and reshape our economy. If not, today’s debates and preoccupations will, in the future, be viewed as incredible.

• Will Hutton is an Observer columnist