Why we still need a public inquiry into the banks

A Leveson-style inquiry would expose the web of patronage and lobbying.

Listening to the Commons exchanges yesterday on the Chancellor’s proposal for a Parliamentary Committee of Inquiry into the LIBOR scandal was depressing.  It was the Commons at its worst: blame shifting; moralising; and, above all, opportunistic point scoring across the floor.  It’s not just the bankers who don’t get it; lots of MPs also do not realise the scale of the disaster that is the UK financial system.  A Parliamentary inquiry is a quite inadequate response to the scale of the problem. Some Parliamentary inquiries, notably those by the Treasury Select Committee, have done good work.  But even when not beset by party divisions they simply have not measured up to the job.  As in the notorious case of Fred Goodwin, they end up largely scapegoating individuals. Now Bob Diamond has followed his chairman in falling on his sword. It’s just as well he doesn’t have a knighthood; he could kiss it goodbye. 

Andrew Tyrie is an honourable man and will do his level best with the inquiry – if it happens.  But we can already see how inadequately he conceives the task: the inquiry will be "ring-fenced" (his words) to examine what the LIBOR tells us about the culture of the City. The LIBOR scandal is being trailed by the financial establishment as precisely that: a scandal.  In other words, a single disgraceful event, and in the manner of all scandals in Britain it is taking a predictable course: moralistic fulminations, and the sacrifice of a few prominent scapegoats.  Morals are important;  the amorality revealed in the Barclays’ e mails is shocking to normal people.  And  it is certainly the case that wrongdoers need to be pursued and punished.  But here at CRESC, where we have been tracking the financial crisis since 2007, we have been  arguing for some time that there are fundamental defects in our financial system, and that these won’t be solved by short term hunting down of scapegoats.  Faced with the  LIBOR scandal, politicians, bankers and regulators have responded  with the traditional Claude Rains defence: like Captain Renault, the character played by Rains in Casablanca, they are shocked, truly shocked, to discover that illicit gambling has been going on in the casino of the City of London.  But  the problems won’t be solved by firing a few top bankers, prosecuting a few white collar criminals, or even by conducting an inquiry into the workings of LIBOR – necessary though all these are.  We need to dispense with the illusion that a casino is the best way to organise the financial system for a modern economy – a truth that Keynes famously expressed many decades ago.

Our research reports show that the claimed economic benefits of the City for the "real" economy are an illusion, the product of effective PR over the years by the City elite.  Boring old manufacturing contributes about twice as much as glitzy financial services to the nation’s tax coffers.  And the City is doing nothing to solve our unemployment problems: throughout the great financial boom up to 2007 employment in finance was flat.  The  PR offensive has been effective because the City has enjoyed unique privileges in the government of finance, and unique access to top policy makers: both the Labour and Conservative parties have, in office, relied on paymasters from the financial elite.  And in turn they have, disgracefully, inserted financiers into key decision making positions.

The result is that the City is a web of markets proliferating increasingly complex and risky financial instruments that do little or nothing to promote welfare or efficiency in the wider economy.  The "other" scandal last week – the outrageous rip off at the expense of small business – is no single accident; it reflects the fact that finance is now in the business of creating and selling financial instruments regardless of the social harm they create.  Adair Turner’s condemnation of "useless" financial innovations is an understatement; the City has moved beyond the creation of the useless to the manufacture of the positively malign.

We need a full Leveson-style inquiry to examine how the casino is working, and to examine the web of patronage and lobbying that has allowed the City casino to trade with impunity.  An inquiry will be uncomfortable for many who were prominent in the New Labour years, and it is to the credit of Ed Miliband and Ed Balls that they have, nevertheless, recognised that full transparency is needed. We need an inquiry on the scale of Leveson, with the power to uncover the cultures and institutions that persuaded City operators that they could operate with impunity.  And we might yet get it if Labour refuses to play ball with Osborne’s proposal. But more important even than an inquiry, we need  a fundamental redefinition of the social and economic roles of finance. Banks must become public utilities with the duty to serve the wider economy, not players in casinos.  A Leveson-style inquiry would help provide the catharsis to  bring us to that point.

To read the full CRESC evidence and argument, download our report.

The claimed economic benefits of the City for the "real" economy are an illusion. Photograph: Getty Images.

Michael Moran is adjunct Professor of Government and Business in the University of Manchester Business School.

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Want to send a positive Brexit message to Europe? Back Arsene Wenger for England manager

Boris Johnson could make a gesture of goodwill. 

It is hard not to feel some sympathy for Sam Allardyce, who coveted the England job for so many years, before losing it after playing just a single match. Yet Allardyce has only himself to blame and the Football Association were right to move quickly to end his tenure.

There are many candidates for the job. The experience of Alan Pardew and the potential of Eddie Howe make them strong contenders. The FA's reported interest in Ralf Rangner sent most of us scurrying to Google to find out who the little known Leipzig manager is. But the standout contender is Arsenal's French boss Arsene Wenger, 

Would England fans accept a foreign manager? The experience of Sven Goran-Eriksson suggests so, especially when the results are good. Nobody complained about having a Swede in charge the night that England won 5-1 in Munich, though Sven's sides never won the glittering prizes, the Swede proving perhaps too rigidly English in his commitment to the 4-4-2 formation.

Fabio Capello's brief stint was less successful. He never seemed happy in the English game, preferring to give interviews in Italian. That perhaps contributed to his abrupt departure, falling out with his FA bosses after he seemed unable to understand why allegations of racial abuse by the England captain had to be taken seriously by the governing body.

Arsene Wenger could not be more different. Almost unknown when he arrived to "Arsene Who?" headlines two decades ago, he became as much part of North London folklore as all-time great Arsenal and Spurs bosses, Herbert Chapman or Bill Nicholson, his own Invicibles once dominating the premier league without losing a game all season. There has been more frustration since the move from Highbury to the Emirates, but Wenger's track record means he ranks among the greatest managers of the last hundred years - and he could surely do a job for England.

Arsene is a European Anglophile. While the media debate whether or not the FA Cup has lost its place in our hearts, Wenger has no doubt that its magic still matters, which may be why his Arsenal sides have kept on winning it so often. Wenger manages a multinational team but England's football traditions have certainly got under his skin. The Arsenal boss has changed his mind about emulating the continental innovation of a winter break. "I would cry if you changed that", he has said, citing his love of Boxing Day football as part of the popular tradition of English football.

Obviously, the FA must make this decision on football grounds. It is an important one to get right. Fifty years of hurt still haven't stopped us dreaming, but losing to Iceland this summer while watching Wales march to the semi-finals certainly tested any lingering optimism. Wenger was as gutted as anybody. "This is my second country. I was absolutely on my knees when we lost to Iceland. I couldn't believe it" he said.

The man to turn things around must clearly be chosen on merit. But I wonder if our new Foreign Secretary Boris Johnson - albeit more of a rugger man himself - might be tempted to quietly  suggest in the corridors of footballing power that the appointment could play an unlikely role in helping to get the mood music in place which would help to secure the best Brexit deal for Britain, and for Europe too.

Johnson does have one serious bit of unfinished business from the referendum campaign: to persuade his new boss Theresa May that the commitments made to European nationals in Britain must be honoured in full.  The government should speed up its response and put that guarantee in place. 

Nor should that commitment to 3m of our neighbours and friends be made grudgingly.

So Boris should also come out and back Arsene for the England job, as a very good symbolic way to show that we will continue to celebrate the Europeans here who contribute so much to our society.

British negotiators will be watching the twists and turns of the battle for the Elysee Palace, to see whether Alain Juppe, Nicolas Sarkozy end up as President. It is a reminder that other countries face domestic pressures over the negotiations to come too. So the political negotiations will be tough - but we should make sure our social and cultural relations with Europe remain warm.

More than half of Britons voted to leave the political structures of the European Union in June. Most voters on both sides of the referendum had little love of the Brussels institutions, or indeed any understanding of what they do.

But how can we ensure that our European neighbours and friends understand and hear that this was no rejection of them - and that so many of the ways that we engage with our fellow Europeans rom family ties to foreign holidays, the European contributions to making our society that bit better - the baguettes and cappuccinos, cultural links and sporting heroes remain as much loved as ever.

We will see that this weekend when nobody in the golf clubs will be asking who voted Remain and who voted Leave as we cheer on our European team - seven Brits playing in the twelve-strong side, alongside their Spanish, Belgian, German, Irish and Swedish team-mates.

And now another important opportunity to get that message across suddenly presents itself.

Wenger for England. What better post-Brexit commitment to a new Entente Cordiale could we possibly make?

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.