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.

Getty
Show Hide image

Leader: Trump's dangerous nation

From North Korea to Virginia, the US increasingly resembles a rogue state.

When Donald Trump was elected as US president, some optimistically suggested that the White House would have a civilising effect on the erratic tycoon. Under the influence of his more experienced colleagues, they argued, he would gradually absorb the norms of international diplomacy.

After seven months, these hopes have been exposed as delusional. On 8 August, he responded to North Korea’s increasing nuclear capabilities by threatening “fire and fury like the world has never seen”. Three days later, he casually floated possible military action against Venezuela. Finally, on 12 August, he responded to a white supremacist rally in Virginia by condemning violence on “many sides” (only criticising the far right specifically after two days of outrage).

Even by Mr Trump’s low standards, it was an embarrassing week. Rather than normalising the president, elected office has merely inflated his self-regard. The consequences for the US and the world could be momentous.

North Korea’s reported acquisition of a nuclear warhead small enough to fit on an intercontinental missile (and potentially reach the US) demanded a serious response. Mr Trump’s apocalyptic rhetoric was not it. His off-the-cuff remarks implied that the US could launch a pre-emptive strike against North Korea, leading various officials to “clarify” the US position. Kim Jong-un’s regime is rational enough to avoid a pre-emptive strike that would invite a devastating retaliation. However, there remains a risk that it misreads Mr Trump’s intentions and rushes to action.

Although the US should uphold the principle of nuclear deterrence, it must also, in good faith, pursue a diplomatic solution. The week before Mr Trump’s remarks, the US secretary of state, Rex Tillerson, rightly ruled out “regime change” and held out the possibility of “a dialogue”.

The North Korean regime is typically depicted as crazed, but its pursuit of nuclear weapons rests on rational foundations. The project is designed to guarantee its survival and to strengthen its bargaining hand. As such, it must be given incentives to pursue a different path.

Mr Trump’s bellicose language overshadowed the successful agreement of new UN sanctions against North Korea (targeting a third of its $3bn exports). Should these prove insufficient, the US should resume the six-party talks of the mid-2000s and even consider direct negotiations.

A failure of diplomacy could be fatal. In his recent book Destined for War, the Harvard historian Graham Allison warns that the US and China could fall prey to “Thucydides’s trap”. According to this rule, dating from the clash between Athens and Sparta, war typically results when a dominant power is challenged by an ascendent rival. North Korea, Mr Bew writes, could provide the spark for a new “great power conflict” between the US and China.

Nuclear standoffs require immense patience, resourcefulness and tact – all qualities in which Mr Trump is lacking. Though the thought likely never passed his mind, his threats to North Korea and Venezuela provide those countries with a new justification for internal repression.

Under Mr Trump’s leadership, the US is becoming an ever more fraught, polarised nation. It was no accident that the violent events in Charlottesville, Virginia, culminating in the death of the 32-year-old Heather Heyer, took place under his presidency. Mr Trump’s victory empowered every racist, misogynist and bigot in the land. It was doubtless this intimate connection that prevented him from immediately condemning the white supremacists. To denounce them is, in effect, to denounce himself.

The US hardly has an unblemished history. It has been guilty of reckless, immoral interventions in Vietnam, Latin America and Iraq. But never has it been led by a man so heedless of international and domestic norms. Those Republicans who enabled Mr Trump’s rise and preserve him in office must do so no longer. There is a heightened responsibility, too, on the US’s allies to challenge, rather than to indulge, the president. The Brexiteers have allowed dreams of a future US-UK trade deal to impair their morality.

Under Mr Trump, the US increasingly resembles a breed it once denounced: a rogue state. His former rival Hillary Clinton’s past warning that “a man you can bait with a tweet is not a man we can trust with nuclear weapons” now appears alarmingly prescient.

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear