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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Northern Ireland election results: a shift beneath the status quo

The power of the largest parties has been maintained, while newer parties running on nicher subjects with no connection to Northern Ireland’s traditional religious divide are rapidly rising.

After a long day of counting and tinkering with the region’s complex PR vote transfer sytem, Northern Irish election results are slowly starting to trickle in. Overall, the status quo of the largest parties has been maintained with Sinn Fein and the Democratic Unionist Party returning as the largest nationalist and unionist party respectively. However, beyond the immediate scope of the biggest parties, interesting changes are taking place. The two smaller nationalist and unionist parties appear to be losing support, while newer parties running on nicher subjects with no connection to Northern Ireland’s traditional religious divide are rapidly rising.

The most significant win of the night so far has been Gerry Carroll from People Before Profit who topped polls in the Republican heartland of West Belfast. Traditionally a Sinn Fein safe constituency and a former seat of party leader Gerry Adams, Carroll has won hearts at a local level after years of community work and anti-austerity activism. A second People Before Profit candidate Eamon McCann also holds a strong chance of winning a seat in Foyle. The hard-left party’s passionate defence of public services and anti-austerity politics have held sway with working class families in the Republican constituencies which both feature high unemployment levels and which are increasingly finding Republicanism’s focus on the constitutional question limiting in strained economic times.

The Green party is another smaller party which is slowly edging further into the mainstream. As one of the only pro-choice parties at Stormont which advocates for abortion to be legalised on a level with Great Britain’s 1967 Abortion Act, the party has found itself thrust into the spotlight in recent months following the prosecution of a number of women on abortion related offences.

The mixed-religion, cross-community Alliance party has experienced mixed results. Although it looks set to increase its result overall, one of the best known faces of the party, party leader David Ford, faces the real possibility of losing his seat in South Antrim following a poor performance as Justice Minister. Naomi Long, who sensationally beat First Minister Peter Robinson to take his East Belfast seat at the 2011 Westminster election before losing it again to a pan-unionist candidate, has been elected as Stormont MLA for the same constituency. Following her competent performance as MP and efforts to reach out to both Protestant and Catholic voters, she has been seen by many as a rising star in the party and could now represent a more appealing leader to Ford.

As these smaller parties slowly gain a foothold in Northern Ireland’s long-established and stagnant political landscape, it appears to be the smaller two nationalist and unionist parties which are losing out to them. The moderate nationalist party the SDLP risks losing previously safe seats such as well-known former minister Alex Attwood’s West Belfast seat. The party’s traditional, conservative values such as upholding the abortion ban and failing to embrace the campaign for same-sex marriage has alienated younger voters who instead may be drawn to Alliance, the Greens or People Before Profit. Local commentators have speculate that the party may fail to get enough support to qualify for a minister at the executive table.

The UUP are in a similar position on the unionist side of the spectrum. While popular with older voters, they lack the charismatic force of the DUP and progressive policies of the newer parties. Over the course of the last parliament, the party has aired the possibility of forming an official opposition rather than propping up the mandatory power-sharing coalition set out by the peace process. A few months ago, legislation will finally past to allow such an opposition to form. The UUP would not commit to saying whether they are planning on being the first party to take up that position. However, lacklustre election results may increase the appeal. As the SDLP suffers similar circumstances, they might well also see themselves attracted to the role and form a Stormont’s first official opposition together as a way of regaining relevance and esteem in a system where smaller parties are increasingly jostling for space.