Leader: The coalition’s anti-banking rhetoric fools nobody

Should the coalition fail to break up the banks, it will make a repeat of the crash not just possibl

It is perhaps unsurprising that, after presiding over the near-collapse of the Royal Bank of Scotland and leaving taxpayers to pick up the bill, Fred Goodwin no longer wishes to be identified as a banker. But his decision to use Britain's draconian libel laws to obtain a superinjunction banning the media from reporting this fact, among others, shows that he has lost none of his arrogance. Were it not for the ancient right of parliamentary privilege, the existence of the injunction would not have been common knowledge at all. And it has taken the governor of the Bank of England, Mervyn King, to point out what our politicians have not: that the degree of public anger over the banks should be far greater.

In the United States, it is the film director Charles Ferguson, rather than Barack Obama, who has given voice to the uncomfortable truth that, "three years after our horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that's wrong". His forensic, Oscar-winning documentary, Inside Job, which exposes the mechanics of the revolving door between Washington and Wall Street, shows the scale of the US president's capitulation to the banks. Obama once denounced large bonuses as "obscene", "shameful" and "the height of irresponsibility", but now speaks soothingly of them as merely part of "the free-market system".

In Britain, the coalition government's treatment of the banks has been feebler still. The Project Merlin deal failed to deliver meaningful transparency on pay, failed to prevent another round of extravagant bonuses and failed to agree the net lending target promised by the coalition agreement. When Nick Clegg piously declared, "I want to wring the neck of these wretched people," his tough words only succeeded in drawing attention to the government's weak performance.

But David Cameron, who has pledged to watch the banks "like a hawk", could still live up to his rhetoric by splitting retail from investment banking, thus ensuring that institutions are no longer "too big to fail". As King astutely noted in a recent interview, the banks know that the state will bail them out "on the downside", which is why they are able to pay such excessive bonuses in the first place.

Ahead of the conclusions of the Vickers commission on banking reform, the government should agree to administer what the Business Secretary, Vince Cable, has described as "fundamental surgery" to the banks. Never again must an avaricious financial sector be allowed to jeopardise the livelihoods of millions and the prosperity of the nation. Should the coalition fail to break up the banks, it will make a repeat of the crash not just possible, but inevitable.

This article first appeared in the 21 March 2011 issue of the New Statesman, The drowned world