Gordon Brown says the banks have taken irresponsible risks. The City minister, Lord Myners, says the activities of the City's masters of the universe are unpalatable and fundamental change will be needed. Someone has to take the blame for what is shaping up to be an economic meltdown, and the prime minister is keen to make sure it is not him. The gloves are off.
Myners is right to call for root-and-branch reform. To ensure that there is not a return to business as usual after a period of sackcloth and ashes, this country has to return to one basic principle: the high-street banks need to be boring.
A healthy banking system is dull because its core function is mundane: to keep the economy ticking over by taking in savings and recycling them as loans.
The Oxford English Dictionary defines a bank as an organisation offering financial services, especially the safe keeping of customers' money until required, and making loans as interest.
Nothing there about borrowing for speculative activities, about gigantic takeovers, about pursuing high returns from collateralised debt obligations.
The classic banker of the old school was Arthur Lowe's Captain Mainwaring in Dad's Army; a solid, pompous martinet who made sure his books balanced. His deputy Wilson was the posher, more rakish John Le Mesurier, who looked down on his superior. Le Mesurier was classic investment banker material but played second fiddle to Lowe's traditional high-street bank manager. The two strands of banking were then kept entirely separate. In recent years, of course, retail banking and investment banking have become intertwined and the Dad's Army pecking order reversed: the investment bankers have been in control and have spread the new creed that good banking is all about financial innovation, taking risks and achieving the best possible deal for their owners. Andy Hornby, former chief executive of HBOS, said his board's aim was to deliver significant increases in shareholder value from the continuing application of our profit order. This is a far cry from the OED definition of banking and may explain why the banks and the wider economy are in such a mess. Hornby made this comment, incidentally, in March 2007, five months before the crisis broke. Back in those antediluvian days, Lloyds TSB was considered to be failing its shareholders through its timidity. When the government needed a saviour for HBOS, Gordon Brown had to turn to the timid Lloyds TSB.
Rather belatedly, the government has woken up to the scale of the problem. Banks are nursing huge losses from their ill-judged investments and the sources of capital they used to finance their broken business model are unavailable.
A paper submitted to the Treasury select committee by economists at Manchester University illustrates the dilemma. Banks used to be run rather like utilities: banks were profitable because they paid less to savers than they charged borrowers, but the spread was relatively small. Banks are no longer run as utilities; they are run, as Hornby said, as profit-maximising institutions.
High-street branches have turned into sales offices, aggressively marketing products for which they charge hefty fees, and have become much more active in the wider financial markets, either through securitisation of loans or by stretching their investment banking functions. The OED definition is at least 25 years out of date: banks used to be run like public utilities, now they are run like all other public limited companies as profit-maximising organisations. The government now wants banks to return to their core function.
On the other hand, the government has no desire to keep the banks in public ownership, even though a period of nationalisation looks ever more likely as the financial and economic crisis deepens. Alistair Darling has made it clear that a return to the private sector will be sought for troubled institutions as soon as feasible. The chancellor says the state lacks the expertise to run banks. But leaving matters to experts has not been a soaraway success either.
So what is to be done? The first thing is to recognise, as the Manchester University paper does, that retail banking is not necessarily a suitable activity for shareholder-driven PLCs.
Secondly, there has to be a recognition that, while Britain's immediate problem may be a lack of borrowing, the long-term problem is a lack of saving. The high levels of personal indebtedness and the chronic current account deficit are manifestations of a country that needs to rediscover the virtues of thrift. The banks have done their bit to encourage us to be spendthrifts.
The third thing needed is a strategy for breaking the banks up into smaller units. We began this crisis with a system in which some banks were considered too big to fail; perversely, the response to the crisis - forced mergers that amount to shotgun marriages - has meant that we now have fewer but even bigger banks.
The fourth thing to do is to reinstate the demarcation between retail and investment banking. Innovation in financial services is not intrinsically bad, but it should only be permitted under controlled conditions.
Should investment banks want to try out exciting new products they should be allowed to do so only after they have passed the sort of test that any pharmaceutical company faces when launching a new drug on the market. Retail banks, however, should be prevented from venturing to these wild and potentially dangerous shores.
Instead, retail banking should be tightly regulated so that it returns to its old core function. That will mean that high street banks will no longer be as profitable, and it would pave the way for remutualisation of a large chunk of the banking sector. There would be a cost to this, since pension funds have relied heavily on the profits from banks in recent years. But far from undermining the case for a return to a more traditional form of banking, it actually strengthens it.
The share of profits from the financial sector has risen as the share from manufacturing has dwindled, leaving the economy unbalanced and vulnerable. This is not about punishing the banks, although they certainly deserve to face retribution for their actions. It is about whether the fundamental weaknesses of our financial system are addressed. This is a once-in-a-generation moment for reform and it must not be wasted.
Copyright Speakers Corner 2017