Adrian Hamilton: There are better things to do than shaming these bankers

The challenge now is whether you act to tame the market or try to replace it

If the Treasury Select Committee wants to understand how an entire financial system was allowed to get out of control perhaps it ought to look at itself. That is not a criticism of the Committee's current show trial of the bankers. The public is desperate for blood. No politician is going to pass up an opportunity like that, especially a group of backbench MPs desperate for their five minutes of fame.

But if the object of this exercise in public flagellation is to find out just how the banks got us into this trouble and what we need to do stop it happening again, it has to be said that it is pretty much a sideshow. We know by now what went wrong (the explosion in derivatives and securitised instruments), why the banks threw themselves into the melee with such abandon (that was where the profits were and the banker's bonuses) and what went wrong with regulation (it suited everybody to let it flourish so long as it produced growth, jobs and the illusion of prosperity).

Mortgage-backed securities and exotic instruments didn't just come out of the blue, however. They came in answer to a globalisation of financial flows and a development of wholesale markets that seemed to be genuinely spreading risk and reducing the cost of finance.

The challenge now is whether you act to tame the market or try to replace it. For the unique, and frightening, aspect of this recession, compared to most of its predecessors, is that it is so global. You're not going to be able to restore growth without a functioning market for international financial flows. And you're certainly not going to be able to restart it with a mantra of banks returning to a deposit-loans base that politicians here keep chanting.

The quandary is particularly acute for Britain, since we have put so many eggs into the basket of London's rise as a capital of wholesale finance. It was financial services which provided most of the national growth and a high proportion of its tax base during the last decade. Easy enough to call bankers criminals now, but does the Government (and the Select Committee) want to preserve London's position and if so how?

Now no one realistically expects Commons committees to tackle difficult questions where there is no obvious right and wrong. The products of the parliamentary patronage system, they're just not built that way. But if the Treasury Committee is not going to get their teeth into the policy implications of the recession, the Commons certainly won't.

There the argument is still stuck in a simplistic reflation-versus-do nothing exchange of insults. The debate has moved on from there. What we should now be discussing is, given that we are now seeing limits of how much we can spend on reflation, what are the most effective measures to combat the downturn?

The Governor of the Bank of England, Mervyn King, merrily talks of reducing interest rates to zero and printing money ("quantitative easing") to fund the deficit. He may be right given the severity of the situation. But there are eminent economists who genuinely feel that not only will this inject inflation into the economy over the long term but that you could replace one bubble in housing with another bubble in bonds.

In the same way there are profound differences, as we are learning from Obama's experience in introducing his latest bank bailout this week, over whether it is best to set up a state bad bank to take the toxic debt off the balance sheet of the banks or to insure their bad loans against loss or to go the whole hog and simply nationalise the troubled banks.

Those urging direct measures to reflate the economy are divided between economists who favour tax cuts against those who favour direct state investment. And even then there is an argument between putting your money in slow-moving capital projects or into direct welfare projects.

These are not just arcane technical arguments. They matter because in the end it is our children who have to pay for mistakes and our expenditure at this point. Buy toxic debt at too high a price, pour money into the wrong projects, throw away sums on ineffective tax cuts, debase the coinage and it could take a generation or more to pay it off.

In the US they are debating these questions with real passion. Here we have hardly begun.

a.hamilton@independent.co.uk