Andreas Whittam Smith: We are angry. So tell us what went wrong at the banks

Was this a case of incompetence or dishonesty? An inquiry would tell us

If only Government ministers were like the rest of us, they would unhesitatingly set up a searching investigation into the conduct of banking. It would be the natural thing to do.

Away from Whitehall and Westminster and the City of London, suppose one was asked, for instance, to bail out a firm – perhaps a supplier – that has got itself into trouble. Let us say there were good reasons for keeping it going. I am involved with a charity that has found itself in this situation.

In these circumstances, most people would instinctively make the price of support the setting up of an inquiry into what went wrong. Was incompetence the sole explanation or did dishonesty play a part? How could things be better done in the future? You have a duty as a trustee or a director to discover the answers.

The case of the taxpayer and the British banking system is exactly the same. By the way, we are all taxpayers. Whenever we purchase goods or services upon which VAT is payable, we are taxpayers. So this concerns pensioners and the unemployed alike as well as those in work who pay income tax. Government ministers are the trustees for the public purse. This is not a demand for vengeance. It is a demand that the Government fulfils its duty in the use of taxpayers' funds.

As a matter of fact, we are on notice that wrongdoing on a considerable scale may have taken place. Look across the Atlantic to the United States. The Federal Bureau of Investigation has poured resources into the detection of financial crime since the bubble burst.

It has many cases under way. And it has already arrested bankers and marched them in handcuffs to the courthouse. Given the similarity of the financial systems, what has taken place over there is likely to have happened here. Our own Financial Services Authority (FSA), for instance, often finds evidence of "informed price movements" – insider trading by another name.

Last month, leading QC Amanda Pinto said: "There are many cases of misconduct that the FSA has pursued as regulatory breaches where the evidence suggests that these offences are substantial and criminal, such as fraud and misleading conduct. These cases could be prosecuted in the criminal courts, yet the FSA chooses to deal with them as if they were simply regulatory infringements."

There is a further reason for going forward with an official inquiry: it would influence people's attitude to the ordeal of getting through a serious recession. As consumers we are understandably cautious. That in itself has a negative impact upon economic activity. But we are also angry. And that makes it harder to escape from the downward spiral.

For anger diminishes trust in the Government, in financial services, in industry more generally and even local traders with whom we do business. There is therefore an economic case for bringing bankers to account. Paradoxically it would provide reassurance.

Set up an investigation, then, with these terms of reference: "To enquire into the circumstances that have led the British banking system to have need of substantial support from public funds." The inquiry should not, however, spend too much time on debating, for instance, whether the deregulation of financial markets carried through by President Reagan and Prime Minister Thatcher was well conceived or not.

I am much more interested to learn whether the non-executive directors of, say, Royal Bank of Scotland were bamboozled by senior executives. Or whether bonus arrangements were set up in such a way that they encouraged reckless behaviour.

The notion of proximate cause is useful here. Taxpayers want to know what were the events that were immediately responsible for the credit crunch. We need to focus on exactly what bankers did. Moreover a narrow in-depth examination would itself contribute to mapping more accurately the long-term causes. This latter task is equally important but it doesn't require the panoply of an official inquiry with legal powers. Central banks, think tanks, policymakers and academics are already doing this. It is best done informally.

Retired senior judges often lead inquiries. They don't always do it very well. Lord Hutton's investigation into the circumstances surrounding the death of Dr David Kelly, expert in weapons of mass destruction, was widely viewed as a whitewash. It exculpated the Government from any blame.

Lord Penrose's examination of the collapse of the Equitable Life Assurance Society was cumbersome and slow although it got there in the end. Somebody brisker than Lord Penrose and more penetrating than Lord Hutton is required. We want an eminent person to mount an inquiry to tell us quickly and authoritatively what happened. After all, we are paying.

a.whittamsmith@independent.co.uk