The deal announced yesterday between the Chancellor of the Exchequer, George Osborne, and the banks is a mish-mash of vague promises and fine words. It neither serves the economy nor the banks themselves.
The national interest requires a fully competitive banking industry that no longer relies upon a guarantee of solvency provided by taxpayers. Nothing in the statement speaks to that. The banks need an act of closure that would mean that their "time for remorse and apology" was truly over. That has not happened. The banks will go on being the whipping boys of public opinion.
Closure in the case of a national scandal has similarities with what we seek in our private lives when tragedy strikes. We wish an act of restitution that enables us to carry on.
To give an example from a completely different area of life, some of the families of British soldiers killed in Iraq are still seeking closure. That is why they continue to hound the former prime minister, Tony Blair. The return of the bodies and their burial with full military honours was not enough. Without a decisive act, in countries as well as in families, coming to terms can be a never-ending process. The families want Mr Blair to accept blame.
There is a third example, however, of an event that greatly offended public opinion but in which closure is being achieved. This was the exploitation by MPs of their system of claiming expenses. Here there is a process of restitution under way. It comprises the criminal trials of the worst offenders. That is the necessary reckoning. As a result, the public will move on. The scandal will no longer torment us when we watch political events.
As for the banks, it is not yet time to forgive and forget the huge damage to jobs and living standards caused by their reckless behaviour. I turn to a speech given last year in Hong Kong by Andrew Haldane, executive director of the Bank of England for financial stability, to get some measure of this. Nobody is more authoritative on this subject than Mr Haldane. Moreover, if he had given the same speech in London, with its incendiary language, it would have caused uproar. But it went largely unnoticed.
He began by stating that the banking industry, like the car industry, is a pollutant. This is an extraordinary way for a Bank of England official to describe the banks, accurate though it may be. By way of comparison, he said that while the motoring industry provides benefits for its employees and those using its services, it also endangers innocent bystanders with exhaust pollution.
In the same way, the banking industry benefits its staff, depositors, borrowers and investors and the users of financial services. But it also risks endangering innocent bystanders by regularly causing financial crises.
Then Mr Haldane set out to calculate what was the size of these social costs. For 2009 he put the loss of output in the UK at about 10 per cent. Yes, believe it or not, the banking industry was able to go on a wild, speculative binge during the 1990s and the early years of this century, and when it all went wrong it reduced our national wealth by £140bn in one year alone. There will have been further costs last year and again this year.
Or, to put it in simpler terms, the social costs of the banking crisis are the hard times that many people are currently experiencing and will continue to do so for some years to come. That may not equal the disaster that was the invasion of Iraq, but it has undeniably been a major setback.
As to conceiving how Mr Osborne should have dealt with the banks, we must first answer some questions.
If the economy is in such a dire state, how is it that British banks are contemplating paying out billions of pounds in bonuses to their senior executives? There is no remorse here. The immediate answer – because they are still making large profits – begs more questions than it answers. Why are banks so profitable in these straitened times? One reason is the nature of banking. Bankers have exceptionally accurate and detailed knowledge of economic and market trends. This comes from their privileged position as party to every transaction that requires money to change hands – which is pretty much everything. Don't let bankers persuade you how hard their job is – with such good information, who wouldn't prosper?
A second source of high profits is that a small number of very large banking groups do the lion's share of the business. They are of such a size that new competitors find it difficult to enter the market. Between them these big banks share what are known as monopoly profits – that is, profits that are higher than they would otherwise be if there were full competition.
The recently created Independent Banking Commission is examining this feature of the industry. Part of its remit is to promote "competition in both retail and investment banking with a view to ensuring that the needs of banks' customers and clients are efficiently served".
There is a third reason, however, why the banks make high profits. They have the benefit of a "too big to fail" guarantee. Taxpayers extend the guarantee. We have seen that governments will always rescue banks when they look like becoming insolvent.
This means that they can operate with lower amounts of capital than they would need if they faced alone the risk of ruin. If Barclays and Lloyds and the others thought that they could go out of business, they would conduct their affairs much more cautiously. Their profits would be lower.
I am not saying that government should stand by and let banks fail. That is a possibility too awful to contemplate. But what I do argue is that the banks should pay for the guarantee. To see how much this might cost, we can turn again to the useful Mr Haldane. He has done the sums.
He says that the reduction in British banks' funding costs, which arose from the taxpayer subsidy in 2007, the last normal year, was £11bn. That is a very significant figure. For it puts into perspective the £2.5bn levy that Mr Osborne has announced. It is obviously nowhere near enough.
What to do with the banks is really very simple. Step One: break up the big banks into more competitive units. Would this weaken British banking vis-à-vis its international competitors? Quite the reverse: it would strengthen them, and with them the City. Step Two: make them pay the full cost of their too-big-to-fail guarantee. They can afford it, for they made £25bn in profits in 2010. These two measures would be right in themselves and would also be the decisive acts that can provide closure.
And bonuses? Stop worrying about them. If the banks are paying a full price for their guarantee, then let them reward their staff as they wish. That is a matter for shareholders. Lending targets? Again, let the amount of lending be what it will be. A more competitive industry wouldn't neglect good business opportunities.