When there's no money left, politicians lose the easiest way to make themselves popular. They can't bribe us into submission. Instead they have to rely on more old-fashioned methods, like displaying moral courage. Ed Miliband did so when he was the first of the main party leaders to stand up to Rupert Murdoch. This morning, David Cameron will have to decide how much he dares take on another great power that uses blackmail as a modus operandi: the banking sector.
By the time you read this, the Independent Commission on Banking's report will have been published, all 358 pages of it. Some expected Sir John Vickers and his fellow commissioners to dilute the recommendations they made in their interim report, which came out in April. Instead, I gather, nothing has been watered down and the final report is tougher still.
Banks will be required to erect a high – and pretty much impermeable – ring fence surrounding their retail operations, which look after your and my money, and excluding their investment arms, which trade in risky securities and derivatives. Vickers will recommend that the retail subsidiaries have their own board of directors, and one of the board's duties will be to ensure that the ring fence stays put.
The banks have been issuing toe-curling threats about the cost to growth if they are obliged to do this. Like Army chiefs who appeal over the head of the Chancellor and go straight to the Prime Minister when the defence budget is threatened, bankers have been lobbying Number 10 directly. They have been telling the Prime Minister that ring-fencing will make it costlier for businesses to borrow, which in turn risks tipping us back into recession.
But the ICB has answers to this. Today's report will advise that the activity of lending to large as well as small companies should be included within the ring-fenced retail arms, where the cost of capital to the banks is lower because they can use the cheap money they raise from our current and deposit accounts to lend on to businesses, rather than having to borrow more expensively in the markets. So it's unlikely that companies will have to pay much more for their loans.
Secondly, while the report will call for immediate legislation, so that shareholders at last have certainty about what is going to happen, it will also propose a gentle timetable for implementing the changes, so that they won't be applied in full until 2018. That leaves the banks plenty of time to build up the new capital they need without penalising their borrowers. The ICB also wants the new financial regulator to have more powers to enforce competition between the banks, which should make it easier for businesses to get loans at less than extortionate rates.
It's not surprising that the bankers object to the ICB's recommendations. They like the way they can keep their profits when times are good and make the taxpayer shoulder their losses when times are terrible. The ring-fencing and extra capital requirements that the ICB proposes are designed to make the chances of another taxpayer bail-out much smaller. If everything went wrong, the costs would fall instead on the banks' shareholders and bondholders.
But if bank chairmen and chief executives claim they are arguing in the interests of their shareholders, the Prime Minister has to govern in the national interest. And it is hugely in the national interest that banks shouldn't fail, or that if they fail, they do so in an orderly manner without incurring massive costs to the taxpayer. The ICB's proposals go a long way towards ensuring that.
George Osborne is up for them. So are Vince Cable, the Bank of England Governor Mervyn King and Ed Miliband. Yet Cameron is still wavering, and wants a pause of a month or two before deciding how and whether to enact all the recommendations.
This is a great mistake. The Prime Minister's maximum power is now. If he decides to go through the cumbersome process of a White Paper followed by a Bill, he only gives the banks more time and space for lobbying. What's more, the ICB ceases to exist by the end of today, so Sir John Vickers and his four fellow commissioners can no longer exert their combined IQ of about 1,000 to the question. Their force will be dissipated the longer Cameron delays.
The Prime Minister can even argue that the ICB proposals are in the long-term interests of bank shareholders. After all, while they might have made money in the boom, the crash more or less wiped out their holdings. A system in which banks make fancy profits for 10 years and then lose them all in the eleventh is not good for shareholders. It's only good for the banks' employees, who take out enormous bonuses for 10 years in a row, but pay nothing back in the eleventh.
The bankers still have their mansions in Kensington and Gloucestershire, while the shareholders have seen their savings or pension funds trashed. It's all very well for economists to claim that the profits made in the boom years are "illusory". That's true for the shareholders, but not for the bankers themselves, who have helped themselves to large sums of cash in each of the good years. Individual bankers have no interest in making modest profits in a stable banking system – they prefer excess profits in a volatile system, the opposite of what the country needs.
It's also the opposite of what shareholders need. Look at the share price of Standard Chartered, a bank that lent sensibly and never got swept up in the boom. It's now roughly where it was in early 2007 before the credit crunch hit. Barclays, by contrast, is trading at less than a quarter of its 2007 peak, while Royal Bank of Scotland's shares are worth less than a thirtieth of their value then. How can bank executives keep a straight face when they claim that light regulation has served their shareholders well?
Yesterday, Miliband called for bad bankers to be struck off, just as doctors can be. There certainly needs to be more accountability in a sector that has the capacity not just to bankrupt itself, but the rest of the economy too. But Labour isn't alone in wanting a crackdown. The promise to reform the banks was item one in the coalition agreement. It is supported by the Bank of England, the Chancellor, the Business Secretary, the Deputy Prime Minister and the public. Yesterday's YouGov poll for the Sunday Times found 51 per cent backing stricter bank regulation as soon as possible, with only 26 per cent who thought it should wait until the economy was stronger.
"If it 'twere done when 'tis done, then 'twere well it were done quickly," concluded Shakespeare in Macbeth. They are still wise words for Cameron today.