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Steve Richards: Who will be toughest on the banks?

Behind Osborne's speech was a tentative ambivalence shared by the Government

The wealthy bankers who plan to get wealthier have little cause for concern quite yet. Yesterday the shadow chancellor, George Osborne, unveiled a seemingly tough policy on cash bonuses, announcing a strict cap and proposing that the awards could be paid instead in the form of shares. As a bonus of a non-banking variety, Osborne argued the share scheme would provide the banks with more cash for much needed loans to small businesses.

Conveniently for the shadow chancellor his policy applies to the bonuses at the end of the year. When an opposition spokesman puts forward a one-off policy for immediate implementation there is cause for more forensic scrutiny than usual. After all he has no immediate prospect of power. The policy will not be implemented.

In terms of the politics the policy is a work of art. I cannot think of an equivalent proposal that neatly appears to tick so many boxes. In the political battle over who can be tougher in advance of the bonuses being paid out Osborne seems to be getting very strict.

From now on he is armed with ammunition when asked about the issue in the coming weeks: "Well I made it very clear I was in favour of a cap. The bankers must realise we are all in this together". Second, Osborne will also have a response when small businesses complain about the banks' persistent reluctance to lend: "I proposed that bankers' bonuses were used as a way of freeing up some cash for loans. Small businesses need banks to start lending again and loans matter more than bonuses". Third, the small print of Osborne's new policy reassures the banks so that he can be their ally too. His policy applies to retail banks, leaving alone mighty investment banks and anyway some of the vast bonuses from the high street banks would still be paid, but take the form of shares.

What a triple whammy of an announcement, the political equivalent of a Goldman Sachs type bonus. In a single speech Osborne becomes a scourge on bankers' bonuses, friend to the bankers, and ally of small businesses.

There is no evidence to suggest that if banks had a bit more spare cash in the form of shares they would make more loans available. Most banks are not strapped for cash at the moment, but are still reluctant to lend. It is one of the new perversities in banking. There is no correlation between the amount of cash available and their willingness to lend. Nor is it necessarily the case that voters' anger would have been assuaged by big pay outs in forms other than cash, especially when the likes of Goldman Sachs would still be free to hand out millions in the normal way. But that is one of the few joys of opposition. A one-off proposal is untested by power.

The response of Osborne, though, is politically significant even if it will have no practical relevance in the future. Behind the tough sounding measure his speech was marked by a tentative ambivalence, one that is shared by the government. Banks have been out of control for so long as a matter of policy that no politician knows how to assert authority over them or whether they really want to do so.

At the Labour conference Gordon Brown and Alistair Darling played the anti-bonus card in their speeches and yet privately, and to some extent in public policy, advisers in Number Ten and the Treasury offer qualifications that soon counter the more strident public oratory: "Of course there must be international agreement... we don't want to kill off financial services, which will still be the major engine of growth in the economy... the City of London must be allowed to breathe again". Osborne's speech had a similar underlying message: "I possess a big stick but have no intention of using it."

Politicians are slow to respond to changed circumstances, looking out for more familiar terrain as they struggle to adapt. This was the case in the 1970s when leaders from all the main parties were reluctant to move away from the corporatist consensus even though the policies were obviously not working. The fact that political leaders feel the need to respond to public rage about bonuses is an early phase of the new consensus, even if the policies are still being tentatively worked out.

The pattern of political behaviour has similarities with the MPs' expenses saga. Before the expenses were published in the Telegraph, political leaders felt the need to huff and puff a little. After the publication they knew they had to appear to be strong, while in reality leaving a fair amount of flexibility as to which MPs were punished for their apparent misdemeanours.

This was the phase in which they were adapting to uncharted waters as they are doing now in relation to the banks. But in the end in relation to expenses they have gone the whole way, pretending to support every recommendation in the Legg proposals on previous expenses and promising to back the Kelly Committee's proposals to be published next month on MPs' future remuneration, even if the report suggests that newly elected members of parliament must live in a mixed dormitory on 50p a week. In the end there was no escape even if that has led all the party leaders down roads they would have turned away from initially.

The public anger with the bankers has not subsided either. Messrs Cameron and Osborne might have succeeded in turning a crisis sparked by a collapse of the financial markets into one about the profligacy of the public sector, but their success is only partial. They know it too. Osborne will be pleased with headlines suggesting he is being tough on bankers even if he is not being quite as harsh as he seemed. The Chief Secretary to the Treasury, Liam Byrne, was out within minutes of Osborne's speech to insist that the government was being far bolder. In practical terms there are quite a few get out clauses in the government's proposals too. But the appearance of boldness in itself makes waves.

The public is forming the impression that a Labour government now and a Conservative administration in the future are going to be tough on the bankers. In which case the politicians will have no choice but to act toughly whether they want to or not. The bankers might still be partying, but not for much longer.