Ben Chu: Why deal with bonuses when you can pick on a scapegoat?

The dishonouring of Fred Goodwin is a cynical political distraction from David Cameron. Its purpose is to divert public attention from the fact that ministers have failed to do anything about the scandal of the wholly undeserved pay of our too-big-to-fail bankers.

The Government's humiliation over the Stephen Hester bonus affair was total. Despite big talk earlier this very month about encouraging shareholders to be more activist over executive pay, when it came to reining in the bonus of the chief executive of a bank that was majority-owned by the taxpayer, our ministers simply sat on their hands. It was only when Labour said they would force a House of Commons vote on the subject that the RBS boss himself backed down. Everyone knows that the Government had been resigned to letting Mr Hester pocket his remuneration package. And having demonstrated their impotence over Mr Hester, the chances of the Government now curbing the rewards of the equally overpaid traders and executives of the likes of Barclays and HSBC are negligible.

The pay of bankers at large financial institutions - and not only those majority-owned by the taxpayer - represents a market failure of gargantuan proportions. When profits at these institutions were up in the boom, the bankers paid themselves a king's ransom. When profits collapsed in the bust, they continued to enjoy lavish bonuses. And now that the share prices of their institutions are bouncing along the bottom, these same bankers are still in line for unfeasibly large rewards. There is no observable link between pay and performance here, and certainly none between employee remuneration and shareholder value. The only way to make money out of a big bank these days is to work for one.

To end this racket, the Government would have to be brave. It would need to ignore the threats of a crippling exodus of talent, and interfere in the remuneration of the executives and employees of Britain's giant banks. There are perfectly sensible ways of doing this which will not ruin the City of London. Andy Haldane of the Bank of England has suggested that remuneration packages should be linked to a bank's "return on assets", rather than "return on equity" (something that allows bankers to make large profits by holding a dangerously small amount of capital).

But there is no sign of the Government exploring any of this serious agenda. Instead, it has made a bid for short-term popularity by stripping an already discredited banker of his worthless gong. The public should not be fooled. We will know that the Government is serious about reforming the culture of reckless and overpaid finance when it stands up to a banker who still has some power.