Steve Richards: The banks debate has a 1970s parallel

The small state free-marketeers sense something is wrong with the greed of bankers but they do not want to act

The determined resilience of bankers seeking millions in undeserved bonuses has a tiny echo with the actions of militant union leaders in the 1970s. The more revealing parallel is the response of different governments to the two enduring crises, or rather their feeble paralysis in the face of daunting and new developments that challenge all they had come to believe. Conservative and Labour ministers were slow to respond effectively in the 1970s. Labour and Conservative ministers have been slow to respond now. In the face of something new, speed terrifies them.

In the 1970s, successive Conservative and Labour governments sought and failed to address a series of industrial emergencies. A miners' strike helped to bring down the Tory government in 1974. The "winter of discontent" led to the fall of the Labour administration that came next. Lessons were not learnt for an entire decade. Now the Coalition follows a Labour government in choosing to tolerate the darkly comical level of banking bonuses, having demanded a more stringent approach in opposition. Lessons are not learnt.

In the early 1970s, the Tory Prime Minister, Ted Heath, introduced a pay policy to ease the emergency. As Leader of the Opposition, Harold Wilson was scathing in his disdain for such an ineffectual approach. Wilson insisted that if he were in power he would have nothing to do with a pay policy. He would sort out the unions in a different way. Within months of entering No 10, Wilson and then Jim Callaghan negotiated an incomes policy too. It broke down in similar circumstances to Heath's. Like characters in a film noir the leaders in the 1970s were drawn to their own downfall by repeating mistakes of their predecessors, even though they recognised their opponents' errors when they were originally made.

Yesterday Ed Miliband unearthed another devastating quote from David Cameron when he was leader of the Opposition in which he pledged to place rigid limits on bonuses in the banks that are currently state owned. Now he seeks no such limit. Like Wilson's attack on Heath's incomes policy, the ferocity of Cameron/Osborne's pre-election onslaught on the banks is revealing. It must have challenged every instinct of their political outlook, ones that took shape in the 1980s. Now safely in power, they renege on what they said then and move closer to their ideological comfort zone in which they take a much more hands-off approach. Yet the duo sniffed the political air before the election and recognised that they had to affect outrage at the actions of lightly regulated banks even though they believed in light regulation. Something in the air had changed.

In returning to their original convictions now, they follow a Labour government that was equally trapped by outdated assumptions. Tony Blair and Gordon Brown grew up in an era where banks were respected. Indeed, Brown sought to acquire an aura of respectability by associating with senior bankers. He assumed that if bankers approved of him, Middle England voters and the newspapers they read would approve too. When Northern Rock collapsed even The Economist magazine, not known for its Marxist tendencies, urged nationalisation. Brown hesitated fearfully. A dread of appearing old Labour meant he could not adapt to a suddenly transformed situation. Even when Labour took over the banks, Brown could still not impose tough new conditions.

Although close to the unions, Wilson and Callaghan agonised over whether they should or could be tougher, as Cameron and Osborne are doing now in relation to banks. They could see Heath's incomes policy failing, and sensed there must be a new way forward. Yet they did not dare to look very far. The failure of the corporatist state was stark, vivid and obvious by 1974, and yet Labour sought to breathe new life into it because it could do nothing else. In doing so, it left acres of space for Margaret Thatcher to make her moves. She was the one that recognised that an era of convulsive change demanded a changed policy direction too. Her Labour and Tory predecessors almost did, but could not transcend their political upbringings.

The hesitant agonies of Heath/Wilson/Callaghan were wholly understandable, as is the tentative behaviour in more recent times of Brown/Darling/Cameron/Osborne. They faced then and face now deep, complex dilemmas that to some extent challenge party boundaries. In the 1970s, Enoch Powell supported the miners' strikes on the grounds that in a free market their worth had soared when world oil prices quadrupled. Brought up on the trauma of the 1930s, Tory and Labour governments in the 1970s feared unemployment rising above a million and felt compelled to act to prevent this from happening. Strikes could break a fragile economy, so ministers averted fatal calamity by agreeing to near-fatal pay rises.

Now ministers face another hugely complex issue. Of course they want the banks to flourish. Flourishing banks mean higher tax revenues and potentially lucrative sell-offs in the next few years. To target the state-owned banks alone would leave them at a competitive disadvantage domestically. The solutions are not easy.

But Cameron/Osborne cannot act, partly because they do not want to do so. They have beliefs and an ideology, and so they should. Politics is partly a battle of ideas. They are fans of the "nudge" theory of politics, whereby government does not make rules, but helps to create an environment in which others choose to behave responsibly. They will be waiting a long time for bankers to respond to a nudge, but that is part of their ideology. In the late 1970s, Jim Callaghan was in a similar position. He knew the trade unions needed restraining, but he did not want to restrain them. The figure who more than any other had blocked Barbara Castle's earlier attempt to reform the unions was not inclined to embark on a set of policies at least as stringent as those he had vetoed 10 years earlier.

Now the small-state free-marketeers who run Britain sense that something is wrong with the greed of bankers, but they do not want to act because they do not believe they should or can.

Politics catches up late, but it gets there in the end. In the Commons on Monday, George Osborne, normally an accomplished parliamentary performer, was red with unease as he sought to defend his approach. Yesterday, Cameron was unconvincing at Prime Minister's Questions. Both deployed a revealing defence: "We might not be doing very much but it is more than Labour did." The argument is almost an admission of weakness, accompanied by a claim that it is less weak than the previous government. Wilson and Callaghan did the same in the 1970s when they were taunted for doing a U-turn over their previous opposition to incomes policies: "We might have been against your incomes policy but our one will be less ineffective." They became red-faced too with exhausted desperation as they repeated the mistakes of their immediate predecessors.

Something gave in 1979. Something will give soon as a substantial political figure or figures moves us on from the assumptions that have shaped economic policy since that historic election more than three decades ago. Bankers are partying. Ministers are frightened and disinclined to act. Neither the party, nor the political fear on which it is dependent, will last.

s.richards@independent.co.uk