Labour must make up for its failure on banking

It is a sign of how serious economic thought disappeared in the bubble – “who needs it when we’re all making money?” –  that public opinion is not pummelling Labour for its failure to regulate the banks. Even the most conservative of Spectator readers might have once have said, “Well I expect Labour governments to increase spending and throw my money around. I expect them to waste it on schemes that won’t help me, but at least I can count on them to treat the bankers like potential enemies of the state.”

I’m sure readers will correct me if I am wrong, but I cannot find one example of a centre-left government presiding over one of financial capitalism’s manic booms and crashes. True, Ramsay MacDonald’s 1929 Labour government was in power during the Wall Street Crash. But as its name implies the Wall Street Crash did not take place in the United Kingdom. More to the point not one bank in Britain or the British empire failed in the 1930s. Labour people used to know that capitalism was not – or was not only – the dynamic modernising force Blair and Brown so admired. Left to their own devices, financiers could wreck societies.

Today there are signs of a mea culpa and a return to basic principles.

In an interview with Sunday Times today Ed Miliband argues that bankers should be regulated like doctors and lawyers and struck off if they engage in misbehaviour such as – oh let me think – losing tens of billons and expecting the taxpayer to pick up the bill.

As I say in my Observer column today, there is an opportunity for a suitably contrite centre-left here:

“Bankers forced the taxpayer to bail them out with public money: a policy that free-market liberals denounced as a sin when coalminers, steelworkers and car workers asked for public assistance for their “lame-duck” industries in the 1980s. Yet those same supporters of markets remain unconcerned about a diversion of public funds on a far larger scale to lame-duck banks, and do not protest when bankers pocket the proceeds as rewards for failure beyond the imagination of the metal-bashing workers of the 1980s. “[But] few conservatives in Britain or America have responded to the crisis by asking where they went wrong. With the honourable exceptions of the Daily Mail and Charles Moore of the Telegraph, conservative and centrist newspapers and thinkers have not been honest with themselves or their readers about the conspicuous failure of their ideas. “A chasm between theory and practice now rends modern conservatism. What conservatives say and what they do no longer coheres. A confident centre-left ought to be charging through the holes in their opponents’ lines and telling the public that unlike the crisis of the 1970s, you cannot blame the economic collapse on militant trade unions or any other leftish force. Our economy is in ruins because Anglo-American leaders ignored the lessons of the 20th century and refused to treat high finance with the necessary suspicion.”

 But Labour has to match words with deeds. Tomorrow the Banking Commission will propose telling banks to build ring fences around their investment and retail divisions. It is a pathetically modest reform in the circumstances – banks that are too big to fail and too big to bail out should be split up into separate retail and investment companies – but it is the only reform on offer. If Labour joins with the Lib Dems, it could be enacted quickly. It has plenty of support on the Conservative benches – I understand that George Osborne is in favour and the opposition to taking on the City comes from David Cameron. So the question for tomorrow will be: is Labour serious or is its rediscovery of basic principles just a stunt to gather a few positive headlines?