It's time to answer the anger

President Obama's bank plan is a good one and Britain should follow suit

Despite the financial disaster that has destroyed economies and put millions of people out of work, the banking sector is behaving as if the past couple of years had not happened and is lobbying against fundamental reform. Meanwhile, the supply of credit to small businesses remains limited. Voters, who are paying for banking excesses in livelihoods and taxes, remain angry.

The President of the United States reflected this last week when announcing new reforms, saying: “If these folks want a fight, it’s a fight I’m ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform. It’s exactly this kind of irresponsibility that makes clear reform is necessary.” The picture is the same in Britain. Labour should be just as vocal in articulating peoples frustration and in focusing it on meaningful changes.

Barack Obama is pushing for the adoption of what he calls the “Volcker rule”, after former Federal Reserve chairman Paul Volcker. Volcker has been pushing for a separation of banking powers for some time, but appeared to be making little headway. He is known for being sceptical about financial innovation.

The Volcker rule has two parts. First, it will limit the scope of bank operations so that: “No bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.” Second, the rule will limit the size of banks with limits to excessive growth in banks’ market share.

The Volcker rule is the first reform since the crisis which, echoing the Glass-Steagall Act of the 1930s, separates banking activities. While it limits bank size, the main challenge is to prevent retail banks being exposed to casino-style investment banking risks. Without separation, the risks remain systemically linked and the failure of an institution such as Lehman Brothers can threaten to bring down the whole banking sector.

The British Government has stated it will not be implementing the Obama reforms in this country. And it has also ruled out copying US plans to levy banks to refund bailout money. There may be better ways of separating banking activities to protect people from casino banking. If that is the case, ministers should say so and avoid giving the impression they are appeasing the British Bankers’ Association.

But we must separate banking activities, if we understand anything about what has happened to our economy. Ideas rejected by banks and governments alike seem to be returning, with the Treasury playing catch-up.

I supported a bank insurance premium two years ago before Lehman Brothers failed, but it was regarded as too radical. Now it is mainstream. The Tobin tax is back on the agenda. We should now get ahead of the curve and promote banking separation. To do so is not anti-City. Banks are vital, but both people and shareholders (and pension funds) need better banks.

Quite why the wider labour movement is not pushing harder for more radical action is a mystery, although the Christian Socialist Movement has been calling for bank separation for some time. Labour is not some sort of conservative party. Labour has become fixated on bonuses, but that is only part of the picture. The point is to give banking back to the people and avoid future bailouts. It is time for Labour to answer voter anger with essential reform.

This article was first published in Tribune on 29 January 2010.