Ed Miliband is right to threaten the banks | Observer editorial

He proposes that they should be kept on a short leash. It's a start, and will cheer Labour conference delegates

When Ed Miliband tells Labour conference delegates that he plans to break up Britain's banks should they backslide on tough new regulations, he is going further than the usual banker-bashing. When he attacks the government, which he argues has capitulated to intense lobbying and let the banks off the regulatory hook, it is not from the easy hit school of political point-scoring.

His strategy is broader and goes back to his long-held belief that a buccaneering, devil-take-the-hindmost approach to business is out of place in the 21st century. More than that, it is counterproductive and harmful to an economy that needs to shift away from a reliance on the money made by banks and their chief asset – the inflated loans made on seemingly irresistible property speculation.

Miliband may seem an awkward, even alien performer to some , but he will strengthen his appeal if he can stitch together policies that resonate with an audience that has spent the last four years watching incredulously as the City and the wealthy successfully defend their corner. Responsible capitalism sounds dull and un-British, but it also presents an opportunity for a little reinvention and a greater degree of fairness. It also has the potential to enthuse disenchanted Liberal Democrats as much as it does delegates desperate for some policy meat from the podium.

At the moment, we are going backwards, with income inequality getting worse and austerity leaving the wealthy unscathed. The crimes of the banks are many and well documented. They stretch from the branches and call centres that mis-sold payment protection insurance to the trading rooms that fiddled industry-wide interest rates and the boardrooms, where characters such as Barclays' boss Bob Diamond sanctioned aggressive tax-avoidance schemes. Not to mention the drug-running and money-laundering schemes that went on under the noses of HSBC and Standard Chartered and for which they have paid multibillion pound fines. Yet their lobbying power remains undiminished.

The coalition's laudable decision to commission Sir John Vickers, former boss of the Office of Fair Trading, to redraw the regulations governing the industry gained widespread approval. Vickers rejected the rules established in 1930s America that split behemoth banks into constituent parts to protect savers from the wheeler-dealing casino bankers that operated in the international money markets. Instead, he opted for keeping them under one roof with a ringfence around the savings deposits of the retail business.

George Osborne broadly accepted the report, only to publish a white paper that let banks off the hook in several key areas. As such, it accepted the industry's argument that regulations cost money and increased costs are necessarily passed to customers. So for lending to increase to small business and home buyers, regulations cannot be too tight.

This message is not just delivered by the banks. The major accountancy firms and City law firms are making more money than ever from advising the financial sector. They have the ear of ministers and wasted little time in persuading them a golden goose was about to be killed. From an economic point of view, they said, Britain needs its banks to be strong and aggressive to get the country back on its feet and generate overseas sales. The UK's foreign exchange reserves are filled with the profits from legal, accounting and financial services much more than our manufacturing industry.

Ed Miliband is cast as a naif by the lobbyists. Thankfully, he has some friends. Sir Mervyn King, governor of the Bank of England, has voiced his disapproval of the government's intention to water down the Vickers rules. Robert Jenkins, a former banker, fund management boss and soon to be senior regulator, has taken on the bankers. Martin Wheatley, acting head of the Financial Services Authority and another major figure in Osborne's regulatory pantheon, is also prepared to upset the industry.

Jenkins has said that, contrary to industry spin, the banks will win more business if they look invincible; London will be a more successful financial centre when there are clear regulations that make contracts safe and policing fair; and borrowing costs are falling, not rising, as the banks threaten, when the sophisticated services on offer in London are married to a robust regulatory system.

Adair Turner, who sits in the House of Lords and is in the running to be the next central bank governor, is also known to favour giving banks a harder time.

But more than individuals, Miliband has the example from across the Atlantic. For many on the left, the US is a shining example of a country that has spurned austerity in favour of running a bigger deficit. Turning away from the disturbing effects of public spending cuts and unemployment across continental Europe, the US has moved closer to a model of recovery supported by Keynesian demand theory.

However, Congress has failed to put in place a coherent set of rules to offset the eye-watering amount of money the Obama administration pumped into the banks, leaving the US with much the same arrangements as before the Lehman Brothers crash. Banks, awash with cheap funds, lend to the same people under the same rules and pay the same bonuses to their executives. Senators Dodd and Frank, who put their name to the new banking regulations, have sadly found their legislation lobbied to death, increasing the danger of another crash in a few years.

Miliband is right to say the same is happening in the UK.

Michael Sandel, the American philosopher and author of What Money Can't Buy, is a star guest in Manchester. Sandel's arguments on the moral limits of the markets have a resonance in Ed Miliband's so far stumbling efforts to explain the rules of responsible capitalism. In his book, Sandel gives the example of the rich hiring the homeless to do their queuing for them – for the theatre, the cinema. Sandel isn't against the market but says a moral line has been crossed and unfairness and the degradation of values flourish, at a cost to us all.

Splitting the banks cannot overturn decades of devotion to the monopolistic markets favoured by established elites. There is too much propaganda for free markets for responsible capitalism to be an easy win. Miliband's efforts to tackle banks, with the support of a new breed of regulators, are a start.


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