Bob Diamond's light grilling by MPs makes the case for a proper banking inquiry

The Treasury select committee's ineffectual clash with the former Barclays boss shows just why MPs might not be best placed to investigate the financial sector

Watching Wednesday's gruelling (for viewers) three-hour Treasury select committee hearing, it was hard to know who to feel most furious with: cucumber-cool Bob Diamond, or the flummoxed MPs who failed, again and again, to land the killer blow. We certainly learned more about the state of parliamentary democracy in 21st-century Britain than the inner workings of Barclays.

For one thing, the links between the mighty financial sector and the men and women who are meant to represent the public are deep and complex. Two members of the committee are ex-Barclays insiders, albeit in the dim and distant past; another, Mark Garnier, had a career as a City fund manager; while Tory MP Michael Fallon had to declare an interest before questioning Diamond, because he's a non-executive director of Tullett Prebon, a brokerage that the Financial Services Authority has asked to help it with its Libor-fixing inquiry.

Of course, a career in finance shouldn't disqualify anyone from public office; and you'd hope a banking background would give MPs the insight and the lingo to hold Diamond firmly to account: Jesse Norman, one of the Barclays alumni on the committee, has often been a thoughtful commentator on the state of modern finance, for example.

Yet, as so often throughout this crisis, the finance geeks were asking the wrong questions. It took Labour's John Mann, an old-fashioned constituency MP for the former mining area of Bassetlaw, to nail Diamond by encapsulating the reason it was right for him to resign: "Either you were complicit, grossly negligent or incompetent." Apart from that exquisite moment, there was little to ruffle Diamond, who must have flown back to the US a relieved man.

The inescapable conclusion to draw from his non-mauling is one that Ed Balls – for his own political reasons, of course – had already come to since the Libor-rigging scandal first broke: that a Commons inquiry, even one chaired by the independent-minded Andrew Tyrie, would be too weak, and too hamstrung by private interests and political point-scoring to succeed.

The extraordinary hold Britain's banking sector has gained over Westminster and the reins of economic power over the past 25 years is a story that transcends political parties and extends before and beyond the financial crisis of 2008-9.

For Thatcher's Tories, unleashing the City in the Big Bang reforms of 1986 meant building a more go-getting, entrepreneurial economy where capital would flow freely and "wealth creators" could flex their muscles.

For Labour, which consciously wooed the money men to win their confidence in the early 1990s, a strong City meant bumper tax revenues to be spent on the health service, schools and infrastructure. Both parties enjoyed the swagger that came with attracting some of the world's best-known financial firms – Goldman Sachs, Lehman Brothers, UBS – to the heart of the City and the gleaming towers of Canary Wharf.

Yet not only did those freewheeling financial capitalists not bring the new, shiny economy and the permanent prop for the public finances the politicians hoped for, they also skewed and corrupted business and society in their image.

The overvalued pound that resulted from billions of dollars of capital flooding into London from the US and elsewhere intensified the squeeze on an industrial sector already struggling to compete with cheaper suppliers from overseas. Unheard-of rewards from once-obscure careers such as bond trading and hedge fund management lured wonks away from universities and corporate R&D departments into the Square Mile.

And it wasn't just their double-shot lattes and graph-paper shirts the American bankers brought with them. A big bucks, heads-I-win-tails-you-lose bonus culture, which took root on trading floors in the 1980s (see Liar's Poker) and was given a sheen of respectability by business school neologisms such as "incentivisation", led to a pay explosion as profits soared.

Once bankers were raking it in, other bosses who had once held their own with the City boys wanted to get in on the act, and the age of remuneration consultants, "golden parachute" rewards for failure and seven-figure bonuses had well and truly arrived across corporate Britain.

But out in the real world, meanwhile, little of the money being churned around London's financial markets found its way into productive investments to build up the capacity of the economy for the long term. Some went to fuel an unsustainable property boom, convincing hundreds of thousands of people they could be buy-to-let millionaires; but much of it was just lent back and forth between a handful of giant financial players placing ever riskier bets.

And those tax revenues that were so useful for Gordon Brown in the age of "prudence" and "stability" went up in smoke when taxpayers were forced to spend tens of billions of pounds bailing out the financiers, who were anything but grateful, let alone humble.

The public deserves a thoroughgoing, independent inquiry into the culture, structure and economic impact of banking, because they know that politicians of all stripes – just like the rest of us – have been taken for a ride.


Heather Stewart

The GuardianTramp

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