Peter Jones: Three cheers for taking the long view

I confess that I am slightly surprised by this. Lobbying by three of the big four banks – Lloyds, RBS and Barclays – put up some stiff resistance to the idea that riskier investment or so-called casino banking, should be ring-fenced or separated from the normal and, to the vast majority of people, essential high-street retail banking.

The exception is HSBC, which gives a clue to why the government has apparently spurned the entreaties of the others. It did not require a bail-out, unlike the other three. Barclay’s only escaped resorting to the taxpayer because it was able to raise the additional capital it needed from private investors. It might also be added that its executives probably offer daily prayers of thanks to Sir Fred Goodwin who led RBS to outbid them to take over the disaster zone called ABN Amro.

Douglas Flint, the group chairman of HSBC, was interesting when he gave evidence to the Commons Treasury Committee on the ring-fence plan. He said he would prefer not to have it, but he could see, from a public policy perspective, that it was needed. The main objective of public policy-makers, he said, was to ensure that the supply of credit to the real economy was not interrupted, and he thought that the disruption that had occurred because of the turmoil in investment banking was “tragic”.

He went on: “Therefore, while an enormous number of things have been done to prevent the repetition of what happened, I think if I were a policy-maker I would seek to set aside the real economy funding capacity from the intrafinancial sector trading activity.” Hear, hear. The main objection to the separation that now seems likely to happen, though you can bet your last penny that some bankers will be working assiduously to prevent it, is that it will make Britain unique amongst the nations with major banking sectors where there is such a separation.

Apart from the cost of teasing the two activities apart, put at between £4 billion and £7bn, British banks will be put at a competitive disadvantage, so the country will lose out on wealth and taxes that would otherwise be created if things were allowed to continue as they are.

It sounds quite a strong argument. I think it is piffle.

It is precisely the argument that was put to US legislators by US bankers who wanted repeal of the Glass-Steagall act passed in 1933 to separate investment and retail banking after the disaster of the Wall Street crash of 1929 and the subsequent depression. Bankers spent two decades lobbying and eventually succeeded in 1999.

They wanted it done because, bluntly, they thought abolition would allow them to make more money. Boy, were they right.

Investment bankers got their hands on money deposited in commercial banks to make their bets in the derivatives markets. Commercial bankers got the chance to dive into the great big Wall Street money-making pond. And they all made fabulous amounts of money until 2008 when it all crashed.

And the worst of it was that because investment banking was now tied into commercial banking, there was implicit thinking that if things did go wrong, the US government would have to bail them out, the “moral hazard” in repeal of Glass-Steagall which legislators seem to have been blind to.

This leads to two points in favour of ring-fencing which seem to me to be utterly convincing. The first is that however much the British economy benefited from by the pre-2008 success of the big British banks (who paid the single biggest tax bills to the government), it has all (and more) been lost in the subsequent crash and recession.

The taxpayer became liable for the £76bn spent on buying RBS and Lloyds shares, indemnifying the Bank of England against losses incurred in providing more than £200bn of liquidity support; guaranteeing up to £250bn of wholesale borrowing by banks to strengthen liquidity; providing £40bn of loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme; and insurance cover of over £280bn for bank assets. That adds up to £850bn.

Then there is all the lost output in the British economy, the output of which is some 10 per cent lower now than it would have been if trend growth had continued.

It means that this year alone, we are missing about £140bn in wages, salaries and profits from the economy, plus there is all the extra money the government is having to pay out in unemployment and other benefits.

You do not have to be a mathematician to work out that the post-crisis losses are almost certainly far greater than the pre-crisis gains of the great credit bubble. So I am all in favour of putting in controls to stop it happening again.

Indeed, Sir John Vickers, though he is too polite to say so, thinks the banks’ arguments against ring-fencing are piffle.

He says: “The recommendations in this report will be positive for UK competitiveness overall by strengthening financial stability. That should be good for the City’s international reputation as a place to do business.”

He is quite clear that the public interest outweighs the private interests of the bankers. The public interest, he says, demands the removal of the prospect of government support for a collapsing investment bank. Some calculations put the current cost of subsidising Britain’s big banks at about £10bn a year.

Sir John says icily: “The fact that some other countries may implicitly subsidise their wholesale/investment banks does not make it sensible for the UK to do so.”

Of course, there will be a cost in this. Finance, whether for mortgages or for company expansion, will remain hard to get. Economic growth will be slower than it was in the last two decades.

But this is arguably what should have been happening all along. We enjoyed good times of easy credit and high spending.

But in the cold light of hindsight, they were just too good to be true.