John McTernan: Why Cable needs to find the right bank balance

IN THE summer of 2009 I was in Madrid at an international gathering of the centre Left. Progressive parties were - and still are - on retreat in Europe, but at the time Barack Obama's election victory was still inspirational, the Tea Party still brewing.

I asked one of the Democrats' leading pollsters what he would do if he were the Labour Party. "Attack the banks," he said. "No-one is attacking the banks enough." Sound advice then, and surely sound advice now.

It is extraordinary to watch as the people of Ireland are saddled with a debt of €100 billion. Why? Because the bankers who played the markets have bankrupted the country's banks and the government is bailing them out. And who precisely is forcing the Irish government to run to Europe for help? The very markets which were played by the bankers.

Has the extra pain Ireland will now have to endure secured the country's future? Not at all. Now the markets are wisely observing that they doubt that a country with a population of 3.5 million can plausibly pay back €100bn in just four years.

So they are gathering to inflict yet more pain. Savage gods, indeed. Swift would have relished the satirical potential of this national tragedy.

What of our own country? One of the most coruscating critics of the banks before the election was Vince Cable, a man whose ability to over-simplify a complex problem and present it in a sound-bite that masqueraded as plain speaking made him a national treasure. In the coalition government he is the Business Secretary and in charge of the banks. What an opportunity to bring the principles of liberal democracy to bear on the excesses of the market.

Indeed, he made a blood-curdling speech at the Liberal Democrat conference this autumn in which he excoriated the excesses of modern capitalism in a way that wouldn't have been out of place in the Labour Party conferences of the 1970s. (Ironically, it was just that kind of leftism that led to the young Vince Cable abandoning Labour for the SDP.) Surely here was a minister who was going to stand up to the banks. But what has happened?

Rather unhappily, last Friday Cable turned up on the BBC's Today programme to explain that he was reversing Labour's plans to force banks to publish their bonuses. In a burst of Europhilia, George Osborne has decided that we need to consult with EU colleagues before we go forward with any such transparency.

Cable was as uncomfortable explaining this delay as he is when defending the tripling of tuition fees and the privatisation of higher education in England. At times like these he is as comfortable as any hostage reading out the words written for him by his captors.

But Vince still has one card up his sleeve - his review of the banks.The less he gets his own way in other areas, the more likely it is that he will do something significant here. And this should be a real worry for Scots. In his anxiety to prove that he is his own man, Cable may follow through with his ludicrous threat to separate "casino" banking from "high street" banking. This could start a chain of events that brings down one of Scotland's major industries.

His first error is to make the assertion that this is an easy judgment to make. Sure, Royal Bank of Scotland and HBOS played fast and loose - and paid the price. But HSBC, Barclays and Lloyds didn't. The risk was not inherent in the banking structures. It was in the ambition of chief executives, and a failure of corporate governance. Should all our global giants be humbled because of the sins of a few?

There are two key problems here if Cable succeeds in creating plain vanilla banks. First, bank accounts will cease to be free and pensions will fall. Why? Because basic high street banking is costly and not highly profitable. So, charges will have to be levied on consumers, and returns on shares (held by almost all pension funds) will fall. Not such a nice prospect really. But that's the least of it.

The second problem is that the coalition is in danger of getting carried away by its own rhetoric. There's a lot of guff about rebalancing the economy, returning to manufacturing, getting back to making things rather than selling services. The problem with this analysis is that it implies that banks and financial services are too large a part of our economy. But is that in any way true? In reality, manufacturing in the UK, and in Scotland, is still a substantially larger part of GDP than financial services. The UK is the sixth largest manufacturing economy in the world. To take just two areas: we make more cars than in the 1970s; and Sheffield makes more steel now than it did in the 1980s.

Certainly, fewer people are employed in manufacturing, but that is why productivity is rising. And, yes, we should support manufacturing in a more interventionist way, but that doesn't mean that we should undermine one of the sectors in which the UK (and Scotland in particular) are global leaders.

Alistair Darling makes the case well in yesterday's Financial Times. He wrote: "As the world's centre of economic gravity shifts remorselessly to the south and to the east, we in Britain need to ask ourselves where we are best placed to compete. Financial services will clearly be part of the answer."

Vital for this, he argues, is government support: "We must make it clear that we want to keep this industry. There are plenty of other countries that would like the business and foreign banks … We need to be clear that we want them to do business here and that we are determined to create the right environment to enable them to do so."

This is the paradox of Cable's position. He needs to score a victory over the banks.But as Business Secretary his role should be to support the sector industrially - there are not so many areas in which we lead the world that we can abandon this one.

It's a huge test for Cable. If he gets it wrong, the impact in Scotland alone will be like the 1980s all over again.