The biggest issue at the election in May ought to be, may even turn out to be, the taming of the City and the reform of the banks. So far New Labour and the Tories are not offering much on this, certainly nowhere near the critical mass of reform needed to transform a dangerous finance-driven economy. The former is proposing in this week’s Queen’s Speech powers to limit greedy bonuses and excessive risk-taking (though the FSA already possesses such regulatory authority) plus some increase in capital ratios without indicating by how much (which is the key factor), but that will still leave the City dominant and the real economy dependent and hobbled. The Tories are proposing living wills (by which banks can wind themselves down in the event of collapse), higher capital reserves, and more support for long-term equity finance (how exactly?). That is also minimalist reform, and given the Tory Party’s dependence on huge support from City institutions and the British Bankers’ Association (whose chief executive was a former Tory MP), neither of whom want any change, it must be doubtful if even these minimal aspirations ever materialise. But the real point is that neither party is seriously addressing the problem.

Neither party is tackling the shadow banking system driven by the investment banks, the trading rooms and the hedge funds and private equity, which are too big, too powerful and too risky. Neither party is addressing a finance sector which is too large for a country of the UK’s size and which is crowding out the industrial and manufacturing sector. Neither party is proposing to reform the financial architecture in order to dynamise innovation and long-term productive investment rather than simply focus on mortgages and consumer credit. Neither party is proposing to regulate closely, or even in some cases prohibit, derivatives trading which lies at the dark heart of finance market fundamentalism.
Above all, neither party is intending to introduce greater competition into the financial sector (other than the small degree demanded by the EU) by breaking up the over-dominant Big Four into perhaps a dozen banks specialising in infrastructure, SMEs, science and technology research and development, and other institution-building in the real economy. And when all this is combined with both parties committed to rapid reduction via public sector cuts of the dudget deficit which the bankers’ folly has created, rather than to fundamental banking reform which is the real heart of the problem, the City appears to have consolidated its position once again as the cuckoo-in-the-nest – whoever wins the election – until the next crisis enforces more decisive, serious action.

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