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Clegg and Cable point to Coalition tensions over banking reform

By Paul Goodman

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In diplomat-speak, "a lively debate" is code for a shouting match.  Ministers may or may not have had one over banking reform, but it's worth noting that Nick Clegg used the phrase when pressed on the matter during Prime Minister's Questions yesterday.  He added that "the Liberal Democrats believed in opposition that there should be a separation [of retail and investment banking], and a debate is now taking place within Government".

Clegg was also pressed earlier on "Today" over the forthcoming spending slowdown.  The programme hasn't exactly been a model of impartiality recently, as Tim as reported, and it's noticeable that it was pressing the Deputy Prime Minister on BBC research claiming that the slowdown will hit the north of the country hardest.

And this morning, the Financial Times and the Guardian picked up Vince Cable's BBC interview yesterday, in which he said that “splitting the banks can mean different things", and that “subtle” methods rather than a “crude” separation of functions could work.  The FT also confirms that the appointment of Bob Diamond, the Wall Street investment banker, as Barclays’ Chief Executive has "infuriated" Cable.

The FT (£) reports that -

"George Osborne, the chancellor, has softened his line on the splitting of banks over the past two years and now takes a less aggressive tone than Mr Cable. At the general election, the Conservatives favoured a UK version of the US “Volcker rule” – restricting banks from proprietary trading on their own account – which may have had only a limited impact on banks such as Barclays."

It goes on to quote a Government official as claiming that "Bank bonuses aren’t quite the political issue they were 12 months ago", and adds - 

That theory will be fully tested in the dark days of the coming winter, as the coalition’s spending cuts begin to feed through into large-scale job losses in the public sector. Anti-banker sentiment, relatively subdued in recent months, could be fuelled by the Liberal Democrats – eager to raise their profile on a popular issue – if the banks do not show bonus restraint. Mr Osborne’s team recognises the potential trouble.

All this gives rise to three key points.

  • It's wrong simply to blame the banks - rather than the banks and the politicians together - for the financial crisis.  There's a case for a simple separation of banking and retail, and one not simply championed by left-of-centre opinion: as the FT says, this was George Osborne's view in opposition.  But the best regulated banking system in the best of all possible worlds will still be vulnerable if, as in America, governments encourage banks to lend to those who can't afford to borrow, and the authorities keep interest rates low for too long.
  • Cable has emerged as the Cabinet champion of the Coalition's left.  Michael Moore is preoccupied with Scotland.  Danny Alexander is burdened at the Treasury.  Although the nights are lengthening as autumn approaches, Chris Huhne seems full of the joys of spring - delighted to be a Cabinet Minister and busy at his Department.  Clegg, with Cameron, has his shoulder to wheel on the Government's behalf.  Cable, however, isn't content merely to take a forceful view on his own Department's business.  He's emerged as the main obstacle to sensible longer-term income tax cuts.  Osborne will have to watch closely Cable's pronouncements on the central plank of economic policy - the need for a spending squeeze now.
  • The tug of war over spending is about to commence in earnest.  With the spending review conclusions looming, and the Liberal Democrat conference taking place very soon, Labour will pile pressure on the Coalition.  Their strategic aim will be to collapse the Government by splitting off Liberal Democrat members and MPs over "the cuts", forcing Ministerial resignations in the process.  The media will take up the theme.  Most of it will want to follow a good story - no more or less.  But for sections of it - the Guardian, big parts of the BBC - the motive will be less impartial.  In the face of all this, the Coalition must grasp the opportunities that the Conference season presents to clarify its message.  More of that next week.


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