Heed the great stabiliser’s words on banking

Paul Volcker, who advises Barack Obama, wants a return to Glass-Steagall rules. He is right both for Wall Street and the City

How does one give a wake-up call to the Masters of the Universe? Very little progress has been made in the reform of banking regulation, even after the worst banking panic for 80 years. In Britain we will have to wait for the general election before we get a new government, capable of taking new decisions.

In the United States, they already have a new government, but it has been involved in other pressing issues including healthcare reform, the Copenhagen summit and the Afghan war. The Basel Committee on Banking Supervision has produced a set of proposals but there is certainly no global consensus on what needs to be done. The bankers continue to award themselves large bonuses.

There is however a very interesting debate taking place in the United States. Paul Volcker, who is the head of President Obama’s economic recovery advisory board, has supported Senator John McCain’s proposal for a return to the Glass-Steagall banking regulation. Under the Glass-Steagall banking act of 1933 the United States based its banking regulation on a statutory separation between investment banks and commercial banks.

Britain did not have the same legislation, but we did have a small group of large clearing banks, which carried out retail banking functions, but left investment banking to the merchant banks. In the United States the Glass-Steagall Act was repealed in 1999; in Britain the Big Bang in the early 1980s led to the clearing banks moving into investment banking functions. If the United States does decide to return to the system that made US banks stick to their core business, it seems likely that Britain would follow, though there would be considerable resistance.

Mr Volcker is an historic figure in modern finance. He was the Chairman of the Federal Reserve Board from 1979 to 1987. In that period he brought the global inflation of the 1970s and 1980s under control through his tough adoption of high interest rates.

At the time he was widely praised as the man who saved the world economy from hyperinflation. He avoided the mistakes of his successor, Alan Greenspan, who did not have the determination to counter-attack financial bubbles in their early stages. Mr Volcker has been right before, and everyone knows that he could be right again.