There's one question that's been sharpened by the Libor scandal which hasn't had the attention it deserves - namely, could banks as we know them survive in a proper, honest, market economy?
I ask for three reasons:
1.Banks are supported by a massive implicit subsidy - the fact that their borrowing costs are kept artificially low by the belief that the government will bail them out if they fail.The Bank of England estimates this subsidy to be worth up to £120bn. This is more than all the profits banks made between 2004 and 2011 (table B3.2 here).
2. Banking, in its present form, creates a large negative externality in the form of risk pollution: all of us suffer when a banking crisis leads to economic crisis. This externality might be so large as to swamp the profits that banks do make. As Andy Haldane of the Bank said (pdf):
Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs.
3. The Libor affair suggests that some of the profits that banks do make are thanks to, ahem, sharp practice. If we heed Warren Buffett's maxim that there's never just one cockroach in the kitchen, we must ask what else are banks up to? How far are profits boosted by mis-selling, or front-running, or insider trading or other dubious deeds?
These facts raise an uncomfortable possibility - that if we were to ever have an idealish market economy - in which businesses don't get state subsidies, behave honestly and do not impose externalities upon others - then banks as we know them couldn't exist.
Banks as they presently exist are not exemplars of a free market economy but rather means whereby a few oligarchs can enrich themselves at the expense of the rest of us.
Those who rightly rail against crony capitalism - as Sam Brittan does - fail to see that a genuine market economy requires very radical change in the banking system indeed - much more so than the Vickers report envisages.