Virtually all financial scandals follow the same pattern. First there is the initial exposure of wrong doing, then comes the mitigating claim that it was common practice and everyone was up to it, and finally it emerges that the regulators knew all along but failed to act.
Photo: Alisdair Macdonald/Rex Feature
An inquiry conducted by legislators is likely to command more authority than the independent, semi-judicial process demanded by Labour.
Any such judicial investigation would likely drag on for years, cost tens of millions of pounds in taxpayers' money, and very probably be largely irrelevant or roundly ignored by the time it was published. This way, necessary changes can be incorporated into the financial services legislation already going through parliament.
In any case, there is a lot to address. What we now know about the libor scandal is that by the time the balloon went up, an awful lot of people, both within the banking industry and among regulators, knew the interbank rate was being manipulated.
Something went very badly wrong not just within the culture of banking, but also the practice of regulation to have allowed this to happen. Libor is a global standard used to price a myriad of different financial transactions from mortgages to complex derivative products.
As such, it is perhaps the most important international benchmark there is. For it to become subject to deceit, concealment and subterfuge is a huge blow to London's reputation as a financial centre.
In a sense, this is an old and familiar story. We already know the big picture of what went wrong. Barclays is only a small part of the wider systemic failure that lies at the heart of the banking crisis. But it is none the less profoundly shaming for that. What happened here was falsification, or fraud, not just plain vanilla incompetence, hubris and recklessness. The sooner action is taken to restore trust, the better, which is why a short, sharp investigation is preferable to a long drawn out one.
All markets require regulation to function effectively. To recognise this is not to become some latter day socialist – free markets remain far and away the most effective and dependable route to growth, prosperity and jobs – but only to acknowledge that without adequate policing, rule of law would fast break down, and like the streets, become subject to abuse, protection rackets or outright anarchy.
There is a sense in which capitalism, in order to survive, has to be constantly saved from itself by the application of appropriate checks and balances. Every now and again, we are reminded of this abiding truism by an almighty financial crisis.
The curiosity of the pre-crisis period is that it wasn't for lack of the volume of regulation that the system broke down. Under Gordon Brown, supervision of finance was split from the Bank of England and placed in a shiny new office down at Canary Wharf, from which it set about its task of showering the industry with rules and regulations with evident relish.
This only encouraged a box ticking culture, and in time, a generalised loss of any sense of individual or institutional responsibility for the industry's actions. Self enrichment, rather than customer service, became the name of the game. All sense of moral accountability was outsourced to external regulators. If it could be thought within the rules, anything went. Not all bankers are guilty of this breakdown in standards. However, it was enough to establish a trend.
From here it was but a small step to the cynicism with which Barclays and others judged it perfectly acceptable to manipulate interest rate benchmarks. By the height of the banking crisis, Barclays had, bizarrely, even begun to believe rate manipulation had been officially sanctioned by the Bank of England.
This is what happens when you over regulate. In the trivia of officialdom, everyone loses sight of the important stuff. So arrogant in its self belief had finance become by the end that it actually thought regulators approved of the deceit it was visiting on the public.
No amount of regulation will ever completely get rid of bad, irresponsible and dishonest behaviour in finance. But if the right incentives and penalties are put in place, it can be made to work much more effectively than it has been. Fraud is a serious criminal offence in any other business. Why is it that there seems to be some doubt about this in banking? What's happened to the zero tolerance of abusive behaviour you see in other industries?
If this were a pharmaceutical company, it would by now have been stripped of its licenses, closed down and its officials had up for endangering the public.
Instead, the post crisis regulatory agenda has been almost wholly focused on the pro-cyclical and often counter productive endeavour of trying to make banks safer, with higher requirements for capital and liquidity. The time for imposing this sort of stuff is the boom, not the bust. Once again, regulation is aiming at the wrong targets.