Occupy Wall Street: In London is focusing on breakdown of social contract between banks and economy

As Heather Stewart observed in a Guardian column, the Occupy London protesters are focusing on the important issue of the breakdown of the social contract between finance and the rest of the economy.

What the protesters, in their kooky way, are rightly identifying is that something has gone badly awry in the relationship between finance and the rest of the economy. 

Gordon Brown got it just right – only a decade late – when he warned in a speech in November 2009 that the "social contract" between banks and the people had broken down. 

Banks should be buried deep in the engine room of the economy, shovelling our savings towards profitable opportunities so that businesses can expand and evolve. 

Instead, in the 25 years since the Big Bang, finance has moved into the driving seat. Having a competitive advantage in financial innovation became one of the UK's selling points. 

That helped cement the power of the money men in Westminster, with Sir Fred Goodwin's knighthood being just the most egregious example of government believing the mystique the financial sector wove around itself. Protecting the status of the City as a world financial centre became a central goal of government policy. 

At the same time, the overvalued pound, caused in part by the surge of investment into the financial industry, helped to hollow out Britain's fragile exporting sector. And the rewards at the very top of banking ran beyond the wildest dreams of average workers — who, to add insult to injury, received consistently terrible service from the high street banks. 

For a decade or so, the pact between the banks and ordinary families held. The economy expanded steadily. The wall of cheap money flowing from China – the so-called global savings glut – helped to pay for cut-price mortgages. Supine regulators nodded through 100% home loans, driving property prices to unheard-of levels. Mortgage equity withdrawal totalled a stunning £365bn in the 10 years of Tony Blair's premiership. 

Yet beneath the surface, the banks were taking extraordinarily risky bets – with our money. 

By 2007, when Northern Rock began to shake, and politicians and central bankers finally realised the size and power of the financial monster they had unleashed, banks' assets were more than five times the size of the economy: much, much too big to fail. 

Osborne tried to close down the issue of banking reform by setting up the Vickers commission. Its recommendations would involve erecting a "ring fence" between risky casino banking and the job of looking after our savings; but they fail to tackle the deeper question – the one nagging at the protesters – of what role finance should play in the economy and society. 

It's one that's been taxing anyone in their right mind over the past three years. Adair Turner notoriously pointed out that much of what the City gets up to is "socially useless". Mervyn King said he would have liked to have seen Alistair Darling order the state-backed banks to throw open the lending taps during the recession; and he's also reflected on the "absurd" risks banks were taking before the crisis. 

There are plenty of radical ideas being drawn up outside Whitehall, starting with splitting up the bailed-out banks into a series of German-style regional champions, and establishing a state-backed investment fund to boost infrastructure. 

Yet the coalition's reflex response remains to defend the City against the pesky meddling of Brussels. While the protesters were discussing how to reform the financial system, David Cameron was warning that proposed European regulations on derivatives would harm the competitiveness of London. Sound familiar? 

Wandering among the tents last week, it was not hard to share the puzzled disbelief of the capital's happy band of tent-dwellers. Their demand was a simple one: a banking sector that serves the economy. It doesn't seem too much to ask.