Attention now shifts from stabilising UK banks to reconstructing them. Mervyn King, the Bank of England governor, recently started the ball rolling with his call for UK banks to divest their risky trading divisions. Financial executives were horrified.

It is funny how history repeats itself. Thanks to a generous reader, I now possess a series of newsletters from a highly-
regarded broker in the 1930s. Reactions to the newly-enacted Glass-
Steagall Act of 1933, which separated traditional banking and speculative trading, were scathing.

Not much has changed. Today’s bankers claim a break-up will cause them to lose their competitive advantage. Banks in other countries would be able to offer a broader range of better-priced products and services, they argue.

Bankers also warn that the public will eventually pay higher bank charges because profits from jettisoned divisions will no longer subsidise banking services. Their preferred solution is better regulation, improved oversight and higher capital requirements. Are they right? In my view, not quite.

Part of the confusion over this issue is due to bankers being economical with the truth. The “blame game” is a good example. The government and bankers both blame US-inspired subprime lending abuses for triggering this crisis.

We know that US financiers have a lot to answer for. But the US did not force the Royal Bank of Scotland to bet itself on an overpriced acquisition of ABN Amro. One insider recently admitted this acquisition would have been disastrous even if ABN Amro cost nothing.

Also, no one from the US forced Northern Rock to borrow short-term while lending long-term.

With hindsight, it is clear that hubris and stupidity by senior British bankers played an important role in the current crisis.

Another point to consider is that oversight and regulation often do not work in the financial industry. Some of the finest brains constantly seek ways to circumvent rules. History demonstrates that they eventually succeed.

On the issue of international competition, it does not ring true to me that the UK economy will be damaged if bankers are forced to hive off risky trading activities. These divisions will still survive, but under different owners. The new owners will be free to prosper or fail. But more important, there will be no government guarantees to save their skins at the taxpayer’s expense if they make a bad bet.

Can a reduced-size investment bank prosper on the international stage? Recall that upstart Google plays to its strengths and runs rings around Microsoft and Yahoo. Apple consistently sticks its thumb in the eye of big rivals. Tesco was once a small competitor against mighty Sainsburys. Investment banking spin-offs need not end in tears if new owners develop unique strengths.

But these are minor matters. A bigger issue is that banker greed and hubris will stunt UK growth for a generation. Bankers destroyed millions of retirement nest-eggs and will cause taxes to rise as well. These are high prices for the population to pay.

It is now time to refocus the debate. Public policy must address the needs of the public who are paying for the crisis, not special interest groups who caused it. The government appears to have missed this point.

On balance, I believe that we need better regulation and higher capital adequacy ratios, just like the banking community advocates. But we also need a modernised version of Glass-Steagall to protect us from banker greed and stupidity.

As the graph shows, we can ignore banking doom and gloom fears. Glass-
Steagall did not cause the US economy to collapse in 1933. In fact, the Dow Jones Industrial Average rose for several more years.

Bankers will probably disagree with me. But even if their fears have merit, why should we care if other countries pamper their bankers to gain short- term advantages? All they are doing is sowing the seeds of their own future destruction. If anything, we should thank them for shielding us from unacceptable risk.

Unfortunately, adding a modern Glass-Steagall to the regulatory mix will not fully solve the banking crisis. Weak banking leadership remains an issue.

A fresh example arrived last week, courtesy of Lloyds Banking Group. The company is now led by Sir Win Bischoff, the former head of failed US giant Citigroup.

The UK government just announced it will pump yet another £6bn into Lloyds. At the same time, the bank announced it will pay bonuses to executive members of its board. This is the group that led Lloyds into its current predicament. Their “penalty” is that bonuses will be delayed until 2012.

The sense of entitlement communicated by the Lloyds action defines the problem that the UK public still faces.

Stock market historian David Schwartz is an active short-term trader writing about his own trades. Send any comments or suggestions to tradersdiary@ft.com