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The second fallacy that is frequently uttered in the public discussion of these issues is the suggestion that the credit crisis that we have experienced worldwide is caused by banks becoming more imprudent. If anything, the reverse is the case. The credit crisis has
revealed the problem of imprudence at certain banks in certain cases, but it has not been caused by that. When the tide goes out we see who was swimming naked—we learn who forgot to put on their bathing trunks. The fact that they did not put on their bathing trunks did not cause the tide to go out. When the credit tide ebbed, we discovered which banks’ lending had been less prudent than others, but that less prudent lending did not necessarily cause the tide to ebb.
A third frequently made statement is that the problem was that banks chose to invest in risky assets when they should have put their money into safe assets. By and large, banks would have preferred to put their money into safe assets; they put their money into risky assets only because there were not enough safe assets with notable returns. Why were they being led in that direction? Why did they spontaneously and across the world start investing in more risky assets?
Mr. Lilley: No, it was not because of greed. It was because it was necessary that they be encouraged to do so. There is a systemic imbalance in the world economy. In China, above all, and in a number of other countries, the willingness to save and lend far exceeds the willingness to borrow and invest—it is extraordinary in such a poor country. That surplus of savings requires the rest of world, if there is not to be a deflation, to borrow more and save less than they would otherwise do in order to match that imbalance. That is what has happened: an outflow of savings from China has financed a huge deficit in the United States and other developed countries. That is the precise reverse of what one might expect to happen between rich and poor countries.
Ms Sally Keeble (Northampton, North) (Lab): I have listened carefully to the right hon. Gentleman’s interesting speech. Does he accept that a number of banks will say that they did not think they were investing in risky products because they were all given good ratings by the ratings agencies and that the products’ weaknesses emerged only afterwards, when it was, by and large, too late for the banks then to do anything about those products—or rather when the banks would say it was too late?
Mr. Lilley: The hon. Lady perceptively raises an issue that I am about to discuss. If she does not mind, I shall try to reach it by my own process, but as she realises, it is fundamental.
The imbalance of savings in China and elsewhere means that the rest of the world has to borrow and spend more, and it is encouraged to do so by decreasing interest rates. The reduction in interest rates means that people have to look around for things in which to invest all that cheap money, and there just are not enough high-yielding assets and opportunities in America, this country and other developed countries. Of course people look for the safest options and the best and most reliable yields, but they are being encouraged in this process.
If people had not spent and borrowed all that money, there would have been a deflationary tendency in the world economy, so let us not assume that there was an easy option—that they should just not have
done it and they should have let the money pile up in their coffers. We would then have been complaining about the lack of spending, investment and borrowing to counteract the excessive piling up of savings in China and elsewhere.
Banks try to ensure that they have good collateral in circumstances in which yields are low; I come to the point that the hon. Lady was making. They think that bricks and mortar are safe, sound and robust. Bricks and mortar—buildings—may be solid, but the value of those assets is in itself a financial phenomenon, and it is partly driven by the weight of lending and borrowing that is taking place. People borrow money on the value of houses and that money then goes around the system, driving up the price of houses. When there is any check on that system, we suddenly find that the whole process is vulnerable, because the asset base used as collateral behind the loans that people have been encouraged to make starts to fall. That is what happened. The value of housing in the States fell, so the loans were not covered, and when people lost their jobs the mortgage institutions called in the loans and found that the value of the housing was not sufficient to cover them. That inherent instability means that when the whole party stops—when the spending stops driving up the value of the assets used as collateral to justify the loans—we find ourselves in a brittle situation.
I do not have a solution, but no one should pretend that the solution will be fiddling around with regulation. We will probably go through a difficult period; we may go through another cycle whereby the whole banking system is re-liquified by the central banks, and everyone thinks that that is jolly good and starts lending again. Unless and until the underlying problem of China’s saving too much and America’s running huge deficits is solved, we will be in an intrinsically unstable situation.
In the long run, we must move towards a situation where China uses its money to enrich its own people and America learns to balance its books and balance its own savings and investments rather than be the lucky recipient of poor countries’ money. Although the issues that I put before the House go far wider than the report, I hope that they will illuminate the further thought of hon. Members and the Committee on this subject and that the Government will take them into account when they think ahead, rather than imagine that a sophisticated system of regulation will solve the intrinsic problems of either the banking system or the world economy.
5.57 pm
Mr. George Mudie (Leeds, East) (Lab): I, too, congratulate both the Chair and the members of the Treasury Committee. We know that my right hon. Friend the Member for West Dunbartonshire (John McFall) works us hard and works himself far too hard. He has steered us through, and achieved a consensus on, a very controversial matter, which is no mean achievement.
I also congratulate the Committee’s staff, about whom I would like to speak to the Deputy Speaker and the House authorities through this debate, if I may. The
hon. Member for Twickenham (Dr. Cable) was a bit grudging about the Treasury Committee reports, but they would be even better if we had more staff. I am amazed at the quality of the reports and the amount of work that the Committee does with such a small number of dedicated staff, and I fear that we exploit their dedication. I think that view is shared by others. The Treasury Committee—this probably applies to Select Committees as a whole—is a very useful institution and a very valuable instrument, certainly in this place, where it is the Cabinet or nothing and where no debate and no policy examination is encouraged. I am not making a point about our Government, because this applies to every Government, but I almost think that the Select Committees are deliberately understaffed and under-resourced—and that applies to the Treasury Committee in particular.
The hon. Member for Twickenham was grudging, but probably right, about the report. The questions he asked were accurate, but I would advise his two colleagues sitting opposite me to have a quiet word with him. It would be wonderful if someone ever volunteered information to the Committee. I remember once asking bank representatives how much they made out of credit cards and their response was, “We don’t tell the shareholders, so we’re not telling you.” Even in respect of this exercise, I can remember an infamous occasion when I was more than bad tempered with a Governor of the Bank of England.
John McFall: Remarks such as that from the credit card companies can be dangerous. They had come before us to discuss unfair penalty charges that they had imposed. We said, “The charges you imposed are all rounded up to the nearest pound. How much do you make out of that?” They replied, “We don’t make anything out of it.” They did not tell us anything, so we referred the matter to the Competition Commission. It is now with the Office of Fair Trading and in the courts, so they got themselves into trouble because of their truculence and stupidity. Does my hon. Friend agree that if they were a wee bit more open with us, that would help both them and the country?
Mr. Mudie: I totally agree. I thought that my right hon. Friend was intervening to say that I was never bad tempered with anyone, let alone the Governor of the Bank of England. I am deeply disappointed that he did not. [ Laughter. ]
The real value of the Committee in the exercise came about because, as it happened, we had fixed a meeting with the authorities in September on another matter—I think it was to be with the Governor on a monthly inflation report. When the Northern Rock situation blew up, we were able to take the opportunity to raise the matter. We performed a valuable service because when three bodies are involved—in this case, the Government, the Financial Services Authority and the Bank of England—there is a tendency for them to fall out and for mistakes to be made. There is also a tendency for bureaucracy to win. Each understands that if there is a falling out and it speaks openly about what has happened, the other two will talk about what it has done. They conclude that the less they say, the better. In this case, we hit them hard, which meant that more information was put into the public arena than
would normally be the case. However, the situation also underscored the problem that Select Committees have in getting people to volunteer information.
My right hon. Friend the Member for Holborn and St. Pancras (Frank Dobson) made what I would describe as a lovely old Labour speech of a kind heard too rarely in the Chamber now. He put the debate in a wider perspective, which is what it needs. We are facing a threat to the economy and to people’s standard of living and jobs, but not because of Northern Rock. It is interesting to see how many northern MPs are in the Chamber. The matter is now rarely mentioned in the papers, whereas until two or three weeks ago it was the staple diet of the financial pages. Northern Rock has been dealt with and dissected, but it is not the real problem.
I do not wish to cross swords with such an experienced and able member of the Opposition as the right hon. Member for Hitchin and Harpenden (Mr. Lilley), but although we reached consensus in the Committee and produced a unanimous report, varying shades of opinion fed into that consensus. On reflection, I think that Northern Rock had a very hard time. Some people would say it deserved that, but it was not the culprit and the cause of all our concerns. Those concerns were caused by the bankers and the banking industry that started the securitisation. We need responsible lending.
There was a lass in America—I think she was 85 or 92—who was sold a mortgage of $450,000. After a year, when she packed up her cleaning job, she defaulted. It did not need an experienced banker to know that there was no way she would repay the money, but still it was lent. The lender did that deliberately, and the debt was passed on and contributed to the contamination of the wholesale markets that paralyses them to this day.
I have had the deepest respect for the right hon. Gentleman for all the years I have been here—he handled the Maxwell crisis in an unparalleled manner. However, the behaviour in the Northern Rock affair was not new for the banks. I commend to him a book called “A Random Walk Down Wall Street”.
Mr. Mudie: I see that he knows it. The updated edition has a wonderful long chapter on banking difficulties. Taking securities and selling them on is not new behaviour. Often in their history, banks have found something that will make them a lot of money, which some poor sucker will buy on the basis that they can sell it on to another poor sucker. That is the way they do things. The problem is not about China, Africa or India. It is about high yields, as the right hon. Gentleman said, and nothing more. The Chancellor said that he wished we could have some “old-fashioned banking” that was sensible and tight. Such banking is epitomised by the hon. Member for South-East Cornwall (Mr. Breed), who is glaring at me—no, he is smiling at me. It involved bankers who cared about their customers and were happy with a steady profit, but that is not what the national bankers are like.
I wonder whether hon. Members remember the tulip bubble in Holland. A particular tulip became very valuable. The price went up and up until the last sucker said, “But this is not worth much.” The reply was: “No,
but you’ve bought it.” By then, the rest were out of the market. “A Random Walk Down Wall Street” mentions all kinds of exercises like that.
Layman though I am on banking, I remember when all our banks were investing in south America. I was the leader of the council up in Leeds at the time, and I was trying to get some of the brass to come to Leeds and invest there. They would have got good yields, but modest ones compared with what they were being offered in south America. Of course, when the south Americans got all their brass, they said, “Bye-bye, we’re defaulting.”
I remember the high-tech bubble. People put their money in high tech, and why? Because of the yields. It was about greed. They did not question, they just bought, because they could sell at a great price. That attitude is what we are up against. If the Northern Rock situation has done anything for us, it should have allowed us to look past Northern Rock to what bankers are doing.
Mr. Mudie: I welcome the hon. Gentleman intervening, because I need to work out where I am in my speech.
John Thurso: It is always a pleasure to help out the hon. Gentleman. Does he agree that his catalogue of historical tales shows that, in the City, it is always far better to be wrong in a herd than ever to risk being right on one’s own?
Mr. Mudie: As always, the articulate hon. Gentleman is spot on. He is a valuable member of the Treasury Committee.
If I wanted to be controversial, I would say that one point of consensus in which I do not share is the heaping of blame on the FSA. Yes, it was lax in its regulation, as is spelled out in the report, but I do not like the way in which the other culprit, the Bank of England, has stolen off the stage without anything being said. It has a lot to answer for.
In an intervention, I asked my hon. Friend the Member for West Bromwich, West (Mr. Bailey) about the market solution that we all wanted. Why was it not pursued? We have had no answer. Why is there no evidence that anybody from the Bank of England met the prospective buyers, one of which is now known to have been Lloyds TSB? We have had no answer. Why did the Governor dismiss that point in this fashion: “Oh, I vaguely remember a telephone call that came through to my officials from the FSA”? At such a time, I would have thought that Eddie George would have had that bank in on the Sunday and closed the doors, and they would have gone out at the end of the day with a deal done on a market solution. But that is a judgment call, is it not? I do not think that Eddie George should have dismissed the situation by not taking a telephone call, by not speaking to those involved and by not bringing in people from the City; he should have been straining every sinew to get a market solution. Clearly, however, the Bank of England did not do that.
Mr. Dunne: I think that the hon. Gentleman is at the crux of what started to go wrong with this chapter of errors. To what does he attribute the failure to engage with the single bona fide credible private sector buyer? Once that buyer’s initial interest had gone away, the Government were left with buyers of straw.
Mr. Mudie: That is an interesting question. It was remiss of me not to mention the hon. Gentleman, as he raised the matter in a question earlier today.
Members of the Committee might disagree with me, and it might be too cynical, but my point is worth making. It might be the wrong answer, but like the hon. Gentleman I would welcome another answer. The big question is: what on earth happened? Why were no efforts made to bring other banks in? Why, when the Government had a buyer, were the discussions not exhausted? Why was there no record of the negotiations? Those are good questions, are they not?
Before I leave the subject of the bank, another question arises on the subject of moral hazard, and leads to that of regulation. Moral hazard has a place in a philosophical discussion. It also has a place in the wider picture, but I prefer what Greenspan said. He said that he saw it as his job not to burst the bubble—although there are questions about that—but to help pick up the pieces. We were in a difficult situation: the bank’s going down could have led to a domino effect. The Bank of England knew that, but sent a letter that was several pages long to the Treasury Committee to explain why it was not morally right to put liquidity into the market. A week later, that was done. If I were in the City, I would want security and confidence in people’s judgment and I would want consistency, and I would be wondering what on earth was going wrong with the Bank of England. I am just throwing that in. It is easy to take a lazy kick at the FSA, but the Bank has to answer questions, too.
The hon. Member for Ludlow (Mr. Dunne) asked a question, and I shall respond. I would go to the tripartite arrangements and why they did not work. First, I support the assessment of the ex-chairman of the FSA, which he gave in a speech at Oxford. He said that considering the tripartite arrangement and how it worked, one should forget about structures and look at people. I thought that that was an interesting remark. Everybody in this Chamber, as a politician, knew what he was saying. It was a valuable but not well-reported comment. As everyone knows, it is possible to build a huge structure with huge organisations, but those organisations are only as good as the people inside them. If the people inside them are not working well, there is a difficulty.
Let me be controversial. Attacks may be made on me from all sides, but as a cynical and hard-bitten politician I wonder whether the Bank of England saw this as something for which that upstart the FSA was responsible. It is well known that the Bank of England as an institution did not like either those powers being taken from it or the creation of the FSA.
Mr. Mudie:
I know; I understand. I do not mind people disagreeing if they put another theory into the frame. Here is one—although I could not push it. In
Committee, I picked up on strains between all three parties. The Chancellor was always very loyal, although hon. Members will expect me to say that. The Bank of England, on occasions, attempted to land the Chancellor in it. The FSA and the Bank had some bad vibes and were unwilling to be forthcoming about the conversations that they had had. That points towards bad relationships that, I think, might have contributed to the problem. We should think about those relationships.
My right hon. Friend the Member for West Dunbartonshire spoke about war games. Another factor was the newness of the Chancellor. We should remember that he had been in office for only a month, whereas the Governor of the Bank of England had been in post for five years and McCarthy has been around for a considerable time. Strong, able and confident as the Chancellor is in such situations, he has to look at those people of experience— [Interruption.] Am I boring the hon. Member for Twickenham already? The Chancellor would certainly have to look to long-standing officials of such stature for advice. The conflicts that went on are very interesting.
I agree that we should be careful about regulation. The trouble is that when there is a crisis or when something has blown up, we change the regulation to deal with that. However, that is not why we should be changing the regulation. We should think of what will happen in the future. We should say, “That’s what has happened; deal with it by changing the regulation lightly, if you will, but do not over-regulate.”
Mr. Breed: Does the hon. Gentleman agree that regulation is no substitute for responsibility? However much we want to regulate, it is the responsibility of the people who made the initial decisions that they should have been right, while regulation is the back-up. Regulation is legalistic, but we really want oversight. We want from those individuals not just regulation but an oversight of what is happening in the industry and with individuals.
Mr. Mudie: The hon. Gentleman puts his finger on the problem.
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