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I remember taking evidence from the Bank of England regarding the collapse of Barings and then BCCIBank of Credit and Commerce International. We rather mocked the Bank for its notion of regulation, which was, Were all good chaps in the City of London. We have you in for a nice chat, you reassure us and we send you away again. Banking regulation has moved on slightly from that approach, but perhaps not as far as we would like.
There is a case for more scrutiny, and to reopen the issue of audits. Many of the banks that are now collapsing have been audited in the past 12 months. The auditors did not reflect any problems with underlying asset values in their audit. When we ask auditors about that, they say that they go on what they are toldif they are told that the asset is worth a certain amount, that is what they put in the audit. If the audit process just allows the big five audit companies to make a lot of money by going through a process, but gives no real information to the public or politicians as to the underlying health of the company, there is something wrong. Such audits are not aiding transparency, regulation or public understanding.
This view will be extremely unpopular, but I am the only person in the Chamber, and one of the few Members still in Parliament, who voted against independence for the Bank of England in 1997. I voted against it because of just this eventuality. The history of the Bank in past financial crises, going all the way back to the 1930s, is that when it is asked to choose between bearing down on inflation, and the growth and health of the real economy, it has always chosen to bear down on inflation. That is the danger of an independent Bank of England, about which I spoke 10 years ago. An independent Bank of England that chases inflation above all is marvellous when the going is good. When the going is bad, however, we will see why some of us would not vote for such independence.
Ann Winterton (Congleton) (Con): The hon. Lady makes an interesting point. Does she not agree that when the Bank of England was made independent, certain of its previous powers were transferred to the FSA? Does she believe that the FSA has acted in the meantime, as it ought to have done, to ensure that the banks had sufficient reserves?
I want to comment on my Prime Ministers economic war council. With 28 people gathering as a war cabinet for economic crisis, it is very impressive. For my taste, however, it is overbalanced towards investment bankers, hedge fund managers, former investment bankers, and people who would like to work in investment banks when they finally leave politics. I put it to the House that wonderful as investment bankers are, we need a more balanced source of advice if we are to move forward in this financial crisis. Of course they will suggest that we pour money into the investment banks. As many Members have said, however, there are other issues that our constituents will ask us about when we return to our constituencies over the weekend.
I am still concerned about the situation of parts of local government that have big holdings in Icelandic banks. It is well and fine that investment bankers are happy with the financial rescue package, but if my constituents or those in other parts of the country find that their services or day-to-day expectations of local government are threatened because the Government are unwilling to support local government in this situation, their love for the financial rescue package will start to drain away.
I was not satisfied by my right hon. Friend the Financial Secretarys answer on the question of repossessions. One of the reasons for our financial problems is the housing bubble in both America and Britain. Ministers need not console themselves that we did not sell sub-prime mortgages. What is a mortgage for 125 per cent. of the value of a house but a sub-prime mortgage? Our constituents will not understand if we can throw billions of pounds at bankers, but can offer people in danger of losing their homes nothing more than the hope that their mortgage holder might be a bit kinder or nicer. We must put in place a practical scheme to make sure that our constituents do not face a rising tide of repossessions while the investment bankers sit back, recapitalised by the taxpayer but under no pressure whatever to resume lending, either to each other or to small business, and certainly under no pressure to have a more long-term and constructive approach to the issue of repossessions.
The availability of loans for small business has been mentioned. I tell the House that the financial rescue package will soon turn into a joke if small business continues to have its current problems with getting bridging finance and finance generally. The possibility of bringing forward public sector spending on housing was raised yesterday. We have promised £8 billion of such spending; why can it not be brought forward? That would do a great deal for the real economy.
I believe that the financial rescue package is right and important, but I also believe that there are many other issues about which our constituents will ask us in the coming weeks and months, which will need to be raised and pursued both on the Floor of the House and in Select Committees. One of the most amazing features of todays debate, meanwhile, has been to see the Liberal Democrats trying to occupy a position to the right of the Tories on City bonuses. I have to tell them that not even the City is defending the current City bonus regime.
We are facing the most serious economic crisis for a lifetime. I hope, as a Back-Bench Member of Parliament, that I shall be able to play my part in the debates and discussions, and I hope that we can arrive at a real and lasting resolution of the crisis in which we find ourselves.
It is a privilege to follow the hon. Member for Hackney, North and Stoke Newington (Ms Abbott). She referred to a speech that she made in a banking debate 10 or so years ago, which is one of the very few speeches from 10 years back that I still remember. It was as distinguished as was her speech today. She was right to say that we face a very serious problem.
I shall try to be brief in making a number of assertions. The first is that recession is now inevitable, but depression is still avoidable. There has never been a 1930s-style depression when the stock of money and credit has been maintained, and I therefore welcome the measures taken by the Government to prevent the contraction of credit and money that would have occurred if there had not been an injection of public money into the banking system to help recapitalise it. My second assertion is that while it was right to put in public money and take a
public stake in the banking system, we should seek to maximise the return to the taxpayers from that money, and maximise the private contribution of new capital to the system.
Members may find it slightly odd that I should support what is effectively partial nationalisation of the banks, about which the Chancellor of the Exchequer appeared rather sheepish yesterday. In fact, I am the last Conservative Minister ever to have nationalised anything, albeit in a rather different sort of crisis: I nationalised all the Iraqi-owned assets after Iraq invaded Kuwait. In an emergency it is necessary to take drastic action, and it is essential for the Government to prop up the whole structure of credit, which exists only because Government allow fractional reserve credit banking and stand as lender of last resort.
We need, however, to maximise the return to the taxpayer and maximise the injection of private capital into the banks. I am therefore puzzled that, in terms of maximising the return, the Chancellor of the Exchequer is proposing preference shares rather than convertible preference shares. If he had insisted on convertible preference shares, if and when, as we hope, the banks are restored to health and vigour and the economy likewise, the public sector would have seen a recognition, in the form of a profit, of some of the good that it had done. By failing to make the shares convertibleperhaps it is not too late to do sothe Chancellor of the Exchequer has deprived taxpayers of some of the profit that they could have made. If we had convertible preference shares, he would also be right to encourage the private sector to put in money instead. If the banks would prefer to have private capital coming in on the same terms, they should be allowed to do so. I should like the Chancellor to consider that.
Of course, there is always a trade-off between the conversion price and the coupon that is paid. However, if that means that a slightly lower dividend is paid in return for a share of the profit at the end, that is a good thing in itself. We want to restore the capital base of the banks by retentions, rather than by paying out dividends, as much as possible.
I welcomed the Chancellors statement that he was prepared to help to underwrite private capital injections. If he does so, I suggest that he take up the idea that I proposed last Monday that additional capital put in now should be given privileged status in the event of an eventual bank reconstruction, and not written off in the same way as old capital. That may indeed be what he is referring to when he talks of underwriting the injection of new capital.
We need to learn the lessons of experience abroad. Some of the best lessonsthey involve some of the greatest problems and some of the worst mistakescan be learnt from the experience of the Japanese, who have undergone a prolonged banking crisis over the best part of 14 years. The lessons there are, I believe, that delay and dithering, a grudging injection of the minimum amount of help rather than help commensurate with the size of the problem, and a piecemeal, bit-by-bit approach, all undermine the impact of any measures that are taken. It is regrettable that we have waited as
long as we have before taking this very substantial step, which, as I have said, is one of the Chancellors measures that I welcome.
Eventually, the Japanese had to adopt all the weapons available to them: not just recapitalising the banks as we have done and not just injecting liquidity as we are doing, but moving non-performing loans off the balance sheet into a separate institution. I hope that that will not be necessary, but as the hon. Member for Hackney, North and Stoke Newington pointed out, it is a mistake to assume that all bad loans are over in the United States in sub-prime mortgages. There will be bad loans in this country, because many loans are backed by real estate and property values that have fallen dramatically and may fall further, and if we do move into recession many may begin to under-perform for other reasons.
Mr. Andrew Pelling (Croydon, Central) (Ind): Is not one of the key solutions moving all the bad debts off the banks balance sheets? The real problem in Japan was a great reluctance to do that, which held the Japanese economy back for many more years.
The Japanese also had to extend a guarantee to all individual deposits. I find it incomprehensible that the Government have not done the same, although implicitly they are offering to do so; they extended a guarantee to all individual deposits in Northern Rock and Bradford & Bingley, which they have now extended to Icesave, or whatever it is calledthe iceberg bank. If they can extend such a guarantee to a foreign and rather dubious bank, it is odd that they should not extend it, for a limited period, to all depositors in this country.
The final thing that the Japanese had to do was cut interest rates drastically. I agree with my hon. Friend the Member for Chichester (Mr. Tyrie) that the Bank of England needs to recognise that in these circumstances interest rates may need to be cut further and faster than ever before. In Japan they had to be cut to zero. We should not relate interest rates to what was necessary during a period of excess credit creation, given that we are experiencing a period in which there is likely to be excess credit contraction.
I hope that the Government will not rule out any further measures that are necessary, and I very much hope that the measures that they have already taken will be effective. They will certainly have the support of the Conservatives, but that does not mean that we will not hold them to account for getting us into these problems over the past 10 years. They must accept responsibility for that.
Barry Gardiner (Brent, North) (Lab): I have only a scarce couple of minutes in which to make my speech. It may shock my constituents that I have sought to address these problems within such a short time scale, but equally I think they would consider it remiss of me not to seek to do so.
I want to focus on three key problems and on responses to them. The first is reserving policies in insurance companies, the second is the difficulties with rating
agencies, and the third is shorting in the market. I then want to look at three other issues: how the Governments proposals deal with pensioners approaching the age where they have to convert their fund into an annuity; local authorities and the need for them to have their funds safeguarded; and business interest rates.
I have been saying for many years that we need to look at the adequacy of reserving policies in our insurance companies, and I will not on this occasion add to the remarks I have made on the subject over a protracted period. To minimise the risk from the sub-prime loans, companies paid rating agencies to advise how to securitise those bundles and turn them into a higher investment grade. Often, that meant packaging them with an insurance policy to cover the expected rate of default. This was, in effect, the modern version of alchemyturning base metal into gold. There was a clear conflict of interest, as rating agencies were paid to advise how this process of securitisation could happen when their proper job was to police it. This is one of the key issues that the Government need to address to create financial stability.
Shorting in the market is where someone promises to sell a stock they do not own in order to drive down its value in the expectation that they can then buy it at a lower price before having to deliver it to the person they sold it to at the higher price. That is how traders make money in a falling market. I call for two further changes. The seller must effect delivery of any shorted stock to the buyer within three days of the original agreement to sell. That will reduce the time in which a speculator can buy at a lower price than the original sale. Cutting this arbitrage window will discourage aggressive speculation by shorting. The second change would be to introduce a rule that allows shorting of a stock only where the price of that stock has actually risen in the pervious trading periodthe uptick rule, as it has been called in America. That would make it much more difficult for traders and hedge funds to engage in a concerted and repeated market attack to drive down the price of a particular share. I hope that my right hon. Friend the Financial Secretary will consider these two solutions, and in deference to him I shall give him a couple of minutes to respond to the debate.
We have had an interesting and thoughtful debate, and I welcome the broad support for the announcements the Government made yesterday. My responses will inevitably be extremely brief, but I want to confirm that the conditions that will be set for banks benefiting from this package will be tailored to the individual case. They will depend on the level and method of the support that is provided, but they can certainly include lending practices, and I agree with what my hon. Friend the Member for Leeds, East
(Mr. Mudie) said about the importance of making sure that home owners and businesses are supported through these arrangements. The conditions can also include dividend payments and bonus arrangements and executive pay. In reaching agreements, any beneficiary will need to satisfy the Government that executive compensation practices are appropriate
Mr. Walker: On a point of order, Madam Deputy Speaker. Yesterday, the Government announced they were taking £500 billion-worth of taxpayers money to bail out the banking sector, which failed under their watch, yet today we have had a miserable 90 minutes to debate the consequences. This bail-out alone could cost my constituents in Broxbourne £750 million, the same as constituents in Burnley, Bolton, Barnsley and Bury. How can you help us, Madam Deputy Speaker, to persuade this Government to give Back Benchers from all parts of the House more time to debate and discuss these important matters?
Madam Deputy Speaker: Order. I understand the frustration of Members who have been present in the Chamber today and who wanted to make a contribution. The length of this topical debate is limited to 90 minutes, but I think it is safe to say that this will not be the last time that matters of financial stability are discussed in this Chamber in the next few weeks.
Mark Pritchard: On a point of order, Madam Deputy Speaker. On 8 October, I received a written parliamentary reply to a parliamentary question I tabled to the Under-Secretary of State for Defence, the hon. Member for Grantham and Stamford (Mr. Davies). In that reply, on the sale of helicopters to foreign Governments, I was informed by the Minister that only three helicopters had been sold to foreign Governments since 2002. On a serious point, that contradicts an earlier reply from a previous Armed Forces Minister dated 6 November 2006, in which the then Minister of State said that six helicopters had been sold to foreign Governments. Is it not concerning, Madam Deputy Speaker, at a time when our armed forces need helicopters in Afghanistan and Iraq, that Defence Ministers do not seem to know how many they have sold to foreign Governments?
That this House has considered the matter of defence in the UK. [Ms Diana R. Johnson.]
The Minister for the Armed Forces (Mr. Bob Ainsworth): I would like to begin by offering my deepest condolences to the families of the 10 service personnel who died over the summer in Afghanistan. We owe them, and all those who have lost their lives in conflict, a huge debt of gratitude.
As the House will know, there have been changes to the Defence ministerial team over the last week. I am very sorry that my right hon. Friend the Member for Kilmarnock and Loudoun (Des Browne) and my hon. Friend the Member for Halton (Derek Twigg) are leaving the Department. They were both dedicated and experienced individuals, with whom I enjoyed working; they made a huge contribution and I shall miss working with them. That said, we have a new Secretary of State and two new Ministers, whom I am very much looking forward to working with on the challenges that lie ahead. The Secretary of State has asked me to offer his apologies to the House for not being here today. He is making his first foray into international defence diplomacy at the NATO ministerial working group in Bucharest.
Our focus is understandably and rightly overseas, but we should never forget the enormous contribution the armed forces make at home. I welcome the opportunity to put the spotlight on defence in the UK. On my visits to military bases around the UK, I have seen for myself the pride of our people in what they do. They know they make a difference, and the public know they do as well. According to the latest polling, 79 per cent. of people think the military are a force for good in the world. We need to make sure that this good will is backed up by a level of recognition and reward that stands comparison with the sacrifices that they make on our behalf.
Defence is, obviously, focused on delivering security. With the current attention on Iraq and Afghanistan, it is easy to forget the many other ways our armed forces provide security through operations at home, such as counter-terrorism and unexploded ordinance disposal. The military provides round-the-clock military bomb disposal teams ready to defuse threats anywhere in the UK, and crack Navy and Air Force search-and-rescue crews stand ready to respond to distress calls at a moments noticein 2007 alone, they responded to a total of 1,793 call-outs. Over the course of the last year, Royal Navy fishery protection vessels conducted 1,311 boardings while the RAF maintained the security of UK airspace every hour of every day without failure. Whatever they are asked to do, they do it. Those conducting ongoing home operations deserve our recognition and the nations thanks.
When it comes to our defence industry, I can say with absolute certainty that our armed forces stay world class because we have a world-class UK defence industry behind them. The purpose of our defence industry must first and foremost be to deliver capability to the front line, and we are proud of the partnershipin some cases the deepening partnershipthat we have with industry to achieve that.
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