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Susan Kramer (Richmond Park) (LD): It is always an honour to follow the hon. Member for Luton, North (Kelvin Hopkins). We are getting a blend of the 18th and 21st centuries in speeches tonight, and that is always a pleasure. I want to pick up some of the issues that have been raised and perhaps to take them a little further. I was very interested in the speech made by the right hon. Member for Airdrie and Shotts (John Reid) about the inter-bank market. He proposed that the central banks create an exchange that takes account of party risk for banks on either side of the inter-bank market. I just want to point out possible fundamental flaws in that approach. That is not to say that we should not explore it; however, it might not be the palliative that it appears to be at first glance.
As hon. Members will know, there are already exchanges within financial marketsan example is the futures marketthat take different kinds of counterparty risk. However, they do it by having margin pools. In other words, they require parties to pay ahead of their due dates, if that is the easiest way to describe it, in order to limit their exposure to the counterparties on either side. If an exchange takes the full credit risk of the counterparty for the banks on both sides of a transaction, the encouragement given to banks to make an irresponsible decision is quite extraordinary, because the transaction is protected by the exchange that stands in the middle. That is almost like saying that the package put together by the British and other Governments to come to the rescue of banks should not only be placed on a permanent footing but should be of a size and proportion that would, in effect, cover the whole banking market. That is a degree of exposure that we cannot possibly underwrite and undertake.
For all of us, there is a sense of great failure in the fact that banking institutions have failed to assess the risk of the transactions with which they have been involved. Rather than relieve them of responsibility of ever having to assess that risk, we ought to require them to assess it. That is the direction in which we have to go; we should not basically say that central banks, and essentially Governments, will stand in the middle and take that counterparty risk.
John Hemming: I share my hon. Friends concern about the proposals made by the right hon. Member for Airdrie and Shotts (John Reid). Does she agree that if we tried to establish a central body to take on the counterparty risk, the danger is that it would take on the counterparty risk for entities regulated in other European economic area countries? As a consequence, we would be taking on risks for places far beyond the UKfor Iceland, Estonia and so on.
Susan Kramer: My hon. Friend is right, and it strikes me as impossible for an international body to have sufficient grip on and be sufficiently responsive to the sort of transactions and changes made by individual banks all over the globe. Such an arrangement would also remove responsibility from banksa responsibility that no Government or central bank should take.
The right hon. Member for Wokingham (Mr. Redwood) talked about the imbalance in the UK economy. That has been a concern of mine for a long time. There was a general feeling that it was following the direction of the future, and not taking a risk, to allow developments in financial services and the various spin-off industries and businesses to become overwhelmingly dominant within the UK economy. However, there has always been a risk involved. For example, nobody in this Chamber, when considering their pension, would put all their eggs in one basket or all their money in one sector of the economy. However, we in this country have largely allowed ourselves to invest heavily in one sector of the economy, largely on the assumption that it would be immune from the cyclical patterns that we know exist in manufacturing and what we might consider to be the more traditional industries. We have discovered that financial services are no more immune than other sectors to inevitable cycles; they follow the patterns that have developed in other industries and sectors. We have put ourselves into the terribly difficult position of having only one major arrow to our quiver. We must avoid going in that direction in future.
This seems an ideal opportunity for the Government to focus on developing the green industries that we need if we are to tackle climate change. Often, when I hear people talk about the economic recessionwe are at the beginning of itI find that they tend to feel we should abandon environmental targets and our work to tackle climate change because we have to give priority to getting the economy back into shape. They have always seen the two as being in conflict with each other. I have never believed that they are in conflict. This is surely an opportunity for the Government to use every mechanism possible to encourage those industries, for example by encouraging the development of new technologies that will reduce our use of carbon and new forms of energy. Work needs to be done on infrastructure, too. There is a whole range of activities that the Government could begin to develop and underpin. We have before us a great opportunity to channel investment into the future; we know that that is required if our children are to have a reasonable environment in which to live. I want to encourage the Government and to hear whether they intend to take advantage of those issues.
We are all concerned about how the regulators behaved throughout the period leading up to our financial crisis. The notion that regulators behaved perfectly and the crisis developed despite them strikes me as extraordinary and naive, and work must be done to create a much more rigorous regulatory system.
Dr. John Pugh (Southport) (LD): Does my hon. Friend recognise that after previous bank crises, there was a demand for a modest amount of new regulation, but that there was no wholesale demand throughout the City or the political parties for better regulation until now?
I very much agree. There is suddenly demand for a lot of new regulation, but wise regulation might be better than simply stacking up layers of additional
regulation. We must work out what needs to be regulated and how it would be most effectively done, so may I suggest one step in that direction? Members will be aware that the Parliamentary Ombudsman recently reached a verdict of maladministration against three of our most significant regulators in the case of Equitable Life, but the Government have not acted on that verdict. What better lesson could the markets, more broadly, and the regulators in particular, be taught than to live up to the terms that the ombudsman laid down, with an apology from every regulator to all those who lost out by taking pensions through Equitable Life, and the payment to them of the full compensation that the regulator called for?
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): My hon. Friend makes a very good point about the ombudsmans report on Equitable Life. It is disappointing that the Government have still not reached the point of saying sorry. Even then, they could develop the details for implementing the practical recompense. The Government have often prayed in aid the fact that it was a big report, but they had draft copies and knew where it was going. It should not have taken them so long to recognise that they needed to say sorry to the people who invested in Equitable Life.
Susan Kramer: I very much agree. The ombudsman was very clear and, so that it was not too complex and difficult for the Government to grasp, made only two recommendations: one was the apology, and the other was a swift process for implementing compensation in full. When it comes to compensation for those who invested in Equitable Life, what once might have seemed like an extraordinarily large amount is lost to the right of a decimal point in the commitment of funds to resolve the broader banking crisis.
Small businesses are very important in my constituency, and Member after Member has talked about the problems that small businesses in their constituencies have had obtaining credit, despite the Governments belief that they have from the various participants in their banking recovery plan the commitment to keep lending to small businesses at 2007 levels. One particular group in my constituency has been suffering, and its situation indicates the depth of the problem. This group, traditionally, has not needed credit lines and therefore has no credit history. Today, however, the companies need credit because their customer base is starting to pay late, but because they have no credit history, the banks are closed to them. Tied to that is the issue of suppliers. I know that the Government have said that they will try to pay people in 10 days, but my hon. Friend the Member for Twickenham (Dr. Cable) asked for much more detail about exactly what that means, how it will play out, and whether it will apply to quangos and related Government institutions, because the private sector is doing almost the opposite.
Lorely Burt (Solihull) (LD):
We all commend the Governments approach, and the 10-day period should be passed on. Indeed, in my constituency we are trying to persuade the local authority to adopt the same approach, but does my hon. Friend agree that when the Government pay within 10 days, it is very often to larger
suppliers that are not necessarily in the same financial difficulty as small suppliers at the bottom of the supply chain? Does she agree also that the Government should make their 10-day payment conditional on the same payment going down the supply chainthe same conditions, right the way throughto small suppliers, too?
Susan Kramer: I very much agree. There is a fundamental flaw in many Government contracts, because they are designed so that only the large entity can bid on them; they are not examined to try to find ways they might be bid on by relatively small businesses to stimulate new enterprise. In that context, several private companiesTesco is the name that comes to mindare going not from 30 days to 10 days but in the other direction, and, I understand, adding another 30 days to the payment period. Very powerful entities, such as the major supermarkets, need to feel some heat from the Government to join them in their approach.
Lorely Burt: Suppliers to another company, Boots plc, can actually wait more than 100 days before it is required by its own changed rules to pay up. My hon. Friend talked about regulators. Does she agree that we should ask the Government to task regulators to ensure that such big plcs fulfil their reporting requirements, because they are required to name in their annual accounts their terms of conditions? It is time, I believe
Mr. Deputy Speaker (Sir Alan Haselhurst): Order. I know that these are exchanges between colleagues, but I ought to say to the hon. Lady that they are very long interventions that are eating into her colleagues limited time.
John Hemming: I thank my hon. Friend for giving way as we move towards 6.30pm. Does she think that the Government should review the insolvency laws and examine the chapter 11 experience in America because of the difficulty that companies could face in a tight credit situation, whereby, owing to payment delays, they face legal action to be wound up? Perhaps chapter 11 is something that we in the UK might consider.
Susan Kramer: My hon. Friend makes a pertinent comment and an important recommendation. Having worked in the United States for 18 years, I am conscious that chapter 11 often allows companies to continue and to be restored to health. We have not followed that mechanism in the UK, and I find that surprising, so the situation under discussion is, as my hon. Friend says, a good opportunity to make that change.
Finally, I am particularly disturbed by the banks dismissal of the Governments recommendations on the current bonus culture and of the publics outrage at its continuation. Members often feel that the reason why there is a problem with the bonus culture is that the sums of money are so utterly outrageous. At a time
when the Government are coming to the rescue, the numbers seem almost immoral, but there is a deeper problem with the bonus culture in our institutions.
The Government know that many bankers at a variety of grades are paid exactly the same salary and that most of their income is from bonuses, which have always been tied to short-term performance. The problem is that when somebody makes a sensible decision, recognises risk and refuses to take it, they lose out on bonuses and rewards, whereas the person at the desk next to them who takes that extraordinary risk gets the great bonus. When that persists year on year, we end up with a culture in which not only do we reward risk-taking but we penalise people who make the appropriate decision and identify and begin to recognise both risk and systemic risk. We must turn the whole picture upside down if we are to have a healthy banking economy.
Mr. Jeremy Browne (Taunton) (LD): Thank you, Mr. Deputy Speaker, for calling me to conclude the debate. My hon. Friend the Member for Twickenham (Dr. Cable) kicked off the debate in a typically thoughtful and insightful way, and no doubt his speech was of interest to all who heard it. My hon. Friend the Member for Richmond Park (Susan Kramer) later made a similarly insightful and interesting contribution.
As my hon. Friends have dwelt in such depth and detail on a lot of the salient points at issue, I will concentrate slightly more on the political response to what in recent months has indeed been an unfolding economic crisis, as the title of the debate suggests. This debate is extremely timely because the economy is shrinking, unemployment is rising and tax revenue is falling. The backdrop to the debate is the issue of how that happened. Two arguments have been advanced by the two main parties. The Prime Ministers essential take on the current situation is that it is all the fault of sub-prime mortgages in America which have contaminated our domestic economyan economy that in other circumstances would have been just fine. As has been reiterated by the hon. Member for Henley (John Howell) and others in this debate, the Conservatives take is different: they say that the problems are the Prime Ministers fault as he grew a bubble of personal and public debt in Britain.
In a spirit of generosity, let me say that both sides are half right; they have identified the twin causes of a grave situation. As my hon. Friend the Member for Twickenham said, there have been international factors beyond our immediate control, but in many ways they have been made worse by how the Government have prepared the country for this situation.
The Labour Government have not prepared us well for the current situation. As the right hon. Gentleman said earlier, the Government allowed private debt and house prices to soar to unsustainable levels, failed to
make prudent assumptions when setting budgets for the public finances and were painfully slow to respond to rapidly changing economic circumstances earlier this year. As the Minister said, it is easy to make such observations in hindsight; it is much harder to make them in advance. That is why my hon. Friend the Member for Twickenham deserves such credit and admiration, because he did precisely that. The Minister spoke for half an hour, but at no point did she address the salient point made about her response in the House to the economic crisis earlier this year. She was completely dismissive and high-handed about the warnings that my party was offering, free of charge, to the Government. If they had listened at that point, they might have been better equipped to deal with the current situation than they have been so far.
I am afraid that the Conservative party has gone through a terribly difficult period; the past few months have been a painful humiliation and a case study in hubris for what was once a great party. It is hard not to wince when recalling the cluelessness, opportunism and inconsistency that has come from those on the Conservative Front Bench. Earlier, the shadow Chief Secretary to the Treasury, who is no longer in his place, made a partisan speech, but he was the one who got his partys uncertain start under way when he made his now infamous observations on borrowing. In one interview, the hon. Gentleman said both this:
Increasing borrowing is not a strategy for dealing with the recession,
To increase borrowing to deal with an economic downturnthats a perfectly sensible thing to do.
Unlike many of his own Back Benchers, I do not wish the shadow Chancellor any misfortune. I have followed the career of the Conservative child prodigy with a benevolent interest, and it gives me great sadness to say that at every single juncture of this economic crisis he has been found wanting. Let me illustrate the point. My hon. Friend the Member for Twickenham has led the debate on interest rate policy. We have already heard what the shadow Chancellor said in the House about interest rates in response to my hon. Friend the Member for Richmond Park less than a month ago:
I do not think that it is particularly sensible...for politicians speaking from the Front Bench to call on the Bank to cut or increase interest rates. Indeed, I make it a practice not to comment on them.[ Official Report, 14 October 2008; Vol. 480, c. 708.]
I am going to chronicle the terrible unravelling of the shadow Chancellors credibility on the issue by referring throughout to that reliable journal, The Daily Telegraph. Initially, there was a false start, because just two weeks after the shadow Chancellor made his comment in the House, the headline that confronted me as I opened the newspaper was Osborne admits his mistake. I thought that progress had been made, but soon found out that the headline referred to a completely separate catastrophic error of judgment by the hon. Gentleman. However, I had to wait only a further 24 hours for the Telegraph headline: George Osborne: Slash interest rates to drag Britain out of economic nosedive. [Interruption.] The hon. Member for South-West Hertfordshire (Mr. Gauke) says that the shadow Chancellor did not say that. However,
I took the trouble of reading the article, which contained quotations attributed to the shadow Chancellorthey may have been written by him or by one of the teenagers in his office. One of the quotations stated that
there is plenty of scope to stimulate demand with lower rates.
Hon. Members do not need to take my word for that, as it is the judgment of the shadow Chancellors own admirers. Only a week after the article that I mentioned appeared, on 7 November, there was a Daily Telegraph headline that will cause sadness on both sides of the House. It read, Support for George Osborne collapses. I did not say that, and neither did Labour party MembersConservative party supporters did. Anybody who thinks that last weeks cut in interest rates was a dramatic percentage fall needs to see the shadow Chancellors credibility rating. In one month, his approval rating has fallen from 70 per cent. to 2 per cent., which is a mark of how well the Conservative party has responded to the economic crisis. The article went on to describe the sheer horror of the hon. Gentlemans position. It said, Only Caroline Spelmanan extremely inauspicious start to any paragraph about a politician in trouble
Mr. Deputy Speaker: Order. The hon. Gentleman is in danger of breaching the custom of the House to refer to right hon. and hon. Members not by name but by constituency, or so to paraphrase remarks so that actual names are not used.
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