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15 Dec 2008 : Column 888

I want to focus in the remainder of my speech on the economy. It is true that many of our citizens in the UK have enjoyed prosperity and good times. However, we are now facing a situation of crisis proportions, and it is a situation that is deteriorating. The economic challenges we face are perhaps tougher than any previous such challenges, and the younger generation have certainly never experienced a similar situation. The credit crunch and recession are realities, and it is true that worldwide influences have played a part in that recession. Job losses are also a reality, as are fear and concern within communities. We are, therefore, facing tough economic circumstances, and many fear that we are facing a very deep recession. Although it is true that the situation has evolved and worldwide global pressures are placed on us all and on Government, the Government must also accept their responsibility. Responsibility can be shared, but accountability must be accepted by those who are in authority over us. At such times of crisis, therefore, people look to Government to give them a very definite lead.

I listened with interest to the advice of the hon. Member for Louth and Horncastle (Sir Peter Tapsell). He talked about the knockabout debate that goes on in the political arena, and he encouraged us to take our debates beyond that. In listening to this debate, I have heard Members of different parties claim that the Prime Minister or the Chancellor said this and that the Leader of the Opposition or the shadow Chancellor said that—and Members will then refer back to the paper record of events and find out what they actually said. Where does that take us? We are facing a very serious situation and the long-term economic prosperity of our country is at stake. Therefore, we must ensure that the steps that are taken go towards solving the current situation and laying a solid foundation for the future prosperity of our people.

I have spoken twice on the measures that have been taken: in an intervention in a recent debate, when I asked the Chancellor a question; and during Prime Minister’s questions last week, when I asked about the banks’ situation and encouraged the banks to pass on the cuts in the cost of borrowing to both their domestic and business customers. Many small and medium-sized businesses are facing a financial crisis, and some are going to the wall. They are going bust not because the basis of those businesses is not good and their plans are not solid, but because they do not have the financial wherewithal to progress their business and face the challenges of this particular time. Therefore, we once again ask the Government to take further steps to ensure that our banks, which have been saved by the taxpayer, pass on the interest rate cuts. I trust that the Chancellor and the Prime Minister will do that.

In Northern Ireland, there is also a situation involving the Presbyterian Mutual Society. The Government should work closely with Arlene Foster, Minister of Enterprise, Trade and Investment in Northern Ireland, to protect fully the millions of pounds belonging to Northern Ireland savers that were lodged with that society. Therefore, I once again encourage the Government to ensure the availability of bank credit. That has not been made available in the way we should be able to expect by the banks that have been bailed out by the taxpayer. This is the biggest single issue affecting businesses, and I trust that the Government can persuade—and, if necessary,
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force—the banks back to more normal lending. That would be of benefit to our economy. Also, although the decision to cut VAT by 2.5 per cent. was one way of passing money into people’s hands, we will have to wait and see whether the people spend it.

We must rebuild confidence. There must be openness and frankness in this debate. There are two sides to that. There must be openness concerning the fiscal stimulus, because any such stimulus will have to be paid for; that is the reality. However, it is also reality that if there is not a fiscal stimulus, there will have to be cuts. We had better be open, therefore, and I believe we need to lead from the front within the community. There must be openness and frankness. There is no single bullet; we must employ all our talents together. I appeal for a collective wisdom from across the House to ensure that we do what is best and what is in the interests of long-term stability, by facing the present challenges while building for the future prosperity of our people.

7.58 pm

Mr. James Plaskitt (Warwick and Leamington) (Lab): In this debate so far, every Member who has spoken on the economy has touched on the issue of banking and the need to stabilise the banking system. We have heard broad support for that from across the Chamber. I, too, want to focus on banking, but to go one step further than just thinking about the banking system in our own country. I want to look at some of the root causes that led to the current problems in the banking system not just here, but across the world.

When my right hon. Friend the Prime Minister was in the Chamber reporting back to the House on the G20 meeting he attended, he referred to fundamental reform of the supervision of the financial system, and we understand that G20 teams are working on a series of papers to turn that into reality, which will be presented to the G20 at its next meeting in March. I welcome the fact that work is being done on the international regulation of banking, but I have some concerns that the timetable for that work to be done is extremely rapid while the issues that need to be grappled with are truly huge. The slight risk is that we might achieve only marginal change, whereas, on the evidence of what has just happened, the situation suggests that we need to go much further.

My right hon. Friend also referred in discussing these matters to “revising the Basel accords”, and I want to take a moment to look at the Basel system. When what is now called the Basel II system was agreed in 2004, it was launched in glowing terms and it was said that

That claim now seems very hollow indeed. The Basel II agreement was a replacement for the original Basel agreement, which had proved to be not up to the job. However, I am afraid that, after a decade of negotiation, Basel II, which has been launched relatively recently and is only just beginning to come into effect, is already dead on arrival. The sub-prime crisis has shown that the model envisaged in Basel II is already inadequate and therefore beyond tinkering with. If we are really to address the problems in the international banking system, we need to look for something with much more substance than that.

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We can see now that the Basel system displays a significant number of weaknesses. First, it comprises what has been described as “soft law”. In other words, it is in no way legally binding. Its status is not even permanent: there are no permanent staff behind it to support it. The second major weakness of the Basel approach is that it is not at all about compliance; it is only about supervision. Nor does even Basel II—the so-called strengthened version—address at all the issue of systemic risk. In fact, it very much reflects the G10 banking culture that dominated all the negotiations that led up to the agreement. That culture is not relevant to the many parts of the international banking system that are now caught up in the consequences of what is unfolding.

The real problem is that the Basel system depends on more than 100 different national regulators. Here, the Financial Services Authority is the first to interpret and then to apply the guidance given in Basel. The system’s other weakness is that it concentrates almost entirely on the issue of capital requirements, which was also an obsession throughout the decade of discussion that led up to the eventual agreement. It says very little—in some cases, nothing at all—about the problems of banking liquidity, about leveraging, about reputational issues or about the use of off-balance-sheet activities. Yet, as we have seen, those are some of the major faults in the system that have given rise to the current problems.

Most of the difficulties that I see in the Basel II system—this is why I suggest that it needs fundamental reform, rather than mere amendment—rest essentially on internal risk-basing. That was the absolute principle that the banks demanded throughout all the negotiations, and that Governments in the end conceded. However, there are four main problems with internal risk-basing, which are now painfully apparent after what has happened. First, it allows banks with complex risk-taking models to select their capital adequacy levels from a range of options. Secondly, it allows banks to use their own measures to determine the degree to which they are exposed to risk. Thirdly, it allows banks to allocate their own risk-weighting to their assets, including those that are off balance sheet. Fourthly, it allows banks to use their own estimates of the probability of any one of their assets going into default.

What are the consequences of such a system, based as it is on internal, risk-based assessment? The system says that it is fine to reduce capital charges on what it declares to be lower-risk lending. What example of lower-risk lending does it cite? It cites residential mortgages. Well, we have seen the consequences of doing that. We saw another consequence when Adam Applegarth appeared before our Treasury Select Committee. He said that it was Basel II compliance that suggested to him that it was fine for the Northern Rock bank to increase its dividend, rather than shore up its levels of capital.

As I said, Basel II has only soft-law guidance—nothing harder than that—which has been shown to be wanting in the conditions that we now face. Basel II therefore displays fundamental weaknesses in terms of a system of governance or regulation of international banking, which is now what we are seeking. In truth, what we have is a global financial structure supervised by a balkanised system of regulation. That is, and is always going to be, an unequal struggle, and international standards will always come off worse in that conflict.

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That is the situation that we are in, and I am afraid that that system will result in a race to the bottom in terms of in-country regulation, because regard for national competitive advantage will always trump regulatory concerns in those circumstances. We have seen, through the negotiations that led up to Basel II and the way in which it has been applied in the last year or so, that Governments in the end generally cave in to the banks’ demands, because that architecture allows the banks to use the “going offshore” threat that resonates so much with Governments.

So the question is: if the G20 is looking again at the Basel agreement and is working on proposals for the spring of next year, what do we need to do to put in place a system that is appropriate for the challenges that we face, and which can move beyond the platform that Basel II itself presents? What we really need is regulation or supervision on the scale of that which we are trying to regulate or supervise; that is the imbalance that must surely be corrected. The logic of that points to a very different approach from the current one. The gaps that need to be filled are fairly obvious. We must have a system that addresses systemic risk.

Banks can now prove beyond all doubt that some of them—many of them—are too big to fail. The underwriting that Governments have now put in place, which was of course the right thing to do, has introduced what is called “shadow equity” into the system, and with it a potential moral hazard. However, because it is there, I see it as giving Governments the right to insist, if we are taking forward a new model, on some global minimum standards of regulation that must apply across the international system. Those must go beyond simply the issue of capital adequacy. We have got to address liquidity, leveraging, securitisation, off-balance-sheet activity, accountancy standards and incentive structures, and we must have early-warning devices. At the moment, Governments around the world rescuing their banks have the upper hand in this argument, but as time passes the terms of trade may shift back towards the banks and away from Governments.

The hard truth is that if we are not to revisit this situation at some future time, we need some pooling of regulatory sovereignty, giving powers to an international supervisory or regulatory body that is on an appropriate scale to supervise or regulate that which needs to be regulated.

Several hon. Members rose

Mr. Deputy Speaker (Sir Michael Lord): Order. Before I call the next Member to speak, let me say that a large number of Members are seeking to catch my eye. It would be most helpful if Members took less than their allotted 10 minutes; then, I will try to call as many Members as I can.

8.8 pm

Mr. Robert Syms (Poole) (Con): First, I declare my interest in the Register of Members’ Interests: I am a director of a family property and building company.

We live in difficult, almost uncharted times, and I am not sure that we have the solutions to what will be a difficult few years ahead. Ours is an open, liberal economy with a very large financial sector that benefits and has
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benefited us and has created lots of very well-paid jobs. That means that we will be affected by what happens worldwide. However, it is also legitimate to say that there are signs that we have gone into a difficult period rather less prepared than we could have been. A lot of that goes back to one of the first decisions that this Government made, which was to give independence to the Bank of England. Two things then occurred: the Financial Services Authority was set up to regulate banking; and a lot of the big disasters occurred under that system, which has also given us occupational pensions, the Equitable Life situation and the various other things that have gone wrong in the past few years.

I rather think that the previous system, in which the Bank of England regulated the City, was better. I remember that there was a banking crisis when I left school in 1973 or 1974, when many secondary banks went out of business. Slater Walker had problems. Several other banks went out of a business, a lifeboat was formed and the banks sorted the problem out before it became a major one. Changing from a rather more informal system, whereby there was a flow of information, to a much more formal clipboard-type of system has not worked that well. I am aware that the City is a far larger and more international organisation than it once was, but I cannot help feeling that the FSA’s watch has not been a good one.

The other relevant issue is the independence of the Bank in setting interest rates. On the whole, that has received plaudits over the past decade, but I begin to wonder whether the Bank’s independence and its setting interest rates has done us any great favours, given that we now have one of the biggest financial busts. I say that because it is clear that there should have been a squeeze and higher interest rates rather earlier. When 120 per cent. mortgages are available, when people are borrowing four or five times their income, when the house-price boom is clearly unsustainable and when first-time buyers cannot get into the market, that is bound to have an inflationary impact on the economy. Therefore, the Bank of England should have acted earlier.

Against that backdrop, it was a little foolish of the Government to continue spending up as they have. The profile of our tax receipts—a lot is City-related and a lot is housing-related—means that they should have done what the Germans did: run a fiscal surplus. One of the reasons we are going to find things very rough and why our room for manoeuvre is rather more limited is because we spent. The Government argue that they spent on schools, hospitals and so on. There were many good things that the money was spent on, but given the rough weather that we have encountered, their decision was foolish and it means that they are far more limited in what they can do.

We have had some discussion about whether the VAT changes will make a lot of difference, and set against the discounting in the high street, I am somewhat sceptical that they will. Indeed, many businesses are finding that there are quite a lot of costs attached to altering VAT. Poole borough council, among others—indeed, all the local authorities that we represent—has spent quite a lot of money making the necessary alterations.

The most important thing is that we deal with the credit markets and with the banking system, because credit still is not flowing. I commend the proposal of
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my hon. Friend the Member for Tatton (Mr. Osborne), because we must get credit flowing to businesses. If credit does not flow to businesses, either through banks or through some support for lending, no matter what the Government do we will have a sharp downturn that will result in very high unemployment.

I am sceptical about the VAT measures, but if the Government are serious about achieving a fiscal stimulus, they could do a lot worse than to start building some council housing. There is a need for housing, there are a lot of unemployed building workers and land is available because the private sector is building almost nothing. That would be a logical sector in which to provide a stimulus and it would leave a lasting legacy, as opposed to opting for a temporary VAT cut, which will not do what the Government want it to do.

There may be an argument for a fiscal stimulus, but what the Government are doing will not have the impact that they hope. As we all know, the difference between Government spending and tax revenues are two very large figures. If the Government are being a little optimistic about the outlook and the profile of this recession, the real figure might be rather larger than 8 per cent of gross domestic product in terms of debt and we would start to get into areas of difficulty. The right hon. Member for Birkenhead (Mr. Field) warned about inflation, and I agree. In particular, if the pound is very soggy, we will import quite a lot of inflation and will end up with higher rates of inflation and a downturn—classic stagflation—which would be very difficult indeed.

Like many Members, I have constituency cases. Some of the people I see who still have housing problems are those who were affected by the downturn under the previous Conservative Government and who perhaps lost their homes because of negative equity—that has a long-term difficult effect. One of the major changes in the British economy is that individuals carry a substantial amount of debt on their credit cards and mortgages—rather more than they might have done 10, 20 or 30 years ago. My real fear is that if unemployment increases beyond 2 million and towards 3 million, many of the people who lose their jobs will be carrying very heavy debts and will find that their long-term prospects are difficult. I welcome what the Government have announced on assistance with mortgages. It will be very valuable, because the long-term impact on many families who lose their jobs and find themselves with major debts against the home or against credit cards when they expected to have a major income will be horrific.

What has happened in the global markets is that a lot of wealth has simply disappeared, because people do not know what many of the debts that banks hold are worth and there is no confidence within the market. That cannot wholly be filled by Governments, and a major adjustment will have to be made. The head of Barclays was probably right today when he talked about house prices falling by 30 per cent., and the sooner prices fall so that we can get to the bottom of the market, the better it will be in terms of the economy’s starting to readjust.

One relevant factor is that whereas years ago first-time buyers used to get into the market at about 26, in recent years they have done so at 34 or 35. That is partly because of high house prices, but it is partly because of lifestyle choices—people getting married later and wanting to travel more; they want to go to Kathmandu and so on. When we get to a point where both the housing
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market adjusts to a lower level and those many young people are feeling more secure in their jobs because they have survived a wave of unemployment, there will be the prospect of people getting back into the housing market and our getting back to a more regular, sensible rolling housing market again. There is some hope, but the housing market has been distorted. A world in which the City paid out bonuses last year of £16 billion and where Russian billionaires buy properties in Chelsea has lifted a lot of the housing market in the south-east. Simply because people will not receive that level of bonuses in the next two or three years, the housing market will have to find a bottom. That will come when first-time buyers do what people have always done—get married and want to buy homes. I hope that the adjustment in the market is quick and that we get back to a more organised market, rather than have a slow fall, and it looks like that is happening.

We have a very unusual recession. People have benefited over the past few years, because as house prices have increased they have been able to withdraw equity for homes, cars, holidays and sometimes for their businesses, but now we have reverse of that process. It will be very painful for those who lose their jobs—we hope that there will not be too many of them—and for all of us in dealing with the consequences of this very serious situation. I commend the proposals of my hon. Friend the Member for Tatton. I fear the worst, but hope for the best.

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