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What we said in our economic review, which Labour Members love to misquote, was that we needed stronger and tougher regulation of banking cash and capital, and that that had to be done by a reunited Bank of England, which saw all the business and the money markets and understood them. We said that we did not need the new regulation of mortgage process that the Government had introduced. If we needed proof of that, we need only consider that we have had more
mortgage process regulation than this country has ever known at the same time as we have had more dodgy mortgages than this country has ever known.
Mortgage process regulation does not stop credit over-expansion. It does not tackle a credit crunch. I find it very odd that intelligent Ministers cannot understand that point; perhaps they deliberately misconstrue it. It seems so obvious to me that they were regulating the wrong things in the wrong way and that they were not doing what a regulator should do. When businesses can extend credit and lend lots of money to people and companies, we should control their cash and capital to ensure that they are prudent.
The massive expansion in bank balance sheets should have been ringing alarm bells by 2004-05 in the Treasury and with the Chancellor, let alone in the Financial Services Authority and the Bank of England. It was ringing alarm bells on the Opposition Benches, as we have learned today. I shall not treat the House to loads more quotes or say that we saw all this coming, as that does not matter. What does matter is that the Government did not see it coming. They were not listening, they were not watching and they were not carrying out their prudential activities sensibly and well.
What should the Government do now? They are making a worse crisis now than the one that they are talking about. We know about the over-expansion of credit, and they do not talk about how they brought that to a grinding halt in a very damaging waythat was the second part of the crisis. We might go into a third crisis if they do not control the public accounts and the public obligations sensibly.
There are huge disputes about what should be factual matters. It seems very clear to me that this country is massively indebted in the public sector, and that that debt has expanded many times in the past two years as a result of the policies that the Government have been pursuing, both through their running of large deficits and, more importantly, through their very expensive policies of support, subsidy and guarantee to the banking sector.
Let us look at the figures. The Government admitI thinkthat there is public borrowing of about £700 billion. If we add in private finance initiatives, public-private partnerships, Network Rail and some other off balance sheet liabilities, we see that that figure is about £1 trillion. I hope that they would accept that figure.
There are, too, about £1 trillion-worth of unfunded pension liabilities. The Government can say that it is not convention to put them on the balance sheet in state accounts, but it is convention to put them on the balance sheet in the corporate sector. Indeed, it is a legal requirement to do soimposed by this Government and strictly enforced. The hon. Member for Twickenham (Dr. Cable) might think that I have made a mistake and I am misrepresenting those figures, but I assure him that pension liabilities are liabilities of the state. They represent money that we do not have and that we have to pay out.
On that basis, the figure is £2 trillion, but to get the Governments true financial position we then have to add something for the banks. If we took on the Governments private sector accounting rules, we would have to put on the balance sheet the gross liabilities of the banks that we have bought, in the proportions of the shareholdings that we have acquired. That would
add another £2.5 trillionfor the banks, the liability is £3 trillion, and we own most of that. That adds up to £4.5 trillion.
Of course, those banks have some assets. I am pleased to say that we will not lose £2.5 trillion, but I fear that we will lose quite a lot of money on these banks. We have, after all, already lost £24 billion in about six weeks on the RBS shares that we bought, based on the losses that RBS has had to report after the shares were purchased. We have lost £10 billion on the HBOS shares that we have bought so far, based on the losses that HBOS has had to report through its profit and loss account. The losses on the shares, based on the current share prices, are similarly very large figures. We can lose a lot of money on this.
If Government Members still do not like the idea of putting those gross amounts on the balance sheet in the way that a company would, why not put on the specific guarantees, subsidies and injections, which would amount to about £1 trillion?
Mr. Brooks Newmark (Braintree) (Con): The Chancellor has asked the banks to be transparent in their accounting only this past week. Is this not a case of Dont do as I do; just do as I ask? The Government should at least be making what is going on off balance sheet as well as on balance sheet far more transparent.
Mr. Redwood: Of course they should. The Government should not think that everybody outside in the real world is a fool. The outside markets and commentators are already adjusting for all these figures anyway, so why do the Government not get real and accept that they have to introduce them?
Mr. Redwood: The Office for National Statistics is going to demand quite a big recognition of these banking risks. That recognition may not be for the full amount that I have suggested, but it will take our total indebtedness as a country, as defined by the ONS, to well over 150 per cent. of national income. That is well above many comparable countries around the world that have not blundered into so much bank ownership as this country has through the actions of the Government.
What should the Government do to start to cut the risk? First of all, they must recognise that the risk is colossal and that, if they get it wrong, taxpayers could be left hopelessly stranded and have to pay enormous losses. They must recognise that house prices are still falling, that the mortgage experience is deteriorating and that there could be more bad loans than we know about. They must recognise that the corporate sector is in deep troubleI fear that there could be many more bankruptcies in the months to comeand that corporate loan books are still deteriorating at a terrifying rate.
For some unknown reason, the Government have made the taxpayer stand behind all those problems. Although a central bank must make sure that a main bank does not go under, it should do so through short-term lending. It should act as an intelligent bank manager and tell the bank involved to cut its costs and risks and to close down its casino banks. It must tell that bank to
stop paying people £200,000, £300,000 or even £400,000 a year when they are making colossal losses that the taxpayer has to stand behind. It is grotesque that we, the taxpayers, are now expected to stand behind people who want to earn £200,000, £300,000, £400,000 or £500,000 a year, with pensions to match, even though their banks are loss making and need state capital and subsidy to survive.
I am a well known exponent of free enterprise capitalism. I am all in favour of people in the private sector getting great bonuses and lots of money if that is what they deserve and if they do it in the normal way, but I also think that they have to live with the downside. High rollers who get it wrong should get no benefit from doing so, and it is deeply offensive to many people in this countryand I am sure, in their honest moments, to many Labour MPs as wellthat this Government are far too generous with the subsidy and capital that they give to the broken banks. The result of the Governments actions is only that there is a delay in adjusting those banks and getting them sorted out so that they are in a position to behave normally again.
The banks involved cannot be subsidised into lending more: they have to be sorted out to lend more, and that means getting rid of the rubbish. They must sell some of their foreign banks and some of the assets that are good so that they can get cash to do something with. There has to be a patient and difficult case-by-case analysis of every loan on their books, and there also has to be some intelligent banking to see how many people can be got through the crisis and how many unfortunately cannot. For the latter category, it may be better to close the loan down quickly before there are more broken dreams and more lost money.
The Government will find outas I think that they are beginning tothat owning something means being responsible for it. By all means let us have intelligent and able people who are not politicians or civil servants running the banks that the Government own on behalf of the taxpayer, but they have to do so according to a sensible and understandable remit from the Government. They are not being given that remit, even though it should be very simple: cut the risk and the losses, get us out of dangerous things like investment banking activities, and sell some of the good overseas banks because we need the money and should not be standing behind them.
The Government have placed the country at grave financial risk. They were warned, but they ignored the warnings. They blundered because they regulated, and over-regulated, but they did not regulate the thing that matters. Will they now please concentrate on the thing that matters? That is that we now have, on the taxpayers account, two broken banks that are bigger than the national income. Do the Government understand how risky that is? Will they issue immediate instructions to cut the risk? Will they understand that the British people will not put up with, or be grateful for, paying enormous salaries to people for doing the wrong things in broken banks that then lose us a packet?
Mr. Michael Meacher (Oldham, West and Royton) (Lab):
At least I agree with the right hon. Member for Wokingham (Mr. Redwood) on his last remarks, about
paying massive bonuses and pensions to people who have brought their banks down. He gave us the benefit of his wisdomhis speech was full of I told you sosand rightly drew attention to the background to the present crisis, but he needs to be a little careful not to skate on rather thin ice.
The build-up of debt through credit and housing bubbles, the deregulation of financial markets, the removal of the capital adequacy ratios from the reserve requirements of the Bank of England, the development of private equity and hedge funds, the light-touch regulation in the City and the development of the bonus culture were all main characteristics of the uncontrollable boom of the Thatcher era. One needs a little more humility and a little less I told you so.
Mr. Redwood: Does the right hon. Gentleman realise that Baroness Thatcher left office more than 19 years ago, and that when she did, the banks were carefully controlled and had to have a lot of capital relative to their loan books?
Mr. Meacher: I was referring to a boom that led to a most serious bust between 1990 and 1992. That bust was the result of the boom being allowed to get out of control, so I do not think that all the lessons are on one side. As I say, history points to a rather different story.
The debate hinges on the fact that the Government have always rightly insistedI do not think that anyone really disagrees with thisthat they had to save the financial system from total collapse in order to preserve the real economy from deep recession by restoring lending to business, preferably at pre-crunch 2007 levels. What has actually happenedhere I agree with what the right hon. Member for Wokingham saidis that unimaginably stupendous sums of taxpayers money have been spent on recapitalising the banks and insuring them against their ill-acquired mountains of toxic assets. However, lending to businesses and home owners has hardly increased at all, although such an increase was the whole aim of the exercise. Indeed, the banks actually decreased lending in the last quarter of 2008, and they announced not long ago that they are reducing it further in the first quarter of 2009.
That in turn has forced the Government to try to substitute for the banks turning off the taps by increasing their lending to some stricken parts of industry. A notable example is the car industry, but the Government have also increased lending to some other industries. That substitution cannot possibly be more than extremely limited, because the deficit in the public accounts is already enormous, and it can certainly never begin to measure up to the scale of normal bank lending to the economy, which usually runs at about £500 billion a year. The fate of the whole economy continues to depend on the banks.
Mr. Bone: The right hon. Gentleman is making a powerful speech, and I am grateful to him for giving way. Does he see the dilemma faced by the banks? The Government are saying, You must lend more money to business on the one hand, and You have to get your capital ratios up on the other. How can banks do both?
That is a relevant point. As the hon. Member for Twickenham (Dr. Cable) said, what is desperately needed is a clear statement of governance if
the banks are to resolve those issues. In my view, if the banks are to have the state behind them, restoring lending to the wider economy should take absolute priority. That is the overwhelming requirement, and that is the central point that I wanted to make.
The policy has been eye-wateringly costly, yet it has not even achieved that one main objective. It is bitterly ironic that a different strategy not only could have achieved that main objective in fullit could still do so nowbut could have done so at a fraction of the cost, and I want to show how. Why was that different strategy not followed? This is probably where I part company with the right hon. Member for Wokingham. There was just one thing blocking the use of that strategy, but that one thing is, I suspect for both Front-Bench teams, the biggest inhibitor in the entire neo-liberal lexicon: the horror of the public sector. The amount of money that has been spent on avoiding it is truly prodigious.
Some £26 billion was spent initially on Northern Rocka sum slightly larger than one third of the entire nations education budgetbut the Government were still forced to acquiesce, reluctantly, in nationalisation. A year later, in September 2008, the Government spent £42 billion bailing out Bradford & Bingley. A week later, they made £300 billion available for a credit guarantee scheme, plus £200 billion for a special liquidity scheme and £37 billion for a bank recapitalisation plan. The banks, of course, were delighted; they took it all with relish. They used it to consolidate their balance sheets, but they increased their lending very little, if at all, so the Government went further. In January this year, they offered another £55 billion to protect the banks in respect of corporate debt. Last month, they made available a further £500 billion for an asset protection scheme to cover bank losses. Altogetherthis figure has already come out in the debatethe Government have offered some £1.15 trillion to the banks, a sum equivalent to 78 per cent. of the UKs entire GDP, yet still bank lending to business and to household customers is stuck at a level that is causing business bankruptcies and joblessness to rise.
The obvious question is whether there is or was an alternative. I believe there clearly is. That is best illustrated by the RBS saga. After the catastrophic takeover of ABN Amro, RBS, as we all know, chalked up in 2008 the biggest corporate loss in British history£28 billion. So the Government stepped in with a £20 billion recapitalisation for the stricken bank. Even that did not staunch a massive further slide in the RBS share price, and by 20 January this year RBS stock, which was worth £78 billion in 2007, had had its value reduced in the marketplace to less than £4 billion, a staggering loss of 95 per cent.
The Government then provided yet another £25 billion recapitalisation. What all that means is that instead of trying to bribe RBS and, of course, other banks, although RBS is the classic example, with colossal subsidies to increase their lending into the wider economyan objective that we all want to see, although there has been extraordinarily little success in respect of the sums concernedthe Government could have taken over the bank at a tenth of the cost and thereby, with proper governance, secured the full increase in lending that was desperately needed.
The key point, and the overriding argument that needs to made time and again, is that if the banks had the state behind themthis is in answer to the second
interventionthey would no longer need to bolster their balance sheets at the expense of the rest of the economy. That is a prize worth having in the current meltdown.
The same benefits of a takeover, as opposed to near-bankrupting the country by shoring up failures, would apply in the case of other banks. I shall give another example. With its very high level of toxic assets threatening now to bring down the whole new Lloyds banking group, HBOS, which was valued at £35 billion a year ago, could instead have been bought in the stock market for £6 billion last October. Instead of £11.5 billion of taxpayers money being pumped in to assist the merger with Lloyds TSB, it could have been purchased at half the price andthis is quite importantthe merger that is dragging down Lloyds need not have taken place. The cost via the public ownership route of returning to full-scale lending for the economy would therefore have been hugely less than under current policy, and also than under the Oppositions national loan guarantee scheme, which I do not think would have achieved the same objective.
Admittedly, and here again I slightly differ from what the right hon. Member for Wokingham said, £1 trillion or more of public funding is currently at risk to assist the banks, but I assume that only a portion of it will be used, although we have been told that RBS wants to shift £325 billion of toxic assets into the asset protection scheme; and Lloyds is now thinking of transferring £250 billion, while Barclays is waiting on the edge. As long as it does not get into public control, it wants to put all its toxic assets, running to a few hundred billion pounds, into that scheme.
It has been estimatedno one knows for certain about this; it is only an estimate, but it is from a reputable financial authoritythat the public accounts may well reach a deficit of £175 billion to £200 billion by the end of the next financial year. That is an astronomical figure, and recovering from such a deficit could take several years. That is one powerful reason for not going down the route of the toxic assets protection scheme and these repeated capitalisations. But I continue to think that the overriding argument for the public ownership alternative is that rapidly restoring normal levels of lendingI do not believe that there is any other way of doing thatwithin the economy would largely prevent the enormous cost of rising bankruptcies and joblessness, which we are told could rise to 3.5 million, which we are now seeing throughout the economy.
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