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I do not have enough time to respond to the right hon. Gentleman’s other question in detail, but the whole of world trade will break down unless there is an
international agreement between the countries that are running surpluses and those that are running deficits to act together. That would mean the Chinese starting to spend a little more in China, which would mean that they would not have to export so much, which in turn would mean that we would not have to import so much from China, meaning that we would not have such difficulties with deficit financing. Provided there is an international agreement to take that on board, we will find a way out of this mess.
Those on the Conservative Front Bench have to face up to the hard-line decisions. They have to recognise that the enemy is not inflation. The enemy was inflation for a number of decades, but the enemy today is deflation. The great danger is that we do what was done in the 1930s. Before Keynes got his way and before Roosevelt introduced the new deal in 1933, the world economy was in a serious position. Instead of trying to stimulate the economy by having programmes of public expenditure and keeping interest rates as low as possible, we had the opposite. In the early days of the recession, in ’29, ’30 and ’31, we had high interest rates. We even put interest rates up initially, until we realised the folly of doing that.
When interest rates went down, the economy did not respond to them and people said, “What now?” It was at that point that Keynes said, “You might want to have some public expenditure”—the right hon. Gentleman and I might agree at least on what was said historically. Today we are in the same position. We have a choice of ways to stimulate the economy. We can have some tax cuts—I think that that will be essential—to give a boost quickly. I am not a 100 per cent. believer in the VAT cut, but whatever one might say about it, it is a quick way of having an effect throughout the economy. We need to look at the VAT cut again in a year’s time and see whether it has had an effect. I suspect that my initial reaction was wrong and that it will have more effect than I thought it might.
We also need programmes of public expenditure as the economic stimulus is taken forward, and we have choices on what that expenditure should be. Some aspects of public expenditure are automatic—they just happen, because of the stabilisers in the economy. That is usually pretty good, because people who need the benefits usually spend the money that they get, which is good for stimulating the economy in the short term. If the Minister is going to give us a taste of what might be in the Budget, I hope that we might hear something along those lines.
On public expenditure on public works, as it were, there are various areas of our economy where we have obvious needs. We need to get parts of our transport system right and now is the time to do that. We need to spend money on education and skills to ensure that when we come out of the economic difficulties that we are currently in, we have people who can take up the future challenges and compete internationally. There has been talk around the Chamber of cuts in expenditure for further education colleges, but that is not true.
Mr. Henderson: No, I am not giving way.
In macro-global terms, there have been increases in this country both in expenditure on further education
and in capital budgets. That seems to be a sensible way of using our public money to get us out of the position that we are in.
I offer a word of warning: at the G20, we must take every possible step to avoid the inevitable protectionist pressures. No matter what plans we have to adopt an economic stimulus that is agreed within certain limits, if serious protectionism breaks out, that will all fall away, as it did in the early 1930s, prolonging the recession as a result. If we allow protectionism to take over now, it will prolong the recession not only in this country but worldwide.
5.5 pm
Mr. Gerald Howarth (Aldershot) (Con): By common consent, we are facing the worst recession in a generation and, as each day passes, we hear more and more gloomy reports. I fear that matters will get very much worse before they get better, and that our constituents have cause to be anxious. For 10 years, the Prime Minister has posed as the man whose command of economic affairs was so all-embracing that he had abolished boom and bust, and thanks to whose stewardship and management of our economy, Britain led the world. There was no acknowledgement of the role played by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), or, indeed, of his predecessor, the noble Lord Lamont for his legacy of a successful economy, which was bequeathed to this Labour Government. That was, of course, all the work of the brilliant incoming Labour Chancellor, whose endless skills stopped short only of alchemy.
Suddenly, however, as everything turned to worms, we learned that our problems were the fault of everyone else—of the global economy. I hope that everyone has noted how the word “global” has been used on every conceivable occasion. That was designed deliberately as a tactic—one that would have been worthy of the good German doctor—to impress upon our people that this was all someone else’s responsibility, and that responsibility did not lie here. Then the hapless Sir Fred Goodwin and his pension were invoked to distract the public’s attention from the architect of this disaster. As interest in him wanes, the laissez-faire market economy has been identified as a villain requiring a form of regulation, which I understand the Government described last night in chilling terms, saying that the banks
“should be very frightened of the FSA”.
They clearly have not been, up to now.
The first issue that I want to address is the banks. I used to be an international banker, ending up with Standard Chartered bank. I believe that the banks must accept a large share of the responsibility, because they were responsible for making the decisions on to whom to lend money and on how to devise the various mechanisms to lubricate the economy. There is no doubt in my mind that the explosion in the number of complex products developed an inverted pyramid, and my right hon. Friend the Member for Wokingham (Mr. Redwood) was absolutely right to point out that capital ratios have simply soared.
Securitisation and derivatives might not, in themselves, have created this crisis, but there is now a growing admission that those on the boards of the banks had
little idea of where the real risk lay, and that the banks lacked the appropriate internal procedures and checks. A former chairman of RBS, Sir Tom McKillop, admitted as much yesterday. When asked whether he was sure that he could understand the full complexities of the sophisticated loans that his bankers had created, he replied:
“You said ‘full complexities’. I would say no.”
In other words, the man at the top of the bank did not understand what was being done in the name of the bank. What an indictment on those bankers, that they should have brought the profession to such a humiliating pass.
There is also the matter of poor lending. It is entirely right that people have referred to what has happened in the United States. An interesting article appeared in The New York Times on 30 September 1999, in which it was pointed out:
“Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people”.
That is, people who were a notch below being creditworthy. There was political pressure to lend, and that was being mirrored at home by the Prime Minister, who wanted to increase social inclusion so that those who were a notch below creditworthiness could also be lent to. In that perceptive article, which I commend to my hon. Friends, it says:
“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn”.
The second issue I want to address is regulation. As my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) pointed out, the Bank of England had been responsible for banking supervision for centuries; it understood the system and the system understood it. The “Old Lady” understood. I recall when I was with Bank of America Ltd in the 1970s, my boss was called in; I asked “How did it go, Bob?” and he said, “Fine, no problems”. We asked whether the Bank of England had anything to suggest, and he said, “Well, it thought our Polish book was a bit longer than we might like”. That meant that, on the following day, our exposure to Poland was reduced—no diktat, no law: it was done because the Bank of England knew what it was on about and its advice was accepted.
My right hon. and learned Friend the Member for Folkestone and Hythe also drew attention to the fact that we have warned consistently of the danger of transferring responsibility for banking supervision from the Bank of England to the Financial Services Authority. Interestingly, in the debate on the Financial Services and Markets Bill on 28 June 1999, the then Chief Secretary to the Treasury, the right hon. Member for Darlington (Mr. Milburn), claimed somewhat extravagantly:
“The Bill gives the FSA the statutory basis and powers that it needs to be the world's leading regulator of financial services. In so doing, it establishes a modern regulatory framework that will stand the test of time and apply into the next century.”—[ Official Report, 28 June 1999; Vol. 334, c. 36.]
How are the mighty fallen. The regulatory regime established by the Prime Minister has been an abject failure, and he must accept responsibility for it.
As anyone who has ever tried to open a bank account knows, the FSA concentrates on erecting hurdles to stop money laundering rather than on monitoring the quality of the lending by the main banks. The independent financial advisers gets the third degree and Goodwin gets the K. That is the way the FSA and its progenitor, the Prime Minister, worked. Now the Government are threatening to impose a draconian regulatory regime. What is wanted is not more regulation, but more effective regulation, which has been lacking.
Thirdly, I want to raise the issue of the Prime Minister himself. I hope to make it clear to the House that I believe he is the architect and the man responsible. One of the most unattractive—indeed, offensive—sights has been how openly the Prime Minister appears to have been revelling in this crisis. He was down and out in October 2007; all of a sudden, a crisis came along and he blossomed. As I have explained, the banks have played their part, but the Prime Minister, the most overrated Chancellor in my lifetime, bears a heavy burden. He destroyed the pensions industry; he destroyed the tried and tested system of banking supervision; he failed to rein in irresponsible lending; he promoted imprudent lending by pressing banks and other financial institutions to lend to those he described as “the socially excluded”; he sold off 60 per cent. of the UK’s gold reserves at $275 an ounce—close to a 20-year low, and, I remind the House, a fraction of today’s price of $900. The Prime Minister imposed a growing tax burden on the people of Britain which, according to the OECD, has risen from 39.3 per cent. of GDP when he took office to 42.4 per cent. in 2006, and rising. He also permitted a 13 per cent. increase in public sector employment when private sector employment grew by only 5.7 per cent. All that has happened under the Prime Minister’s watch and he must be made to accept responsibility.
The Chancellor said last year:
“The Government do not want to run Britain’s banks—we want to rebuild them.”—[ Official Report, 13 October 2008; Vol. 480, c. 541.]
How can that be reconciled with the bullying of Barclay’s bank to join the scheme, presumably in exchange for its shares? I received an interesting note from a former colleague at Standard Chartered bank, who wrote to me today:
“I am astounded how lazy the response has been to the extent of the RBS and Lloyds reliance on the Asset Protection Scheme. Over half their risk-weighted assets are covered. The cost to Lloyds shareholders has been enormous as by far the majority of the assets covered in the scheme are from HBOS, and the ‘price’ of insurance has increased the state holding to 70 per cent. Daniels and Bland should be given the Byng treatment and Government ‘congratulated’ for passing the cost of bailing out HBOS onto Lloyds shareholders—state sponsored grand larceny!”
I could not have put it better myself.
The test for the Government will be how quickly they can restore the banks to private ownership. As the hon. Member for Twickenham (Dr. Cable) said, they will need direction on whether to increase lending or to reinforce their capital ratios first; they cannot have it both ways. Secondly, the Chancellor must demonstrate how he will reduce the taxpayer’s liability.
This is not a failure of capitalism; nor is it an indictment of Thatcherism. She was all for sound money. The public have become completely bewildered by the turn
of events and the amounts of money involved. At a time when finance is so tight that the Ministry of Defence has to scrape together every penny to fund the armed forces who have never let this country down, the banks have had literally billions of pounds thrown at them. Now the Government have even adopted Mr. Mugabe’s policy of printing money, a policy that has destroyed Zimbabwe and will come back to hit us.
I believe that the message we must take away from all this disaster is that the country has become far too reliant on the financial services for wealth creation. We must create a much more broadly based economy, and we must reinvent engineering and manufacturing as well. I hope that the House will recognise that the one man who bears responsibility for this is the Prime Minister, and he should go.
5.15 pm
Colin Burgon (Elmet) (Lab): I agree with the final comments of the hon. Member for Aldershot (Mr. Howarth)— [Interruption.] I refer to his comments on the need to rebuild Britain’s manufacturing base. I had better clarify that, because I am after a job in the future.
I want to avoid what I consider to be pretty senseless tit for tat. I want to avoid aiming for the easy target presented by the individual bankers who have caused outrage in society. I want to deal with some of the fundamental questions. I think that we should be discussing and arguing about those, and hopefully the public will be listening.
It is my contention—here I pick up a point made by my right hon. Friend the Member for Oldham, West and Royton (Mr. Meacher)—that the past 30 years have been dominated by a neo-liberal consensus that has unfortunately been accepted by new Labour and, much to our detriment, willingly embraced by the Conservatives. I am not so sure about the Liberal Democrats.
Let me define neo-liberalism. The theory is that the market should determine individual actions, that we should support privatisation and deregulation and trade and financial liberalisation, that we should shrink the roles of the state and of trade unions because they interfere with the workings of the market, and that, on an international level, the International Monetary Fund and the World Bank should carry out the structural adjustment programmes that introduce such ideas into the societies of developing countries.
How do these incredibly sophisticated ideas work out in our everyday lives? I think it is tremendously important that, at an individual level, we are defined as consumers rather than citizens. The high priest of neo-liberalism, Ronald Reagan, said when he was elected that government is the problem, not the solution. Those involved in the neo-liberal revolution of the mid-to-late 1970s promised that an economic panacea could be delivered that would mean growing wealth for everyone, but that was far from the case. Neo-liberalism has not delivered gains of that kind for people; in fact, I would argue that throughout the world it has delivered growing insecurity.
Over the past three decades there has been a widening of inequality between rich and poor nations, and—just as important from our point of view—a growing inequality within the populations of the advanced economies. Another less well-known fact is that those three decades
of neo-liberalism have led to no improvement in the living standards of large sections of humanity, and in many areas incomes have fallen.
As for the international dimension, Real World Economic Outlook, which was published by the New Economics Foundation in 2003 and used the IMF’s own figures in assessing the world economy, described what had really happened over the past three decades. World GDP per head was static between 1980 and 2002. In some crucial years—at roughly the time of the collapse of the Soviet Union, between 1988 and 2002—world GDP per head actually fell. Between 1980 and 2002, real average GDP per head in the countries outside the IMF’s group of so-called advanced countries, comprising four fifths of the world’s population, fell from $1,400 to $1,100 per year.
What has been the impact in the home of neo-liberalism, the United States? The figures for median earnings of working males in the United States are interesting. The median earnings in 2005 were slightly less than in 1980. The New York Times has been mentioned, and its report of 29 March 2007 is also interesting:
“The top 1 per cent.”
“received 21.8 per cent. of all reported income in 2005...more than doubling their share of income in 1980.”
That approaches levels of wealth distribution last seen in the 1920s. Warren Buffett, one of the richest men in the world, stated in 2006:
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”
What has been the impact of these neo-liberal ideas over the past three generations? What have they done to our society in Britain? A recent article in The Guardian dealing with inequality in Britain makes worrying reading. Using 1974 as a baseline, it said that inequality had increased by 40 per cent. by 2006. The Guardian explains that the increase
“was the sharpest in the developed world”,
and suggested it was partly the result of the political architecture that we labour under.
Child poverty figures are particularly important, as they show how the economic system works out for the most vulnerable. We now have 3.9 million children living in poverty in the UK, after housing costs are taken into account. The UK has one of the worst rates of child poverty in the industrialised world. This is the result of three decades of this economic system working through. I could go on and highlight the figure for child poverty in the east end of Glasgow, which is, I think, about 98 per cent., or even state that four out of 10 kids in London are brought up in poverty, even though the richest square mile of the country is located in the city.
David Taylor (North-West Leicestershire) (Lab/Co-op): Will my hon. Friend give way?
Colin Burgon: No, I will crack on, if my hon. Friend does not mind.
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