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I am told that in France the Chancellors opposite number, Christine Lagarde, has a daily conference call with the chief executives of every leading bank and insurance company in France to ensure that taxpayer value is aggressively pursued, with the Government working actively with the banks. People may not like the French model, and in normal times I do not think that we would advocate such a dirigiste approach to the banking system. However, the idea that the Government have to grasp the nettle and treat the state-supported banks as nationalised industries is shared across the political spectrum. Those who have advocated that approach include John McCain, the defeated Republican candidate for the US presidency, and Alan Greenspan, so this is
not an ideological point. It is a recognition of the reality that if vast amounts of taxpayers money go into the banking system, it should be run in the national interest.
Ruth Kelly (Bolton, West) (Lab): Does the hon. Gentleman accept that if every country followed the French model that he proposes, there would be a real danger of financial nationalism, which would in itself pose a threat to a global economic recovery?
Dr. Cable: There would be that danger, and that would obviously be a problem for the UK, because we have several global banks here. But RBS, which is a global bank, is not being rescued by the globe. It is being rescued by British taxpayers, and it is not unreasonable in the circumstances for it to make it a priority to lend to solvent British companies. The Government have to pursue that in the interests of the people whom we represent. I am not a nationalist, but that is the reality of the world that we now live in.
Instead, the Government are pursuing what they call the asset protection scheme, which the Conservatives also support. I argued from the outset, and I probably used strong language at the time, that that is a fraud against the British taxpayer. The leading banks are taking their bad loans to the Treasurythe banks know a lot about those loans and the Treasury does not know as muchpaying a fixed fee of insurance and walking away. I have discovered, although I have not yet been able to obtain the documentary evidence of it, that the banks are then promptly closing down the companies that they have insured. That is fraud in a real sense, as well as in a metaphorical sense. That is happening under the noses of the Treasury. There is no reason for that scheme. It does nothing to promote new lending, which is much better done by direction or through credit insurance of the kind that the Conservatives have promotedboth valid approaches to the problem. The scheme is also a massively expensive commitment for the British taxpayer.
Kelvin Hopkins (Luton, North) (Lab): I am following what the hon. Gentleman is saying with great interest, and I agree with much of it. Anatole Kaletsky, writing two or three weeks ago in The Times, suggested that if we completely nationalised RBS and it became a state bank, others would quickly follow, dominoes would fall all over the world and we would very quickly have a world where the banks controlled public investment. Publicly owned banks and state banks would run the economies of the world. I would welcome that, personally, because I am a socialist. Other people might not. Does the hon. Gentleman think that Anatole Kaletskys concerns are valid?
If non-socialists want reassurance, they should probably consider some of the models from when that has been tried before. The obvious one is Scandinavia, where the banks were nationalised and re-launched as private banks a decade later. That made money. I talked yesterday night to the ambassador of Israel. I did not realise this, but the Israelis had an enormous banking crisis 25 years ago, nationalised all their banks, cleaned them out and sold them on at a big profit to their taxpayers. Their banks have had absolutely no trouble in this recession because they were cleaned out and prevented, among other things, from engaging
in securitisation. There is a model that is not a socialist model but shows a practical, common-sense way of dealing with the problem.
I was talking about the asset protection scheme and it is probably worth quoting one of the more distinguished members of the Monetary Policy Committee, who was one of the first to serve on itWillem Buiter. His comments, I think, have been valued throughout this crisis. He notes:
Like its American and Dutch counterparts, this toxic asset insurance scheme is without redeeming social value: it is inefficient, unfair and expensive.
One positive bit of news about the asset protection scheme in the past week, however, is that it looks as though our second biggest bank, Barclays, will not use it. That is very good news. Barclays was probably scared off by the bad publicity surrounding the potential exposure of its tax activities, and the British taxpayer has therefore been spared a great deal of grief. That remains to be seen.
I want one issue clarified when the Minister sums up. Where do we stand on taxation and the asset protection scheme? It is very clear from the original terms issued by the Treasury that any company that wanted to avail itself of the scheme, whether it is nationalised or non-nationalisedthis provision is in section 5 of the Treasury paper on the schemehas to disclose any information available to it or any opinions given to it on tax matters. Within the last week, the Treasury has appeared to dissociate itself from that and has said that tax matters are entirely separate. When I asked the Chancellor of the Exchequer about that during Treasury questions last Thursday, he confirmed that from the Treasurys point of view, tax is a separate issue. Is it, or is it not? It seems to me, from the point of view of the taxpayers interests, that we cannot possibly use taxpayers money to underwrite banks that do not pay their British taxes but try to avoid them. There is massive ambiguity on that from the Government and I hope that they will clear it up.
Let me make one final point about the asset protection scheme. It is very clear that all the leading Treasury officials and several of the leading Ministers involved in the scheme are preoccupied, night and day, with trying to make the scheme operate. As a result, they are not focusing on potentially much more important issues. Why, for example, have the Government not yet focused on the problem of how to convert debt into equity? If many companies are over-leveraged and need to acquire fresh equity, which many of them do, the Government can use that process through their control of the banks. The banks have no interest in doing that, obviously, so the Government will have to require them to do it or to set up a scheme to do it. There is no evidence that that fundamental problem is even being faced.
We also know from the evidence given to us by many of the businesses that have talked to us that there is a major crisis in trade credit insurance. The system has completely broken down, which is one reason why supply chains are collapsing. I understand that in France that problem was fixed last December. It could be dealt with in the UK through the activities of the Export Credits Guarantee Department, but again it would appear that nothing is happening and that nothing is being done. The Government are clearly distracted from these important and pressing issues.
Mr. Todd: The hon. Gentleman may have noted my oblique reference in my intervention on the Chancellor to the fact that major, entirely credit-worthy companies with solid orders appear to be having difficulty with their loans from banks and the ECGD. Does he agree that further assistance may involve applying some compulsion to the banks under Government control to support those loans?
Dr. Cable: I am not familiar with all the details, but I believe that there are three specialist institutions in the business, none of which is now working. All their potential customers are being left high and dry, with disastrous consequences. That is a clear example of market failure: the Government should intervene and deal with such situations, but that is not happening.
Mr. Andrew Love (Edmonton) (Lab/Co-op): Before the hon. Gentleman moves on from the asset protection scheme, may I ask what alternative to it he believes exists? I understand some of the criticisms that have been made of the scheme, but how else can we deal with the problem of bad assets on banks books? The public-private scheme that the US Federal Reserve and Treasury Secretary have produced has been roundly condemned, but what alternatives are there?
Dr. Cable: There is no doubt that the bad debts have to be separated out, and in some cases it might be sensible to convert them into equity of some kind. At some point in the future, the bad debts can be sold off, but it is not clear to me that they are a priority. The overriding need is to get new lending going, and that is what the banks are not doing. The Government are trying, in a very oblique way, to create confidence in the banking system, when they should be directing the nationalised banks. That is the answer: the hon. Gentleman may not agree with that approach but, if he acceptsas my party doesthat there is no alternative to the de facto nationalisation of the banks and the effective direction of their strategy, the asset protection scheme becomes, if not unnecessary, then certainly a lower priority.
I turn now to this weeks G20 meeting. I agree with the Conservative shadow Chancellor that it was odd for the Chancellor not to address it at all. That was very strange, because the meeting is something that we should very much welcome. People in a negative frame of mind ask why we are having it and say that it is a waste of time and money, but of course it is not. The world economy is in peril, and it is absolutely crucial that there is a collaborative approach to the problems.
Some fundamental things can and probably will be done at the G20 meetingfor instance, on getting agreement on the IMF funding that many countries, especially in eastern Europe, need, and on securing a more effective role in decision making for China and the other emerging powers. Most important of alland again I agree with the Conservative spokesman on thisprogress will probably be made towards a meaningful agreement on preventing protectionism, both in traditional trade and more widely.
Those are obviously essential tasks, but I am perplexed by the overriding priority that the Government are giving in the short term to issues of international financial regulation. Of course we need such regulation, but many of the things that must be done can be done at a national level.
For instance, there is a broad consensus that banks will need to be regulated through their capital on a counter-cyclical basis, but that can be done at a national level. It is already in hand in some countries: Spain has tried to do it, and there is plenty of discretion in that regard in the European rules and the Basel process. There is no reason why countries need an international agreement before they get on and introduce regulation.
Another problem involves tax havens, on which the Government are quite rightly focusing. Tax havens are a long-term problem, in part because of money laundering issues but also because of tax policy. However, most of the tax avoidance in the UK takes place under the Governments nose and with the Governments full knowledge. In the case of the banks, it is happening with the active complicity of the British authorities. To say that there needs to be an international agreement to deal with the problem is perverse. That is simply escapism, and an example of our Government failing to face up to their responsibilities.
In conclusion, I want to make a final point about financial regulation. We have had Lord Turners report since we last debated the matter, and it is a very important milestone in how we look at financial regulation and the City. The debate has often been presented as meaning either more or less regulation, but that is not a sensible way of looking at the matter. There was plenty of regulation going on, and an enormous amount of box ticking, but the problem was that there was very poor supervision.
Supervision is not regulationthe two are fundamentally different. Custard pies may fly backwards and forwards across the Chamber about whether we need more regulation or less regulation, but that argument comprehensively misses the point. Plenty of institutions in the City do not need heavy regulation; for them, light-touch regulation is perfectly relevant, because they pose no systemic risks. What is absolutely clear, howeverthis goes back to the Cruickshank reportis that the banks were different: they needed to be supervised much more actively and regulated in a different way from other types of financial institution. That is the conclusion that should have been drawn.
Mr. Cash: Following the line the hon. Gentleman is taking on the importance of national supervision, does he rule out the proposals in the de la Rosière report and the European Commissions proposals to have European supervision of banking and financial services, which the Government appear to be pretending could be supervised at national level, when in fact the legal framework would be decided through the majority voting arrangements and the ultimate jurisdiction of the European Court of Justice?
Dr. Cable: I do not rule out the proposals in Mr. de Larosière report, which, as I understand them, involve much closer collaboration between European regulatorshe uses the concept of a college of regulators, I believe. Surely all our experience last autumn and the panic induced by the Irish independent policy on bank deposits suggest that European co-operation is needed more than ever. That is not to say that we would support an ending of national regulationthat is the bedrock on which the collaborative structure is based. A combination of the two is needed.
John Reid: The hon. Gentleman is making a most interesting speech, but does he accept the point I tried to make earlier, which is that it is not a matter of just regulation or supervision? Regulation and supervision are impossible if there is no transparency. If the counter-partys assets are completely untransparent; if some of the derivative products were not understood even by those who were selling them, far less those who were reinsuring them; and if the credit default swapsin extremis, verging on speculative gamblingare covered over the counter with a total lack of transparency, unless we have some way of putting the information in the hands of all the parties in the market, we will not have a rational market or the means to supervise and regulate.
Dr. Cable: The implication of the right hon. Gentlemans argument is that some sort of clearing house is needed internationally to create a market for those products. As I understand it, that has been agreed in principle. There is a particular problem with one type of derivativecredit default swapsbut most of the others, contrary to some pessimistic expectations, have not exploded in the way that was feared. Certainly, in that respect, effective international co-operation is needed.
In addition to the broader point on regulation, we may draw several conclusions from Lord Turners work, one of which is that he, like the Prime Minister, bottled out of answering the question whether the banks should be split into their relatively low-risk utility operations and what the Governor of the Bank of England calls their casinos. In practice, in a world of rather complicated financial products, that split is technically difficult to achieve, but the principle is right. I am pleased that the Opposition parties are of the same mind on that matter, and I think that many Labour Back Benchers take the same view. I am utterly perplexed as to why the Prime Minister, uniquely, seems to be standing in the way of such a reform.
Dr. Cable: At this stage, we are arguing about how we progress from that to a reformed system. In a world of securitised products, it is quite difficult to separate the two types of transaction, but that is what needs to happen. Instead, however, we are hearing a lot of excuses, based on technical problems, for failure to implement what people who have fairly sophisticated knowledge of the area, including many in the banking system, accept is a reform that simply has to happen.
To summarise, I welcome the debate. The Liberal Democrats agree with some of the points the Government made, but there are several points on which we disagree. We think that the approach to banks not accepting the responsibilities that go with nationalisation is fundamentally wrong, and we disagree with the make-up of the fiscal package. We believewe will deal with this when we discuss the Budget in a few weeks timethat, within a public financial system that we all recognise is highly constrained, there is a great deal of scope for rebalancing the tax system in the interest of greater fairness.
Ruth Kelly (Bolton, West) (Lab):
It is always a pleasure to follow the hon. Member for Twickenham (Dr. Cable). I always enjoy his arguments, about half of which I fully and strongly support, and half of which I disagree
with vehemently. However, he makes his arguments with great authority and I am pleased that he has now converted his party to the idea of a fiscal stimulus. Not many weeks ago, he argued that any tax cuts, or indeed spending increases, should be fully funded. While he correctly says that the fiscal stimulus is only part of the solution, at least he now accepts that it is something on which the UK and other Governments ought to be engaged.
I congratulate my right hon. Friends the Chancellor and the Prime Minister on the strong and robust leadership that they are showing. They are leading the way, across the globe, with a concerted, robust response to what must certainly be the biggest financial crisis within living memory. It is accompanied by the first global economic slow-down since the second world war. Indeed, the Governor of the Bank of England said only last week:
I cannot recall any previous experience of such a sudden, severe and synchronised downturn in world output of the kind that we have seen in the last three to four months.
Of course, most severe recessions are caused by mistakes made by policy makers, rather than by any global economic shock that has come along and hit the financial or economic system. We should never forget that it took the world years to recover from the 1929 Wall street crash. However, the problem was not a function of the crash itself, but of the response by global policy makers to that crash. It is timely to remember that the London summit in 1933 collapsed in disunity as the world retreated into a downward spiral of protectionism and depression.
Kelvin Hopkins: Is it not a fact that the depression in the 1930s arose, at least primarily, from the deflationist policies operated after 1929 by certain Governments, notably the Government of Germany [Interruption]and Britain? A degree of tariff protection enabled countries to reflate their economies. Protectionism came later, and actually helped the recovery. It was the deflation at the beginning that caused the problem.
Ruth Kelly: My hon. Friend is right in parts. Of course, the overwhelming problem was deflation, but how the world reacts to deflation decides whether it will manage to come out of it properly. There is always a case, in specific areas, for really well targeted tariff protection, but overall, the world system has to remain open to growth. We have to accept that 70 per cent. of world trade comes from developing nations. Without that contribution, the whole worlds growth would slow down. It was not until the Bretton Woods economic summit in 1945 that the world was able to unite to agree a new international economic and financial architecture that laid the foundations for half a century of peace and prosperity.
The G20 meeting this week is a huge opportunity for world leaders to agree to stimulate the world economy as much as is necessary, either this year or next, depending on their specific circumstances; to continue to take the measures necessary to restore trust in the banking system to get credit moving again; and to design a system to minimise the risk of any repetition in future. It is clear that, to date, Britain has been leading the way on the international stage, arguing for bank recapitalisation, designing an innovative scheme to protect and insure banks against toxic assets, and putting in place a significant
monetary and fiscal easing to stimulate the economy and get growth going againpolicies that are being replicated, in one form or another, around the world. Indeed, only this morning the OECD said, in an interim report on the world economy that it produced to inform the G20 meetings:
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