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I welcome most of the schemes that the Government have announced. They are important because, as others have said, the real economy has gone into recession.
The national debt amounted to half a trillion pounds even before the banking crisis began to bite, and that left nothing in the tank to stimulate the economy when the downturn came. As a result, every action that the Government have taken has effectively been predicated on increasing the national debt to £1.2 trillion in a few years.
Even that may not be enough, if the recent forecasts that the Government are out by £100 billion this year alone are correct. To put that in context, that is a debt equivalent of £50,000 per UK household, but if all the contingent liability for the banking bail-outs and the off-balance sheet PFI stuff is included, we may well be talking about a national debt somewhere north of £2 trillion.
The Government oversaw the creation of a house price bubble, allowed too much credit into the system in the early part of the cycle and had nothing in the tank to stimulate the economy when the recession came. All we had were their foolish claims to have ended boom and bust, but the real economy went into a hideous recession, with output down, capacity lost and unemployment at 2 million. We have suffered the largest ever single rise in unemployment, and many of our constituents are in a pretty miserable place, but the difficulties in the banking sector almost overshadow those faced by real people in the recession in the real economy.
I want to speak briefly about what might be called the public genesis of the recession in the UK—the Northern Rock crisis. On 14 August 2007, the Bank of England was made aware of the difficulties in Northern Rock. Shortly afterwards, the European Central Bank, followed by the US Fed, Japan and Canada, pumped huge amounts of money and liquidity into the banking system. On 12 September 2007, the Bank of England rejected that approach. The run on Northern Rock began on 13 September, and it was five months before the company was finally nationalised on 17 February 2008.
The lack of capital was such a problem—although it was not recognised at the time—that we have recapitalised the banks. We have had the facilitated takeover of Bradford & Bingley, whose mortgage book has been taken on by the taxpayer, and we have pumped hundreds of billions of pounds, in one form or another, into the banking system, but the Banking Act has only just been passed. However, we do not have legislative proposals yet for new banking regulation, even though many recognise that weakness in that regard was a significant part of the problem.
I welcome the asset protection scheme, even though it amounts to open-ended insurance on the banks’ excess bad debts, because it will insulate the toxic debt, remove the fear of default and give banks back the confidence to lend to each other. However, the Government have placed untold billions of pounds of liability on the public books even before the new banking regulations are place.
Let me bring the banking story up to date with the sale at the weekend of Dunfermline building society to Nationwide. I have no problem with Nationwide—it is a good building society—but the story has parallels with those of Northern Rock and HBOS. The Financial Services Authority ought last October to have concluded a deal to recapitalise Dunfermline building society, at a cost at that point, it is reported, of some £20 million. Apparently, the FSA did not have the people needed to
conclude the deal. We ended up yesterday with the announcement of the transfer to Nationwide, including £1.6 billion in net financing to cover the value of the deposits transferred, plus the liability of the bad debts, mainly the commercial loan book, being taken on by the taxpayer. That five-month delay was unnecessary.
In addition, as happened with HBOS, when the Government panicked and did the deal, they excluded other potential bidders: in the Dunfermline’s case, as we found out yesterday, Scottish Friendly had put in a serious bid to solve the problem, but was ignored by the Government. The Lloyds-HBOS deal was forced through in much the same way.
Of course the banking fixes are expensive, but as important to fixing the real economy are many of the Government’s other actions, including the fiscal stimulus package, which I support, although I shall discuss the detail in a minute. However, as I have said before, I would like to see recognition of the fact that in February, April, October and November 2008, the United States, Spain, France, Japan, Germany and others announced stimulus packages—well in advance of the UK.
On the stimulus package, in particular the VAT cut, although I think we need fiscal stimulus, I do not think that monetary policy will be enough. We found a week after the VAT cut was announced that the same sum directed to direct capital investment would have preserved or protected more than twice as many jobs. That would have been a far better route to go down.
The health or otherwise of the economy generally and the success or failure—or even the commencement of delivery—of the Government’s initiatives are of equal, if not greater, importance to helping business craft a recovery from the recession. One of the key features of policy is the enterprise finance guarantee scheme, but of the £1.3 billion promised, only 5 per cent. has been allocated since January. As for the other schemes—and in no particular order—only £100 billion has so far been drawn down from the £250 billion announced to support interbank lending; the consultation on the house sale and rent back scheme will not report until May; and the home owner mortgage support scheme, which is even more complicated, fiendishly so, is not properly up and running. According to answers I received from the Treasury four weeks ago, not all the re-profiled money brought forward to be spent in the next financial year has yet been allocated to specific projects. All those schemes are essential. Why were many of them not properly worked out and ready to go before the press release was issued?
We can also clearly measure the impact of the recession on business, not simply through the rise in unemployment but in other ways. I was struck by the purchasing managers index scoring for January, which is well below any indication of an upturn in the economy. The spokesman for the Chartered Institute of Purchasing and Supply said that the sector reported an “anaemic opening to 2009”, with record falls in employment in factory jobs. I understand that 30,000 factory jobs are being lost every month. He went on:
“While the weaker sterling exchange rate acted as a crutch to prop up export orders, benefits were offset by the downturn in global demand.”
However, the weaker exchange rate is also acting to exaggerate inflationary figures for essential imports, as we saw only last week in the contradictory messages given by the consumer prices index and the retail prices index. Even with sterling down 15 per cent. against the euro and 27 per cent. down against the dollar, the balance of trade figure for the whole of 2008—a £46.1 billion deficit—is barely changed from the £46.5 billion deficit of the previous year.
Kelvin Hopkins: Will the hon. Gentleman give way?
Stewart Hosie: No. I have nearly finished and it would not be fair.
The position may be made worse if the quantitative easing programme fails to deliver what the Government expect.
In the few seconds left, let me make two pleas to the Government. First, they must get the schemes they have announced up and running properly and stop announcing new ones. More important, they must get before the House the legislative framework for any new banking regulation we need, including the appropriate early warning systems promised some time ago, so that we can consider it fully and quickly, and get it up and running as well.
7.35 pm
Ms Sally Keeble (Northampton, North) (Lab): I listened with great interest to the hon. Member for Dundee, East (Stewart Hosie), who made several important points about the need to deal with banking regulation. We in the Treasury Committee have been examining key points relating to regulation.
I find it surprising that all the Opposition parties are so opposed to the Government’s active intervention to tackle the present crisis. I understand the Conservatives taking that position, because they believe in a small state and, unlike Labour Members, they do not take the view that, in a recession, the state should actively intervene, but I am surprised by all the Opposition parties taking that view. I am especially surprised by the attitude consistently taken by the hon. Member for Twickenham (Dr. Cable). I believe that the interventionist approach taken by the Government, risky though it is, is the right and the only way to tackle the crisis and kick-start the economy out of recession.
I shall look first at the monetary side. The asset purchase facility is the right policy; the one thing I would question is whether the release of the funds has not been a bit cautious. The scheme has now moved beyond gilts and on to commercial paper and some of the riskier products, but still only half of the facility has been used. I was interested to hear—I cannot remember which Front Bencher said this—about the 0.5 per cent. fall in long-term interest rates, which is perhaps the first sign that quantitative easing has been working. That is precisely what is supposed to happen and what will hopefully start to get the money flowing through the system, making it work again.
The Government were also right to introduce the asset protection scheme. It is right to insure and not to nationalise, because the functions of banking are essentially market functions and belong in the private sector. We should not nationalise them. The valuation of the assets
subject to the asset protection scheme is not yet known, nor is it clear when the losses, if any, will crystallise. We have to hope that the losses are limited and that, in fact, the taxpayer does not have to pay out the full value of the assets.
People have spoken as though the Government have done all that without asking for anything back, but that is not true. Agreements have been made with banks that have accessed the recapitalisation funding and the asset protection scheme that they will lend at 2007 levels. The Government have been clear about that. In the original statement to the House, my right hon. Friend the Financial Secretary said that he would report back after a year. At that time, several of us pressed him to report back month by month. I hope that he will accede to those representations and report back monthly on the lending position of the banks. To encourage that, I have tabled questions and will continue to do so, so that we get information on bank lending levels.
Public patience with the policies, good though they are, will run very thin indeed if the banks continue to fail to honour their side of the bargain. We have all heard stories about that in our constituencies; I have in mine. I have heard of cases in which banks have not only not been lending, but have trawled through the facilities that they have provided and have called them in. In my area, in spectacular fashion, HBOS called in a £2 million loan on a property that is part-way built, and which, I am assured, has tenants signed up for when it is completed. We need to be absolutely clear that in return for the taxpayer providing the insurance for the toxic assets—getting them off the banks’ balance sheets, so that the banks can start to lend again—the banks will keep their side of the deal and lend at 2007 levels.
The other side of the equation is fiscal policy. There has been much discussion about a second fiscal stimulus. It is really important that the Government do not pull up the drawbridge on public spending just when the recession is starting to hit some of the most vulnerable people. The Governor of the Bank of England’s expectation was that as quantitative easing worked, and as money started to flow through the system, the demand side of the economy would pick up. That is very much a trickle-down approach. It assumes that we have time to sit and wait while that happens, but we do not.
In addition to looking at what is happening with the money supply, we have to deal with the social consequences of the recession. It is important that the Government use the fiscal measures at their disposal, as they are not in charge of the quantitative easing or the short-term interest rates. They should use fiscal policies—the tools that are at their disposal—to increase demand, and to protect some of the most vulnerable members of the public from the consequences of the recession. I shall identify two particular ways in which they should do so. The first relates to a point that David Blanchflower, a member of the Monetary Policy Committee who is about to retire, made in a powerful presentation in Portcullis House recently. He said that of the 600,000 young people leaving school this summer, an estimated 300,000 will be unemployed. We cannot tolerate the idea of 300,000 young people—plus some university leavers, no doubt—finding themselves unemployed. His report also pointed out the long-term consequences for young people of a period of unemployment early in their lives.
I now come to the second respect in which we cannot just wait for the trickle-down effect, and hope that it will happen. We must protect people who risk losing their homes. We have all seen the figures on mortgage arrears and repossessions. I join in the criticism that I am sure that other people make about the mortgage rescue scheme not yet being online. I am extremely concerned about the fact that the mortgage interest support is linked to income-based jobseeker’s allowance, and not contribution-based jobseeker’s allowance. I am also concerned about the fact that it runs only for two years. That will create real pressure for a good number of families.
If I have a particular ask for my right hon. Friend the Financial Secretary, it is that in the coming Budget there should be measures to tackle unemployment among young people; perhaps that could be done through a reduction in national insurance and tax contributions for employers who employ the under-24s. That would help both businesses and young people. My right hon. Friend should also link the mortgage interest support to tax credits. That would give us a more flexible instrument with which to support families who risk losing their homes. I strongly support the measures that the Government are taking, but I hope that they will put in place small, targeted fiscal stimuli, even if they think that one big one is out of order, to protect some of the most vulnerable people from the impact of the recession.
7.44 pm
Mr. Richard Spring (West Suffolk) (Con): In his Mansion House speech in June 2007, the Prime Minister actually congratulated the City on its global pre-eminence and looked ahead to furthering the objective of light-touch regulation. Today we can look at the wreckage of the failed tripartite regulatory system, the deterioration of our international competitiveness and a massive increase in the involvement of the state. The pound sterling was then riding high. Today the world has made a judgment on us via the performance of our currency, and it is damning.
We have a chronic trade imbalance, and a recession that is severe and likely to endure for longer than in any other industrialised country. Of course, to a greater or lesser extent, no country is unaffected by the world downturn. We see in this crisis how globally interdependent we are. There was an unspoken mutual interest in the United States purchasing Chinese goods in exchange for China’s accumulation of massive dollar reserves, but clearly that is now ending. It may be that as a result of the G20 meeting, there will be more agreement to share in the monitoring of financial activity internationally, and an enhancement of the funds available to the International Monetary Fund, but the fact that the Chinese floated the notion of a new international currency mechanism, which was not rejected out of hand by the US Treasury Secretary, suggests that the total dominance of the dollar since world war two is destined to end. We may be witnessing, in this credit crisis, the beginning of a hugely significant shift in the world order.
Whatever the final communiqué of the G20 spells out, it will still leave this country in the midst of a terrible hangover of excessive public and private debt, which will cripple us for years to come. The Prime Minister, then Chancellor of the Exchequer, gave the Bank of England a core remit of keeping inflation low.
In 2003, under the guise of trying to achieve pan-European measurement comparability, house prices were excluded from the measurement of inflation. That was a tragic error, because on the back of a substantial rise in money supply, interest rates were kept too low for the credit free-for-all that ensued and the huge resulting increase in private debt. Northern Rock could offer 125 per cent. mortgages.
With cheap Asian goods flooding the country, inflation, as measured by the Bank of England, looked unrealistically low. That is something that the Governor of the Bank of England now regrets. Given the importance of home ownership in this country, and our traditional investment focus on residential and commercial property, it should now be a matter of the utmost importance that the Bank of England reviews how housing costs can be assessed for inflation target purposes, and that the macro-prudential role of the Bank of England incorporates consideration of asset prices. Never ever again can we suffer a repeat performance of the policy that led to an asset bubble being effectively excluded from interest rate policy.
The transfer of banking supervision to the Financial Services Authority was quite simply wrong. Individuals of the highest calibre in the Bank of England had monitored banks’ activities for generations. Of course, no regulatory system has been or ever will be perfect, but I have often heard how much that accumulated wisdom and experience was valued, giving the Bank of England a credibility in the world that is now much diminished.
We are entitled to look at how our tripartite system failed us, and so compounded the problems that arose from unfettered credit and asset expansion across the world. That has been well spelled out in the Turner review. We know that officials in the Treasury, the FSA and the Bank of England were aware of growing imbalances, but none took responsive action. There was a clear failure to recognise the extent of the systemic nature of the unfolding failure. The inability to act was a fundamental flaw in the system—a system that was of the Prime Minister’s creation. We understand that, incredibly, the three principals hardly ever met formally; that is woefully characteristic. To announce a policy, but to then be incapable of dealing with its implementation, is a hallmark of the functional incompetence of this Government.
We need carefully to consider how, in future, macro-prudential regulation is to be managed. Looking ahead, I believe that we have to revive the central role of the Bank of England. What the public rightly demand is that this terrible crisis is not repeated and that at the very heart of our regulatory system of financial services is a clear pre-emptive remit. Its ability to assess and dissect the continuing pattern of change which invariably arises in the financial sector, to ensure financial stability and to understand and interpret the marketplace is for the avoidance of both systemic and excessive individual corporate risk. We need a 21st-century version of the Governor’s eyebrow—a focus and influence that the FSA will simply never be able to achieve.
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