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Not that that exonerates the equal folly of the bankers who, whether out of ignorance or greed, also threw prudence to the winds. Of course, the history of banking is punctuated with examples of this. Given the recurring phenomenon of banking folly and the massive growth of overall debt, the need for adequate banking supervision is greater than it has ever been, because the failure of core banks can be a threat to the entire economy. That is why there has always been a
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We have seen worldwide a massive failure of bank supervision as banks have been permitted to boost their profitability by taking bigger risks—increasingly, risks they were unable to evaluate—while diminishing their non-earning capital. While the so-called Basel system, which was intended to prevent this, has been defective, the buck stops with national authorities, where the blame properly lies. This, above all, needs to be remedied.
The pattern of failure has not, of course, been uniform, although it has been extensive. Among major financial centres, Spain probably comes out best and the UK almost certainly worst. The FSA has already accepted that it was asleep on the job in the case of Northern Rock. However, in fact, it was asleep on the job across the board. Indeed, at least until very recently, if you looked at the FSA website and clicked on “What we do”, you would find a lot of things, but no mention at all of bank supervision. That, at least, was honest, I suppose.
As some noble Lords will recall, when I was Chancellor I was concerned about the inadequacy of banking supervision in this country, which is why I created the Board of Banking Supervision with the Governor of the Bank of England as chairman and the best former bankers I could find as independent members. Regrettably, when he became Chancellor, Mr Brown first removed any connection between the board and the Bank, then downgraded the quality of the independent members and then abolished the board altogether, leaving the task entirely to the FSA under the profoundly mistaken belief that financial regulation and banking supervision are the same thing. They are not. Banking supervision is much more like high-level auditing than financial regulation and requires totally different skills and totally different personnel. As a result, both here and indeed virtually worldwide, there has been a complete failure of banking supervision, leading to banks being hugely undercapitalised for the risks that they were taking; hence, the severity of the present crisis.
Now, the fire brigade has had to be activated and a massive rescue operation put in place to recapitalise the banks. I am very happy that that has happened. However, it clearly needs to be followed by the creation in all the major financial centres of an adequate system of banking supervision for the future. It is this, rather than a new Bretton Woods or a new international financial architecture, that is required. Talk of a new Bretton Woods and so on is just claptrap, and most of those who utter it have very little idea of what they mean by it.
Two things in particular will be assisted by getting banking supervision right. The widespread banking folly that we have seen has been caused in no small measure by a form of Gresham’s law of lending, which has meant that bad or imprudent lending has driven out good or prudent lending. This happens because prudent banks see their market share gradually fall as that of imprudent banks rises, so eventually they decide to protect their market share by emulating the
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Again, at present there is understandable concern at the wide range of institutions that have had to be rescued in one way or another by the authorities here and in other countries. That became necessary because the core banking system was allowed to become so undercapitalised and thus so fragile that the collapse of non-core institutions might well have brought it down. Adequate supervisory requirements, properly enforced, would have ensured that the core banking system was strong enough to allow non-core institutions, if they made their mistakes, which they did, to go to the wall, which would have been very much better. Therefore, it is clear what needs to be done to avoid a repetition not of banking folly but of banking folly on the scale that we have seen.
What, finally, do we need to do now over and above the rescue facilities that, happily, are already in place? There is of course no way that we can escape the recession that is already upon us. The greater the binge, the greater the hangover, and this has been the greatest consumer credit binge ever.
It is not just banks that need to rebuild their balance sheets; consumers do, too. The fool’s paradise of debt-fuelled prosperity has to end as consumer indebtedness—which, incidentally, as a proportion of disposable income is far higher in this country than even in the United States—is brought back within the limits of prudence.
However, the recession, although inevitable, can and should be mitigated. The inflationary threat will one day re-emerge but for the time being it has gone. As other speakers have already said, the time has now come for significant further cuts in interest rates, preferably on an internationally concerted basis. Among other things, this would greatly help confidence, which is always important at a time such as this.
I am not persuaded, however, that an attempted fiscal stimulus is desirable. Of course the budget deficit will rise as the recession erodes tax revenues and increases benefit payments, and that is no problem. But in the UK in particular, where, under this Government, the underlying fiscal position has deteriorated alarmingly, discretionary action to cause it to deteriorate still further would, in my judgment, be unwise. Public spending increases, other perhaps than accelerating sound infrastructure projects already in the pipeline, would be particularly unwise, slow to come into effect and hard to reverse, unlike interest rate cuts.
Temporary tax cuts, although less harmful, are probably also unwise. A temporary cut in VAT, although much talked about, would be prohibited under European Union law. But even if it were not, the numbers need to be borne in mind. As my noble friend Lady Noakes has pointed out, under this Government, the savings ratio has plummeted from 10 per cent to virtually zero as a proportion of disposable income. A recovery of that ratio is both inevitable and necessary. Even if it returns only half way, to 5 per cent, that implies a reduction in annual spending of roughly £50 billion, a sum way beyond the prudent or maybe even practicable capacity to borrow, over and above what will need to be borrowed as it is.
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I believe that any plausible, discretionary fiscal loosening would, at best, be of trivial use now while adding to the problems that already lie further ahead on this front. In short, the right answer—in so far as there is one, for the worst recession since the war is now unavoidable—is sizeable interest rate cuts now and, above all, proper banking supervision to prevent a recurrence on anything like this scale in future. And, of course, there should be no more nonsense about the end of boom and bust.
4.31 pm
The Lord Bishop of Chelmsford: My Lords, it is always difficult for us to come to terms with a fundamental truth that we are not in charge of events. Our world is so often changed and shaped by the unexpected. That shifts the political task from seeking to control events to one of responding to what is happening. We all know that a storm has hit us and our survival will depend on the quality of leadership and the depth of our shared vision and values. I share the noble Lord’s concern that, in the midst of the turbulence, the last thing we need is to collapse into mutual recrimination and blame. Lessons will have to be learnt, but a coming together by us all will be required to reconstruct that which is damaged by the storm.
As I know from my experience in Christian Aid during the tsunami, houses built on sand get washed away. Although this financial storm has not washed away the house of our economy, it has revealed cracks and faults both in our financial institutions and in our social culture. We now see a profound mismatch between personal and public morality, the behaviour of citizens and that of corporate institutions. In recent years, it has been obvious that we have been living far too dangerously. It has become okay in our country to live in debt as a short-cut to prosperity. We have sent our young people off to university and told them that it is now publicly acceptable to leave with £30,000 worth of debt. People have gone into banks and asked for mortgages of, say, £45,000 and been told, “Why don’t you have three times as much?” whether they need it or can afford to pay it back. “Things can only go on getting better”, people were told; “The risk is worth taking”.
I expect I am not alone in this House this afternoon in having friends who work for highly professional businesses that have been bought out, in recent years, by hedge funds—in one case I can think of, twice in five years—which do not have a clue about the professional character of the business they have taken on. The deal has been simply about profit in the short term, making money by the shortest route. That could not go on and certainly cannot go on.
As we know, storms have no respect for the integrity of people; the destruction is indiscriminate. Suddenly someone who has sought, with wisdom and prudence, to save for their retirement faces the collapse of the value of their investments at the same time—this is the ethical mismatch—as the high financier and banker walk away from the collapse with bonuses and income intact. The moral affront of the crisis is the way it hits the weak and innocent and leaves the culprit to go free and relatively untouched.
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The moral confusion is evidenced in the reality that at the same time as we are counselling people not to take on unsustainable debt, the Treasury is proposing to let the national debt free of past restraints. It seems that there is one rule for citizens and another for public authorities. That is the moral corruption of a time such as this. We all know that things are going to get worse for ordinary people. A storm leaves wreckage everywhere. Things have not only to be cleared up, but built on a better basis. I am particularly concerned for the poorest who are at risk of loan sharks. I echo the noble Lord’s question to the Minister. I thank the Government for what they have done for credit unions in recent years, but what plans do they have further to strengthen that facility across the country?
We need to assert some basic values such as: returning to spending what we have rather than constantly borrowing against an unknown future; encouraging people to save and to trust the security of their savings; moving away from a culture of debt and returning to banks and financial agencies helping people to manage their affairs with care and foresight; the public purse setting an example of the husbanding of our common national resources; and ensuring in the midst of this hardship that we target resources to offer as much protection and help as we can to those most at risk.
In thinking of those most at risk, will the Minister reassure us that the international aid budget and the targets that the Government have set for it are secure? This is an international crisis, and we fear its impact on the most vulnerable nations in our world, not just in the developed world. It is surely time for all of us to challenge this nightmare culture where people are encouraged to think that they can have what they want, be it the binge-drinking culture of some of our towns and cities or the binge-banking culture that has been going on on the markets. Only a sense of shared values and responsibility and a move away from this straight individualism into a community neighbourly life will enable us to live through to a better place. A time of crisis is a defining moment for us all. It is surely time to strengthen our common foundations and build a more sustainable financial and social culture for the future.
4.38 pm
Lord Blyth of Rowington: My Lords, since the present Government came to power in 1997, I have consistently described their presentation of economic news as somewhat disingenuous. I spoke in your Lordships’ House on 3 December 1997 when the then Chancellor had just removed the tax relief on dividends to pension funds, to which my noble friend Lady Noakes referred. Your Lordships will remember that the Chancellor described it as a tidying up of corporation tax. I said that it was nothing of the sort but a blatant raid on company pension funds. I recall I even put a number on it: £5 billion per annum. If we fast forward 11 years, the most dependable set of pension funds in Europe are no more. Nearly all final salary schemes are closed to new members, and the cost of this tidying up is put by most experts at £200 billion, so I seriously underestimated. Meanwhile nothing has been done to tackle the huge drain on the economy of the final salary schemes of local authorities, civil servants and,
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I could go on, but I would like to highlight two particular pieces of presentation that should not go unchallenged. We are told that the present economic crisis—it is indeed a crisis—is international in nature and that therefore the UK had no opportunity to escape any of it. The implication is that it is no worse for us than for any other country. That is not the case; it is worse for us. The US and the UK will prove to be the greatest sufferers from the housing market bubble. I put it to your Lordships that the UK will suffer more than the US; that is precisely why the pound is falling against the dollar.
The huge amount of churn or remortgaging in the market, coupled with the availability of 120 per cent self-certified mortgages, is already causing hardship and will cause hardship on a scale that will not be seen in other European markets. Consider a simple sum. If you took out a 120 per cent mortgage, spent the 20 per cent a year ago and the value of your house has dropped by 20 per cent in that year, you are not in a 20 per cent negative equity trap; you are in a 40 per cent trap. There is no economic bounce around the corner that will rescue you from that any time soon.
Why were those pernicious lending practices allowed to go unchecked by regulation? Much has been said on that already: partly because no one appears to have been quite sure whose job it was to check them; but partly because it suited the Government very well to have people believe that their house represented of itself a pension of sorts. The whole problem has been compounded, again unchecked, by the growth in the buy-to-let market. In the relatively prosperous city of Leeds alone, I am told that of 5,000 new-build apartments, 1,000 are either unlet or unsold.
Let me lead your Lordships across the water to the great state of Texas. Your Lordships will remember that Texas suffered horribly from the savings and loan crisis of the 1990s. What did it do? It passed a law that said that you had to have 25 per cent of the equity in a property even to get a mortgage. Texas will come out of this relatively unscathed, and so could we have done.
The last piece of disingenuousness that I would like to expose is the Government's plan to borrow and to spend our way out of recession, instead of dramatically cutting interest rates and costs. The first thing to say, which, again, has been much commented on, is that that is a return to 70 year-old Keynesian economics. The second is that the Government have not a clue whether it will work. I suspect that it will not, for several reasons. First, our national debt is already at record levels and the decreasing value of the pound against other key currencies is set to cause the cost of increased borrowing to rise significantly. Secondly, as
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If I sound like a prophet of doom, I apologise to your Lordships, but Britain has already slipped to sixth in the GDP league table behind the USA, Japan, Germany, China and France. I suspect that that plan will drop us below Italy.
The Chancellor said on television last week that a precondition of the rescue package for the banks was that they should lend at the same rate as they did in 2007. The use of the word “rate” gives him some wiggle room, but not a lot. The economic conditions of 2007 are no longer with us. Businesses—builders, for example—which may have been perfectly good lending risks then no longer are. Had the noble Lord, Lord Myners, still been with us, I should have asked him, because I know him to have been an extremely prudent banker, whether he would agree that it would be imprudent to lend to such businesses and that it is therefore impossible for the Chancellor to fulfil his promise.
4.44 pm
Lord Haskel: My Lords, as other noble Lords have said, the past few weeks have seen some extraordinary events, which will impact on the lives of us all. So I welcome this debate to try to understand better what needs to be done to ensure that we all get through the difficult times ahead. First, let me deal with the politics. Noble Lords opposite say that this crisis is the Government’s fault because, as the Minister reminded us, we did not fix the roof when the sun was shining, or share the fruits of growth, or put something aside for a rainy day. This is sloganising; it is not a serious attempt to get to grips with a difficult situation.
This is largely a financial crisis, which was caused by mistakes and misjudgments made in the financial sector. I think that the mistake was for the financial sector to think that it no longer needed properly financed institutions to carry risk and that the market could do it. To a large extent, we all believed that. But when this was tested and carried to excess, the whole thing collapsed, which is why the Government were absolutely right to recapitalise the banks. We need institutions with capital in reserves to carry financial risk for business and for the public. We cannot leave that to the market. Someone famous said that the first responsibility of leadership is to define reality, which we did and we acted. No amount of moralising, sloganising or interventions by noble Lords opposite is a substitute for understanding the reality and acting.
Where do we go from here? Certainly, we should move towards better regulation and supervision to stop this happening again, and to save the financial sector from excess and its own inadequacies. This must be done in the open and not in the dark. Regulators will have to be able to impose heavy penalties if timely and accurate information is not provided.
If we are not to end up in the bizarre world of Sarbanes-Oxley regulation, one matter has to be resolved. For many years, we have known that there are two
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This conflict has been well spelt out by Tomorrow’s Company in its recent paper, Tomorrow’s Owners, which puts it that the financial ownership role of shareholders now far outweighs the stewardship role of shareholders and that unless it is brought back into balance, our economy will suffer in both the financial sector and the real economy. If the rights and duties of stewardship are equally balanced with the rights and duties of ownership, less regulation will be required, especially for banks, which is the concern of most noble Lords who have spoken.
Last week, in his maiden speech, the Minister spoke of the benefits of good governance and effective regulation, and how he would like to continue to promote this in his ministerial role. Recently, the Prime Minister spoke of the need to address fairness, stewardship and co-operation in our financial system. It seems that they are speaking of morality of ownership in our financial system, which needs to be addressed. I put it to the Minister that a time of crisis is the time to address it, because renewal often emerges from crisis.
Meanwhile, the Government have to do what they can to keep the economy going. I welcome the pressure that the Government are putting on banks to provide credit to small and medium-sized enterprises. I welcome the help from the European Union and I agree with the noble Lord, Lord Bilimoria, that this is not enough. But lenders have to be given some discretion. It is no use insisting that they lend to businesses that are basket cases because we are only postponing the inevitable and repeating one of the errors that got us into this mess in the first place.
The noble Baroness, Lady Noakes, said that we should nurture the economy. I would like to see nurturing that will not only retain jobs and keep businesses going, but help to transform them. So I agree with the noble Lord, Lord Newby, that it is right that we should continue to encourage skills training, and indeed enlarge on it. We know that without skilled personnel, our position in the global economy is threatened. I urge the Government to implement the Education and Skills Bill currently in your Lordships’ House. We must extend education and remove barriers to further learning, encourage both new skills and upskilling. All this must help people stay in work and benefit our economy. There may be some dispute over the need for compulsion, but there is certainly no dispute over the objectives. In spite of this crisis, I hope that the Government will continue to invest in and encourage skills training and education.
The noble Lord, Lord Newby, spoke of balance. With the inevitable decline in financial services, manufacturing will have an important role to play in achieving balance in the economy—and it can do this. Manufacturing is rapidly learning how to operate in a market that demands less waste, less cost and less energy but more variety, more complexity and more technology. The same argument therefore applies: we
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I hate to quote Keynes again, and I am sure that eminent economists in the Chamber will correct me, but I think it was he who said that the major barrier to developing new ideas is escaping from the old ones. Let this crisis encourage that escape. Noble Lords opposite say “don’t spend”—the noble Lord, Lord Blyth, just said so—and that instead we should reduce taxes. That may help companies in the short term, but the spending I have outlined will help companies keep going while at the same time help to transform the economy. In the end, it is that transformation which we must achieve. I urge the Government to continue borrowing, but to explain why very well.
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