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6.52 pm

Lord Barnett: My Lords, I thank the noble Lord, Lord Saatchi, for his reference to what I have said on a number of occasions about those three little words, “subject to that”. In return I will support his Bill if it ever has the slightest chance of getting on the statute book.

I broadly support the Government’s proposed action. Indeed, I wish to speak briefly on the question of action rather than on the history, short or long, of the past. I believe that the Government are broadly right. What they are doing gives us at least a chance—I put it no higher than that—that the recession that we are about to go into will be shallower and shorter than might otherwise be the case. However, I fear that the alternatives of the Opposition offer nothing at all; they are virtually gloating about the depth of the recession. The noble Baroness, Lady Noakes, ended her speech by telling us that they have a plan, but understandably she did not tell us about that plan.

I turn first to the Government’s proposals. While this is not a proposal, the Government have implied that there should be cuts in interest rates. I strongly support that. One reason why I was unhappy about the three little words was that I feared what the Governor of the Bank of England would or would not do. I fear now that the current governor and the MPC may well not cut interest rates as much as they should. If we are in the kind of crisis that we all agree we face, I am not happy to leave it solely to the MPC, and particularly this governor, to decide what interest rates should be. The Bank of England Act allows the Government to overrule the MPC and decide the interest rate. In the current crisis, I would strongly support and commend such action. However, I accept what the noble Lord, Lord Skidelsky, said: cutting the base rate is not necessarily the same as cutting interest rates, especially as they are in the hands of the same banks whose recent behaviour has done so much damage to our economy.

I come to the second of my conditions in supporting the Government. Increased liquidity for the banks was absolutely right, but my worry, as with interest rates, lies in the fact that I cannot trust the bankers to decide how the liquidity should or should not be used. The noble Lord, Lord Bilimoria, and others have spoken about helping small businesses and householders. There are all kinds of ways in which the liquidity that we have provided to the banks can or cannot be used. My right honourable friend the Chancellor has rightly said that he does not propose that he or any other Minister should run the banks.

My worry is focused on the bankers who are running the banks, because they have not shown themselves to be very successful in doing so. The plain fact is that at the moment they are not lending to small businesses. Having greedily used all kinds of methods to increase short-term profitability in order to get high bonuses, they are now not willing to lend to the people to whom

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they should have been lending in the first place. Small businesses desperately need this finance, but they are not getting it. I worry that this increased liquidity will not result in lending to small and medium-sized businesses that could use the money to the advantage of the economy, bringing it out of the recession more quickly. I am concerned about how the banks will behave.

Many speakers have argued quite rightly for greater supervision by the FSA than we have seen so far. We know about the enormous errors on the part of the FSA under its previous leadership in the case of Northern Rock and I will not repeat what has been said. We now have a new leader for the FSA, but it is still working under the same rules. That is not good enough. We need the authority to be given instructions or a remit that banks must use the money that we the taxpayers have provided to lend to small and medium-sized businesses. That does not rule out decent bankers deciding that some businesses do not deserve any more money and should go bust. Of course that is the case, in the same way as small borrowers in households will have to be allowed to go bust, although early repossessions should be stopped. We must not take work away from those bankers who know best how small businesses are behaving. My worry is that bankers do not always know best because the old bank manager does not exist. I have an account manager, but I can never get hold of her unless I send an e-mail. I cannot reach her with a telephone call. That service does not exist any more.

My last main point relates to increased borrowing. Should the Government be borrowing more? I worry that, if they lend now, action will come only much later. Where there is an easy way of lending to someone who can quickly spend the money to the advantage of the economy, that is all right, but not otherwise.

I have one or two questions for my noble friend who is to wind up the debate. She is not in her place, but I am sure that my noble friend Lord Myners, whom I welcome to his position, will answer. I am worried not about investing in and saving these banks—I agree with that—but about the prices being paid. For example, shares in the Royal Bank of Scotland are to be bought at 65p each. How did the Government work out that value? Was anyone given due diligence on that—not that I would trust anyone to show due diligence on toxic assets? How did they look at those toxic assets? Did they look off balance sheet to know what the value of RBS was? I declare a brief interest in that I bought a few of the rights shares at £2 a share just a few months ago, I am sorry to say, but I do not know whether 65p is the right price now. Perhaps my noble friend will tell us whether proper due diligence was given to that and other banks to find out whether the share was worth even 65p. On that, I leave it to the Government to do all that I have asked them to do. I hope that they will.

7.01 pm

Lord Tugendhat: My Lords, the strictures levied at the banks by the noble Lord, Lord Barnett, are, in many cases, well taken. It behoves us all—certainly me and those of us who have earned our living until recently in the banking industry—to approach this

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debate with a certain amount of humility. But so should the Government. Whatever the faults of the practitioners—and there have been many—it was the Government who constructed the regulatory framework and presided over it and it was the Prime Minister, as he now is, who was for ever telling his European partners how marvellous things were here and who always wanted to be associated with what was going on. If, as the Prime Minister says, there has been an age of irresponsibility, in this country he was the master of the revels and the noble Baroness, who will be returning to the Front Bench soon, was his page.

Their mentor, the grandmaster of the revels, was Mr Alan Greenspan, the man who opened the new Treasury building. It will not have passed unnoticed in the Treasury that Mr Greenspan has now eaten a certain amount of humble pie; he has looked closely at what has happened and has admitted that perhaps he made errors of judgment in certain respects. It behoves the Government to follow Mr Greenspan on the way down just as they followed him on the way up.

It is true that other countries are suffering great difficulties, as the Minister pointed out, and that some of them are in a much worse situation than we are. But, although the storm began in the United States and is blowing across the world, certain features of it are particular to this country and are the responsibility of the Government and, in particular, the Prime Minister as the Chancellor of the Exchequer for so many years.

That said, I give the Prime Minister credit where credit is due and congratulate him on the way in which the recapitalisation of the banks and the attendant measures were put into effect. The British Government have set an example that has been followed elsewhere in Europe and in the United States and they deserve praise for that. So, too, does the Conservative leadership for supporting those measures, which is not what opposition leaders always do. It is worth pointing out that this time they did and that they deserve credit for it.

So where do we go next? Clearly the whole system of financial regulation and oversight must be looked at again from the bottom up—not only with regard to banks but with regard to insurance companies, hedge funds and the role of shareholders, who were for ever pushing management forward into taking greater and greater risks. The Minister and the House will recall that Lloyds was attacked by its shareholders for not doing the kind of thing that HBOS was doing, and we can see where that has ended up. All these players need to be looked at in the context of an overall review, as does the role of auditors.

In the time available, I shall make only one point at this stage. The primary responsibility for banking regulation should rest with the FSA rather than with the Bank of England. I agree with my noble friend Lord Lawson that regulating banks is not the same as regulating other institutions and requires particular skills—one might almost say particular arts—but I would place the primary responsibility with the FSA rather than with the Bank of England. Banking regulation is a thankless and controversial task, involving much

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public hassle and reputational risk. The Bank of England found that as it grappled with the secondary banking crisis in the 1970s and later with BCCI and Barings, to name only two.

Today, unlike in those days, the Bank of England’s primary responsibility is monetary policy. Its ability to command public support and respect in that role could be seriously compromised if it was also held responsible for problems that arise in the banking sector and the way in which they are handled. Again, one needs only to look back at what happened with BCCI and Barings to understand the point that I am making.

This brings me to the question of monetary policy. Here I am very much with the majority. I agree with my noble friend Lord Griffiths that the Bank of England should cut interest rates when it next meets. I should like them cut quite sharply. I agree with Martin Wolf in the Financial Times that it cannot make sense for US rates to be 1 per cent while the United Kingdom’s are 4.5 per cent. Last year, the Bank of England was slow in injecting liquidity into the system compared with the Fed in the United States and the European Central Bank. This year, it has been slow in cutting interest rates. I hope that, when the events of the past few months, or even the past couple of years, are looked at and when conclusions are drawn about the role of different institutions—of the Government, of the banks and of the FSA—the role of the Bank of England will also be looked at. So far the Bank of England has escaped a little easily during the debates over what has happened. I look to it now to cut interest rates. At this stage, the principal effort in combating the recession should be on that front.

No general throws all his weapons and all his troops into the beginning of a battle and we should see how we get on with monetary policy. I hope that we can avoid drastic fiscal measures and too much in the way of public spending, tax cuts and so on. However, in the circumstances in which we find ourselves, while we should rely on monetary policy now, the Government would be wise to make preparations for other measures should they be needed.

7.08 pm

Lord Lea of Crondall: My Lords, I look forward to hearing more in future from my noble friend Lord Myners, whom I welcome to the Front Bench. I also look forward to reading his memoirs in due course to discover how this job compares with the others he has had.

I am quite sure that the instinct of the British public at the present time is that the Government have shown courage and good judgment on the handling of the crisis and the recapitalisation of the banks. I regret that the support from the Conservative Party seems now to have been withdrawn, but I suppose it was only a matter of time. A comparison has been made several times today with the crisis of 1929-31 but, in practice, I never detected any Labour anxieties that this time round we could be in for a rerun of the Ramsay MacDonald episode. I do not recall bank nationalisation featuring in the programme of the National Government.

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This may or may not be the time for a public inquiry into the banks’ suicidal leverage policies, but that time will come. In the past few months, we have seen in the financial sector the nemesis of the casino, to use Keynes’s metaphor, whose players have leveraged their way to the biggest fiasco since 1929-31. One could spend all one’s speech pointing the finger at those responsible. The fact that Wall Street has done something similar in no way absolves the City of London. As the chief executive of, I think, Citibank admitted, they were all dancing faster and faster until the music stopped.

The banks seem to have had a herd instinct. Paradoxically, that seems to be a consequence of the oligopolistic competition between them so that they have all gone over the cliff together, like the Gadarene swine. It is no defence to say that they were trying to take on sub-prime commitments to help the lower paid in the mortgage market; mutual building societies did that for years and did not get into trouble. It is the doubling and trebling of the leverage ratios that did the damage, and I have to echo other speakers by saying that the Bank of England and the FSA appeared to stand idly by. The Americans have just discovered that rates as low as 1 per cent are not doing the trick on the recovery, so the manifesto of the right-leaning gang of 16 economists in last week’s Sunday Telegraph is not proven, even by the Federal Reserve.

The present conjunction of circumstances is precisely what Keynes had a lot to say about in the General Theory—namely, the ineffectiveness of monetary policy when banking failures are triggered by falling asset prices. His solutions, including greater public spending funded by borrowing, have been criticised on the ground that they increase long-term public debt. They were not calibrated, as I think the noble Baroness, Lady Shephard of Northwold, stated, on accrued surpluses. That is not really the problem, though, if one looks at the reverse scenario; namely, economic collapse. In a mixed economy welfare state society, debt in Keynesian recovery will first go up and then go down again when, after the downturn, we get back to an economy working at high levels of employment, producing the spending power and the tax revenues that will enable productivity to go forward. The key is aggregate demand. That is one reason why demand management is good also for people in developing countries, and we provide them with the market. Here we are faced with the most obvious demonstration of the fallacy associated, rightly or wrongly, with the noble Baroness, Lady Thatcher, and dutifully followed today by the noble Lord, Lord Forsyth of Drumlean, that the finances of the economy in aggregate can be regarded like the finances of an individual household.

What are the people of Burton-on-Trent supposed to make of all this? They are bewildered and short of confidence in the motives and actions of the financial services industry. They see a grotesque inequity in the rewards for top executives in the sector and the average man and woman in the street. When you boil it down, it was the average household that was paying for those £20 billion bonuses last year and the year before. To add insult to injury, the figures jack up the average earnings index due to the way that the ONS does that arithmetic, sending out perverse signals about inflation.

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I have not yet heard anyone say that this crisis is all the fault of the workers, but I am reminded of the old dictum; “It’s the poor what gets the blame”.

Another dictum, which has obviously occurred to the noble Lord, Lord Smith of Clifton, who unfortunately is not in his place, is that in “The Mikado”; “Let the punishment fit the crime”. I do not know who the noble Lord had in mind for the role of Lord High Executioner—maybe Arthur Scargill, but I think Arthur Scargill would have been far too squeamish. The serious point is this: we have not heard too many apologies from the City of London, have we? Frankly, some apologies are long overdue. Instead, though, we have had the not atypical speeches from the Conservative Benches saying that, whoever’s fault it was, it was certainly not the fault of their friends in the City. There have been some exceptions to that, but that is the tone coming across from the other side.

On the macroeconomic side, with the debate raging about the merits of what John Maynard Keynes may have said, having read my economics at Cambridge all those years ago and being in the presence of distinguished economists inter alia on these Benches such as my noble friends Lord Peston and Lord Eatwell, I presume to point out that Keynes did not say a lot of the things he is caricatured as having said. What is true, though, and what is central to the Keynesian revolution, is that when there is a lack of confidence and the prospect of a deep recession, simply relying on cutting interest rates is like pushing on a piece of string.

I strongly welcome the fact that the UK, and Gordon Brown in particular, is helping to give strong direction to the European Union. The EU should play a central role in drawing up global rules, and it is welcome that the Labour Government are giving a lead in Europe and in the world to bring some better co-ordination and order to financial markets. I agree with the implication of the noble Lord, Lord Taverne, that the City of London could remain as a financial centre of Europe as part of the euro-zone. We cannot in this country for ever go on having our cake and eating it.

My final point is about new banking assistance to small firms and so on. Some years ago, I had a hand in writing a TUC Labour Party policy statement setting out the case for a national investment bank. Of course this was howled down with derision in the City pages of the newspapers. I welcome the new initiatives by the European Investment Bank. A national investment bank, however titled—the noble Lord, Lord Bilimoria appears to recognise that a new publicly accounted facility is needed—could work in conjunction with it. I note that the TUC and the CBI in Wales are in fact now working towards that idea.

We have to avoid the recession tearing up the social contract, if I may use that term in the broadest sense. You cannot negotiate a redundancy agreement with a hedge fund. The new capitalism is not one happy family if one does not know even who one’s parents are. Let us get back to basics on that as well.

7.17 pm

Lord Higgins: My Lords, one can begin only by saying, “Better late than never”. It is absurd that, after months of economic crisis, this House only now has

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the opportunity to debate it. Moreover, I am not at all clear why this is not a two-day debate rather than a one-day debate; some noble Lords have been deterred from taking part when the list is so long. We have had a number of repeated Statements in the House but, as we all know, they are not the same thing as a full debate. The quality of the debate so far makes it clear what the Government have been missing. They are in need of advice of the kind that the expertise and experience of this House can provide.

I congratulate the noble Lord, Lord Myners, on his ennoblement and on taking up his new office. I add a word of appreciation for the noble Lord, Lord Davies of Oldham, who has battled valiantly during recent months when debating these issues in Statements and so on. However, it is quite apparent that he has had remarkably little backup from the Box. In fact, the backing he has had generally from the Treasury is not the appropriate level of briefing that this House is entitled to receive. I regret to say that this looks as though it will continue, and I therefore make that point to the new Minister. For example, in the debates that we had in Committee—which unfortunately I could not take part in because I was at the UN in New York—although the Prime Minister was rushing around the world saying, “New Bretton Woods! New Bretton Woods!”, it is clear from the Minister’s reply that they have no very clear idea of what that means.

That is also true of the speech that the Minister delivered today. In his intervention during that speech, the noble Lord, Lord Davies, suggested that we were intervening because we had been Members of the House of Commons. That might have been understandable because the Minister in fact made a House of Commons speech; indeed, it may be a speech that they have not made in the Commons. Be that as it may, I intervened because I was shocked by the reply he gave my noble friend. The idea that we should have an investigation by the FSA after Equitable Life and Northern Rock I can describe only as “quaint”.

I want to bring to the attention of the House one particular problem which, believe it or not, no one else has referred to this afternoon. It is clear that the Government are vastly increasing debt. I make no immediate complaint about that because they are pursuing a policy of recapitalising the banks. I am very glad that the Prime Minister has suggested taking equity interest in banks rather than simply buying dud bank assets. We are certainly doing it the right way round and I am glad that the Government have taken that decision, which Mr Paulson seemed to be remarkably slow in understanding.

In any event, there is an increase in debt and the crucial question, which no one has even mentioned, is what we are going to do about it. As everyone knows, there are only really three possibilities. You could try to cover it by increased taxation but it is inconceivable, especially ahead of an election, that any Government would increase taxation, at any rate in the foreseeable future, to cover the debts which we are incurring, together with the guarantees. I hope that both of these will now appear on the balance sheet and not be hidden, as they have been on many occasions in the past. The second option is to cut public expenditure.

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Again, I do not think that that is conceivable on the scale that is necessary. So it all comes down to borrowing. As I was either at the Treasury or chairman of the Treasury Committee throughout the previous financial crises, I am bound to say that how we fund the borrowing is crucial. If it is funded by issuing stock and gilts to the banks, that will probably have the usual well known multiplier effect, perhaps modified a little by the fact that they will recapitalise themselves to some extent as well. None the less, if that is the way the borrowing is funded, there will be an increase, probably a huge one, in that unfashionable concept of the money supply. The money supply is not the same as interest rate policy—there has been confusion during the afternoon between interest rate policy and money supply policy. The effect will be to exert enormous inflationary pressures.

The problem is that if you want to borrow from the public, you can do so only at higher interest rates. At a time when one would like to see lower interest rates, there will be pressure to put them up. That is the crucial point made by the noble Lord, Lord Skidelsky—the bank rate is not the same as interest rates. Throughout today’s debate there has been confusion, if I may presume to say so, between the bank rate and interest rates. The pressures which the Government have now created will raise the money supply and inflationary pressures.

As always in economics, timing will be crucial. There is, I think, a very real danger of going from an impending recession to extremely high inflation at a time when the rate of inflation is already way above the Government’s target and when those inflationary pressures are being accentuated by the fall in the exchange rate. We could go straight from one situation to another with very little gap in between.

The noble Lord, Lord Peston, rightly drew attention to the short term and the long term. We need to know—and we certainly did not find out today—the Government’s policy on dealing with the debt which they are now, quite rightly in my view, incurring. I hope that we shall have better figures and that we can get a reply from the Minister, preferably today, if the Box can scribble away fast enough—I rather doubt whether they have the answer to this one—or perhaps by way of a written reply in the Library or, at any rate, by the time of the Statement to explain the overall situation as the Government see it. The core of the policy is how we fund the debt.

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