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7.25 pm

Lord Crickhowell: My Lords, one of the most bizarre features of the financial crisis and this debate has been the presentation of the Prime Minister as a leader in the creation of world financial stability and as the man who saved the banking system by means of an original and uniquely bold initiative. The Minister got rather carried away in his eulogy, apparently without embarrassment, denying that the Prime Minister had any responsibility for the creation of the crisis or even for the 25 per cent devaluation of sterling.

That the banking system had to be rescued no one doubts, and the Opposition were right to support recapitalisation. The trouble is that the rescue was

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carried out in a manner likely to do much long-term damage. The mistakes seem very strange when one considers that there were many precedents to guide us and that other leading players were much more skilful in avoiding them.

My noble friend Lord Forsyth referred to two of the mistakes. However, the most serious was not the much higher rate charge for preference capital than that applied in the United States and in some parts of Europe—Barclays has chosen to pay comparable rates to retain its commercial freedom—but the fact that the Government created so much damage by underwriting the issue of ordinary shares in a way that seemed designed to guarantee that existing shareholders would not, and in many cases could not, participate because of the threat that the banks would not be able to pay dividends for five years. Even if Lloyds finds a way to escape the restriction by repaying preference debt sooner, much of the damage has already been done and the possible routes mentioned by the chairman will not be found cheaply.

Already the Government’s terms have achieved three things: they have increased, probably by several billion pounds, the amount of taxpayers’ money that is to be tied up in the participating banks; they have ensured that British banks will be placed in a less competitive position than those that offer more lenient terms overseas; and, not for the first time, they have produced devastating consequences for pension funds and savers, for whom bank dividends were a most significant source of income.

The latest government-inflicted blow to private sector pensions comes on top of the damage done by Mr Brown’s abolition of advance corporation tax relief in his first Budget. I need not add to what my noble friend Lord Blyth had to say about that lamentable story.

It seems a long time since the Prime Minister enjoyed and took advantage of the benign economic inheritance left him by the outgoing Conservative Government, assisted, for a time, by prudence. Like other noble Lords, I think that he began actually to believe his repeated claim that he had done away with boom and bust. Overcome by hubris, he fed on, encouraged and took part in the reckless surge of borrowing and expenditure that followed, frequently outdoing the financial world in devising off-balance-sheet instruments and manipulating his own golden rules to the point where they were utterly discredited. When the boom ended, the bust was on an almost unprecedented scale; nothing had been put aside in the good years to feed us during the bad.

We now have the spectacle of the Prime Minister attempting to claim credit for borrowing in order to finance cyclical expenditure programmes, when the reality is that he is forced to borrow on a huge scale because of past excess and because tax revenue is falling and will fall much further just when expenditure to fund benefits is rising. Net government borrowing will almost certainly rise to well over £100 billion next year. That is not debt to fund Keynesian expenditure policies. The situation cannot simply be blamed on the Americans or the banks. The British economy has been stagnant since last April and has been falling more sharply than the economy in the United States, where the Federal Reserve has been more aggressive in

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cutting interest rates. As my noble friend Lord Saatchi pointed out, our interest rates have been the highest in the G7.

Some capital infrastructure projects are no doubt worth while but, as others have said, it is doubtful that big new programmes will produce economic benefits in a relevant timescale. Most are likely to reach completion when the economic priority is to,

as the Chancellor told us in his Mais lecture. Past precedents provide little encouragement that such a policy would work. As the Times leader put it last Thursday,

The time has clearly come to use lower interest rates and currency flexibility. Unlike the noble Lord, Lord Taverne, I say thank goodness that we are not tied to the euro or forced to defend a fixed exchange rate. However, if we are to have special expenditure programmes, could not some of them be directed to re-equipping our chronically underresourced Armed Forces?

My noble friend Lord Lawson and the noble Lords, Lord Skidelsky and Lord Lea of Crondall, referred to confidence. Confidence is everything. Lack of confidence in the Government’s approach has been a major factor in producing the astonishing 25 per cent fall in the value of sterling—a fall that would have destroyed past Governments. It is one thing to be thankful that we do not have to defend an unrealistic exchange rate against the markets; it is quite another to face a devaluation that could reignite inflation.

It was not a government spending spree that rescued the British economy in the 1930s, or even—I am sorry that the noble Lord, Lord Skidelsky, has left his place—leaving the gold standard. Government policy at that time was austere. The economy recovered and unemployment fell when consumers found the confidence to spend again and fuelled the rapid growth of new industries. Anatole Kaletsky makes a similar point about the US economy in today’s Times when he argues that, if the new United States Administration give grounds for fresh confidence, the economy could recover comparatively quickly.

I borrow from the noble Lord, Lord Skidelsky, Keynes’s comment that,

The real disaster would be to fuel the fear rather than hope by continuing the Government’s previous policy, devastating to confidence, of reckless and irresponsible spending and borrowing.

7.33 pm

Lord Eatwell: My Lords, in the face of the most severe economic circumstances encountered by this country since the 1930s, we need emergency action for the short term and a strategy for medium and long-term recovery. In other words, we need an economic policy road map to ensure that our policies are comprehensive and coherent.

In my search for that road map, I begin with quotations from two major economic policy speeches. The first is that,

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The second is that,

and that,

One of those quotations is from Mr George Osborne. The other is from Herbert Hoover. Only some slightly archaic language in the words of President Hoover, the architect of the great depression, allows us to identify which is which.

Mr Osborne did us a great service in his speech last Friday by defining a clear policy demarcation between the Opposition and the Government. It is, as Mr Osborne puts it, a choice between,

What is the substance of the choice between Keynes and what we must now call the Osborne-Hoover approach? First, the Keynesian approach involves a fiscal policy that contributes to the growth of demand. Of course, it is impossible to envisage fiscal policy compensating totally for the collapse of credit that lies at the heart of this crisis. There are well known timing problems in government expenditure, too. However, where already planned infrastructure projects can reasonably be brought forward, they should be. Fiscal measures that benefit the poorest households will also have a positive effect on demand, as the poor spend everything that they receive.

Secondly, there is monetary policy. Clearly, interest rates should be reduced by as much as is reasonable—a move that has the added advantage of exerting downward pressure on the exchange rate. However, Keynesians know that interest rate policy may not work, especially when there has been a general collapse of confidence. In that case, the Government must take direct measures to stimulate the provision of credit, as this Government have done with their inter-bank lending guarantees.

A further crucial lesson that Keynes taught us is that a credit crisis is above all a co-ordination failure. The inter-war period demonstrates the danger of international co-ordination failure. My right honourable friend the Prime Minister has played a unique role in leading co-ordinated international action in money and credit markets. To these measures must be added a co-ordinated implementation of expansionary Keynesian policies. Without co-ordinated expansion, one country could be left carrying all the world’s deficits, and the expansion worldwide would fail.

A similar co-ordination failure exists in banking. It would be all too easy for some banks to sit on the sidelines, while others, perhaps those over which the Government have some direct influence, extend credit in a risky environment. It is therefore vital that the Government require all banks to extend the credit necessary to enable industries, large and small, to maintain their activities and extend their investments.

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Thirdly, there must be regulatory co-ordination to prevent the regulatory arbitrage that undermines authority as financial institutions locate their activities in the most lax jurisdictions. My right honourable friend the Prime Minister guided the world in an important step towards regulatory co-ordination when he persuaded the G7 to create the Financial Stability Forum. Now the international community must build on that vital British creation by giving it appropriate powers in an international regulatory environment.

Co-ordination at any of these levels is a problem of political economy—indeed, of politics. I may have been a little unfair to Mr Osborne when I identified him with President Hoover. After all, Franklin Delano Roosevelt was elected on a commitment to balance the budget; then, faced with the economic reality, he had the political flexibility to change his mind and to implement expansionary policies. That is the flexibility and political intelligence that the Chancellor of the Exchequer clearly possesses and Mr Osborne clearly does not. We should be grateful that my right honourable friend Mr Darling is at the helm in these troubled waters.

7.39 pm

Lord Naseby: My Lords, I declare an interest as chairman of an investment trust. Before I start my speech I shall reflect on Parliament’s role at the moment. As my noble friend sitting on the Bench in front of me has mentioned, we have been back for four weeks, before which we had a very long recess. I really do not understand why Parliament was not recalled just because there was a whole host of party conferences. Frankly, Parliament has failed the people at a time when we face the direst economic circumstances that any of us in this Chamber or in the other place has ever faced.

In congratulating my noble friend on the Front Bench, with whose speech for once I totally agreed, I raise two issues: regulation and small businesses. They have been highlighted by several speakers, principally the noble Lord, Lord Bilimoria, who spoke about small businesses, and my noble friend Lord Lawson, who raised regulation.

I start with regulation, because that is the macro-dimension. My noble friend was right: banking supervision is vital to the future and has been missing for a decade—we are all feeling the results of that. There is no point in the new chairman of the FSA saying that he needs more people. He already has 3,000 people working for him, at a cost of more than £300 million a year. The FSA, sadly, has never worked. I suffered when I was chairman of a small life assurance company from the way in which the FSA dictated to everybody about the millennium bug, and not a single problem with anybody or any business arose. The FSA was totally asleep over Northern Rock and, as others have mentioned, during the period when it was responsible for Equitable Life. It had absolutely no idea how to react to the sophisticated financial instruments that we have seen created during the past decade. What is needed within the FSA is a complete switch of resources to proper regulation, to anticipation and to working with economists—academic and applied—and a removal of needless checking of information to the

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consumer. Will it do it by itself? I doubt it. It needs an urgent independent inquiry into how it has failed and a way forward—or a road map as the noble Lord opposite just said. However, I emphasise the urgency of the situation, because everything happens very quickly in a global market.

Many commentators have noticed how different is the speed of reaction of the authorities in the United States from that of those in western Europe, particularly ours. Why cannot we move with more speed? Why do we dither, deliberate and discuss, and so rarely act? Interest rates have to come down now. When I was at Cambridge, also listening to lectures on Keynesian economics, we had a run on sterling in 1957. Interest rates were put up by 2 per cent overnight. Why can they not come down by 2 per cent overnight? The interest would still be 2.5 per cent, which is way above that of the United States.

I turn to small businesses, because they are the practical side of our economy. Thirteen million people are dependent on them, which is a very large proportion of the workforce of this country. I have a number of action points for the Minister, who has now joined us—and very welcome she is, too. If she will tick at least three or four of them, we might get some support for small businesses. I should like to see action to freeze or reduce business rates—it can be for a limited period, but it would be a practical benefit to all small businesses. I should like to see action to suspend any new employment laws, which can be introduced at a later date. I should like to see action to withdraw the policy of charging rates after three months on empty properties—that is not working and is costing the nation dearly. I should like to see action on bank loans and overdraft rates, so that when they are renewed, they cannot be increased nor have terms changed—one of the great problems for many of our small and medium-sized businesses at the moment is that they are being changed. Why cannot stamp duty on any property under £500,000 be charged for a limited period at 1 per cent, which would help the housing market? The Government should support the campaign for retailers’ rents to be paid in arrears rather than in advance. I should like to see action taken so that all new leases can be upward or downward. I also support the plea for the small loans guarantee scheme to be introduced.

The Minister, whom we welcome to the Front Bench, said twice that the Government are taking decisive action and are determined to help. Does he not realise that the alleged £4 billion of support from Europe over four years, handled by the banks, is pretty useless for every small and medium-sized business and retailer in this country? Those are the front-line troops who are sustaining the damage at the moment and will continue to do so through the winter and into the spring. If they are to survive this massive downturn, they need action and help now, this winter and next spring. Keynes will not help them any more than he did Denis Healey or Jim Callaghan.

In medicine, early diagnosis followed by remedial action saves lives. Small businesses are like people: the diagnosis has been made; now we need sensible and specific action to restore the patient to good health.

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7.46 pm

Lord Watson of Richmond: My Lords, there is something rather statuesque about the title of this debate; that the House,

The words are neutral, even bland, when the reality, as we all recognise, is so serious, so significant and so surprising, even though some of us may claim with hindsight to have felt an early unease, rather like sensing turbulence in an aircraft before it really starts to bounce.

Last week, I did a lot of flying, mainly visiting companies on the Continent. I shall share something of what I heard to illustrate the extent and rapidity of the recession that we now face. Major computer software suppliers compared the present situation with a tsunami, because they felt that they had built in counter-cyclical barriers of many kinds, broad ranges of products, ranges of clients from SMEs to multinationals, and ranges of geographies from China to the US and Asia-Pacific to Latin America. Yet, virtually without warning, the recession has overcome all those barriers.

Car manufacturers said to me, “Suddenly, we have hit a concrete wall”. Retailers said that they had moved within a matter of weeks from anticipating the Christmas season to fearing it deeply. Everyone to whom I spoke used the word “unprecedented”, yet there is something very predictable and precedented about our response to this crisis. There is the precedent, much discussed this evening, of Keynesianism. The signs are that the Government believe that part of the answer is to spend our way out. Yet, as the right reverend Prelate the Bishop of Chelmsford pointed out earlier, there is something counterintuitive about borrowing and spending our way out when it was borrowing and spending that got us where we now are.

However, the real challenge about the Keynesian precedent is that it was for an industrial manufacturing recession in the 1930s. In the United Kingdom at any rate, we are almost living, rightly or wrongly, in a post-industrial society. The main impact on jobs, as is now widely realised, will be in the south and in London rather than in the north. The question, therefore, is: will Keynesianism work for a post-industrial society such as ours?

During the opening speeches today, there was more than a whiff of the hustings. We were hearing the exchanges that an early general election may make inevitable: “Whose fault?” “To what extent is it the result of government error or Downing Street hubris?” “Would the main opposition party have done any better?”. As far as the Liberal Democrats are concerned, with Vince Cable we would of course have done better.

However, one thing is very clear. Whatever we do, and whoever we blame, we cannot and will not return to where we were. When this crisis is over and the recession recedes—and it may take a time—our world will be different. In what ways will it be different? I shall suggest four, although there are many more.

First, there will be a technical but important change. The mark-to-market rules introduced last January by the International Accountancy Standards Board required banks to report their assets daily on a fire-sale basis.

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The European Union persuaded the IASB to relax these rules, but only after inter-bank lending had dried up and Lehman Brothers, among others, had folded. We should be very wary about returning to the stringency of those rules. What is the Minister’s view on the issue?

Secondly, there is European co-operation. It got off to a decidedly shaky start, but it has been more effective of late in dealing with the credit crunch, if not with the recessionary crisis. Sarkozy and Brown have both said—Sarkozy more openly than Brown—what a good crisis they have had. What does the Minister see as the thrust in terms of European co-operation, particularly EU co-operation, on recession rather than the credit crunch and the banking crisis?

It may well be—this will not be good news for everyone in the Chamber—that one of the long-term gainers from this may indeed be the euro. Hungary and others want the shelter of the euro, which is not surprising. The latest opinion polls from Iceland show that the Icelanders after the turmoil of the past month are reconsidering their position.

Thirdly, there will have to be a new architecture—a successor architecture to Bretton Woods. My noble friend Lord Newby, who is in his place, was right earlier to insist that whatever emerges in terms of new architecture, China and India must be given the say that their economic importance and clout requires. There cannot be any further delay about this. What is the Government’s timetable on that? How are they going to move this agenda forward?

Finally, tomorrow the Americans choose a new president. The reality of the crisis that we have started to experience, and which we will now experience for quite a long time, is that there are no hard or soft powers. There is no Mars or Venus. There is no unlimited sovereignty for any state, no matter how powerful it may be. Every state is vulnerable. Interdependence is where it is; unprecedented co-operation is what it is about. In the new landscape, every country and every continent is joined. In Washington, in London and throughout the world, grasping this reality can be the one true gain from this appalling global misfortune.

7.53 pm

Lord Ryder of Wensum: My Lords, after succeeding Tony Blair, Gordon Brown published a Green Paper on the constitution, in which he pledged to redress the balance between Parliament and the Executive. However, Parliament was not recalled during the Summer Recess, and we have had to wait weeks for this debate to take place in your Lordships’ House.

A few noble Lords took part in a lively Finance Bill debate in your Lordships’ House on 18 July, two months before the collapse in the markets. By July our public finances were already in disarray. I submitted that borrowing would reach £70 billion by the end of the financial year, which is about double the forecast the Chancellor made last March, and that the duty to restore our finances would fall to the next Administration—indeed, that fiscal policy would dominate the daily lives of future Downing Street residents, and that their reputations would be defined by their success in tackling the mounting deficit. That was in July.

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If anyone doubted the identity of the person responsible for this upheaval in our public finances, then the noble Lord, Lord Desai, gave the answer in his Evening Standard article on 22 September. He declared with all his authority:

“The Golden Rule was fudged and fudged again until Alastair Darling inherited an empty kitty. Brown talked of prudence but the Public Private Partnerships have saddled us with a lot of debt off the balance sheets. Those chickens will come home to roost”.

The Prime Minister promised to eliminate boom and bust, yet months ago the IMF concluded that Britain was the one major economy likely to suffer a recession, partly due to the incompetent management of its public finances. The IMF fears were confirmed when public spending figures published a fortnight ago showed the worst first-half borrowing statistics in this country since 1946.

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