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There will always be cycles in capitalism, and in a sense one cannot do away with them. It is important to draw the distinction mentioned by the noble Lord, Lord Lamont, when he said that we have had stop-go business cycles for a long time. However, in reality these cycles are often due to mistakes in fiscal policy. There has been a long debate since the 1950s in British macroeconomics as to whether government policy exacerbates the normal cycle or not. My former colleague Professor Phillips wrote an interesting article on this, while Christopher Dow wrote a book. What my right honourable friend the Prime Minister was saying when he was Chancellor was not that he would eliminate the cycle but that he would not exacerbate it through mistakes of fiscal policy. That is what he meant by no more boom and bust. If people thought he would eliminate the cycle, that is just ignorance—I cannot help that—but I clearly saw it as a promise. By declaring a medium to macro economic policy, by not giving rise to surprises, a predictable fiscal stance would lessen the exacerbation of the normal real output cycle which goes on in any modern economy.

What is happening now is not a cycle due to fiscal policy; it is a crisis due to a global financial market meltdown. It is due to the many financial innovations which have happened recently and to the fast IT equipment which leads to quick settlement of deals. Again, as the noble Lord, Lord Skidelsky, said, it is

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because most people at the top of the banks do not understand the nature of the business they are in. I have said before in your Lordships’ House that the chief executives do not understand what the rocket scientists do. They thought they were reducing risks by securitisation but all that happened was they ended up holding each others’ risks. Each thought they were spreading the risks to the others and, as they all did it together, they ended up holding each others’ risks and did not even know what risks they were holding.

That having been said, what is to be done now? The financial markets will have to do something about Bretton Woods. Again, I back the noble Lord, Lord Skidelsky, who said that we have to devise an instrument whereby excess reserves of countries such as China and others can be banked with the IMF—not with the United States, which would only go on to become spendthrift—give a good yield across different currencies and be recycled in the banks.

As to domestic fiscal policy, expenditure will not work fast enough. We need either a postponement of VAT payments—a promise that no small business has to pay VAT for another two and a half years, or whatever you want—which will reduce the liquidity shortage; or a promise that the threshold at which taxation starts, which is currently about £5,500, would be substantially increased so that a number of people who are lower paid will pay less tax. The Chancellor should then say that that can be implemented now and people will be given lump sum payments calculated at the lower tax rate. That would immediately put money into people’s pockets—and my time is up.

9.03 pm

Lord Northbrook: My Lords, I am grateful to the noble Lord, Lord Desai, for reiterating government policy. Like other speakers, I am grateful that prime time has been given to the House to discuss the current economic situation. As I am nearly in the graveyard slot, I am quite surprised that I have got one or two original ideas still to add to the debate.

First, as a former UK fund manager, I also welcome the noble Lord, Lord Myners, to the Government Front Bench. I was able to benefit from Gartmore’s expertise for my clients, through its Far East and Irish funds in particular, and its performance contributed to the high regard that was held for him and Gartmore in the City when he was at the helm. His expertise will add enormously to our deliberations here. However, if he had been making a current fund manager presentation I think he would have offered a more balanced view of the UK economic situation.

I should first like to make a few comments on the Government’s stewardship of the economy since 1997. I then wish to iterate my view of the key causes of the current economic crisis, discussing the global and UK background, before coming up later in my speech with a slightly more original look at the possible solutions. I always give the Government credit for their key decision to hand over control of interest rates to the Monetary Policy Committee in 1997. I also have given them credit for keeping inflation in line with the MPC’s target for part of the period after that. However, after their decision to stick to Conservative spending

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plans early on, I have been cautious about the effectiveness of the spending on health and education in particular, especially as the Budget deficit kept increasing.

Continued growth made for overconfidence. As many speakers have pointed out, the Prime Minister claimed in March 2007 that he had abolished boom and bust. The serious argument that he was trying to make is that the situation we are in is at variance with the economic cycles of the 1980s and early 1990s—in other words, he was saying that the boom and bust we are in is not the old boom and bust. The trouble is, we have a new boom and bust. The old boom and bust featured rapid fluctuations, with a medium-sized boom followed by a medium-sized bust. This time we have had a long period of growth followed by a bust so bad that it has nearly destroyed the financial system. The stability was a trick of the light; the lengthy period of growth was fuelled by house prices and debt. The length of the good years has been paid for by the severity of the crisis we now face, yet still the Government do not seem to have learnt certain lessons.

The Chancellor wants to return to 2007 levels of debt. That cannot be a good idea. To see why requires analysing the causes of the economic crisis. As many noble Lords have stated, the crisis has been caused globally by debt reaching unsustainable levels and by investors looking for higher yields in a lower interest rate environment without considering the risk. It began in the USA and has spread faster and more broadly than many of us would have predicted. In the UK it has differed crucially from the two previous economic crises, which were caused by high interest rates and high inflation. This is a balance-sheet recession, where inflation and interest rates have been low, low interest rates encouraged individuals to borrow more and buy property as it seemed to be going up in value for ever and ever, and financial institutions were prepared to lend on an increasingly reckless basis to finance the borrowings. In the USA this recklessness was emphasised by lending to so-called NINJA borrowers—no income, job or assets. In the UK, financial institutions were lending 120 per cent of the value of property.

The UK has been particularly badly affected by the crisis because our economy, as many speakers have said, is dependent on financial services and the Government have gone on a borrowing spree. The level of borrowing has reached the top limit of its self-imposed financial rules, thus allowing no room for pre-emptive pump priming to stave off trouble. Nothing had been kept back for a rainy day. The USA and UK crises have had two key components: a crisis in the financial system and a crisis among households where personal debt has been high. The crisis in the financial system has not only been one of debt but a crisis of confidence in financial institutions lending to each other. It is easy to forget that the hugely successful investment banks were up to 30 or 40 times geared, so they were able to finance deals that now would never get off the ground. This is another example of, with hindsight, the overuse of borrowing. Debt got to an unsustainable level, and any sustained fall in the housing market was likely to lead to a crisis.

A crisis in the financial system can always be bailed out by Governments, which is what has happened in this case. I give credit to the Prime Minister for his

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handling of this crisis, but we must not forget his Government’s responsibility for it. Household debt is a separate issue. People try to rebuild their savings, which is very difficult. They cannot borrow any more money because the banks themselves are stretched, and the value of their housing has gone down. As personal income is not rising and people are trying to save, consumer spending falls off a cliff.

How do Governments sort out the household problem? Mine is an amateur economist’s solution, and may cause surprise. I have been cautious about the rise of inflation until recently, but now I believe it has peaked. In particular, sharply declining commodity prices and weakening demand will help, along with the slowing down of wages as job losses unfortunately hit the real economy. Like the noble Lord, Lord Bilimoria, I believe that in these exceptional circumstances, for a period, the Bank of England should relax its inflation target and allow it to remain at the current level so that the real value of debt will decline over a period. Thus I would support the Bill of my noble friend Lord Saatchi.

In terms of UK fiscal policy I would, however, criticise the idea of big increases in government spending. Last week, the Chancellor of the Exchequer conceded that he would have to abandon the fiscal rules. Michael Saunders, an economist at Citigroup, said that the UK now has no credible fiscal rules. Without such rules, as the noble Lord, Lord Skidelsky, remarked, confidence will weaken and the cost of government borrowing will rise in addition to its level increasing. At the end of the day, the cost of this will fall upon the taxpayer, even if he is given short-term government support.

Here I would like to promote the Ricardian equivalence theory. Consumers will not increase spending if Government increase their deficits because they know that although they may have more money now, they will have to pay higher taxes later, so the extra saving by consumers would offset the extra spending by Government.

The major economic action, as many other speakers have said, should be taken on monetary policy. I have until now fully supported the MPC’s concern about inflation, but now that the threat is passed, it is time to lower rates, and lower them quickly. They should be pushed down to 1.5 per cent to 2 per cent. That will help weaken the pound further, which will aid our exports. That will, I hope, help boost the money supply, which has weakened due to the removal of the prop of support from hedge funds and the derivatives markets and the banks’ crises of confidence. It is becoming common knowledge that even good companies are finding it much more expensive to renew bank facilities. Weaker businesses are finding it harder to borrow at all.

Also putting pressure on companies and businesses are increasing pension fund deficits caused by the collapse in stock markets. Actuaries are insisting that contributions are increased. Profits, therefore, will be under further pressure; one route, sadly, to remedy this is job redundancies, which are likely to rise for these and for demand reasons. Therefore, interest rate reductions are crucial but even then they may not be enough to improve confidence in the short term of the real economy, which is likely to be weak for several years.

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I turn finally to regulation, on which I think I have something original to say. The incorrect knee-jerk reaction to the financial crisis will be to overregulate. Unlike what the noble Lord, Lord McIntosh of Haringey, said, what is needed is better quality regulation rather than quantity. Regulators need to be better trained and more experienced. They have to be fully up to the mark in the area of derivatives. They should tighten up on off-balance-sheet finances. UK regulators are very good at prosecuting minor offenders while the major culprits get off scot free. The UK needs to take a leaf out of the US SEC’s book in bringing financial wrongdoers to justice.

Overall, the tripartite regime introduced by new Labour has clearly not worked. More power needs to be given back to the Bank of England to monitor financial institutions’ solvency.

In conclusion, the Prime Minister deserves credit for his action on the financial crisis, but it must not be forgotten that he must take a lot of responsibility for allowing it to happen.

9.13 pm

Lord Selsdon: My Lords, when you speak in the position that I do, you have spent all afternoon rather nervously adjusting your tie, feeling insecure, wondering whether anyone will say what you are going to say and then panicking because you are not quite sure yourself what you are going to say. Automatically, one should take a theme.

I had a birthday last week, and I have passed the average age of Peers in this House. That is quite an interesting thought. Also, I have been in this House longer than anyone else speaking today. I had a flood at home, and the modem that connects me to the parliamentary intranet went dead, so out of all the information that I had researched for what I was going to say today, all I could find were my former speeches on the economy, which came to a total of five hours since 1971.

I have a great respect for Front Benches and for the noble Lord, Lord Davies of Oldham. When, before the Recess, I asked him what the Government meant when they talked about boom and bust, he was rather like a first division goalkeeper on an ice hockey pitch. He answered very nicely but said nothing; it confirmed to me that what we get mostly from Governments is what I call useless information. “Useless” does not mean that something has no use; it is less use than anything you can think of at the time.

Today, we have a new Minister. He is a man I have known of. I have listened to him in the past and have great respect for him, but he was given a most useless brief. I do not mean that it was of no use, but it was so useless that it was hopeless. That does not mean no hope; it means less hope than anything else you could think of. At the end, as noble Lords know, you either wind down or you wind them up. I was always told that you are not allowed to have notes or read a speech, because noble Lords shout, “Reading, reading, reading”. I will try to stop exactly at seven minutes. I do not have enough to say, so I can bang on a bit.

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I wish to go back to banks and banking. I started my life in industry in asbestos, which was not the best thing to do. I finally moved into the banking business, which was also not the best thing to do. I had written reports on trade and went to work at one of the accepting houses, Singer & Friedlander. We had just become an accepting house—the last one after Warburg. When Siggy Warburg became a member of the accepting house, was there any point, anyway? Warburg never had people to lunch. I am the only person who has ever been to lunch twice with Warburg. When he decided that the house needed to talk to the outside world, he had two lunches every day.

I learnt that in accepting houses—I was later with Samuel Montagu—your assets went up and down in the lift every day, but you had the Bank of England behind you. Of course, we in Samuel Montagu were owned by Midland Bank. What was the difference between an accepting house and a clearing bank? The accepting house had the Bank of England behind it, but the clearing banks were undoubted. That meant that the Bank of England had the clearing banks behind them. Occasionally, when I was on the committee of London clearing banks, I would have to go to meeting after meeting. You learnt the trick that to get to the Bank of England sometimes when it was raining, if you talked to your friends who had offices, you could go in through the back door and out of the front door without carrying an umbrella and you did not get wet, until the new Stock Exchange was built and the swirl of water around soaked you through.

What we did with the Bank of England was fairly simple. We all knew that it was an unwritten rule that you could not lend more than 17 to 20 times your share capital in reserves. To put it another way, if you lose or write off £1 million, you reduce your lending by £20 million. If you lose £100 million, you write off even more until you cannot lend. You were not allowed to sell credit. You had customers, whereas accepting houses had clients—a subtle difference that I have never managed to understand. The point was that, in general, there were not enough people to have bank accounts. Only a third of people held bank accounts because the clearing banks deemed that only a third of people should have an account. You looked after your esteemed customer and had an unwritten rule, “Know thy customer”. That was an important factor. The building societies should never have been allowed to be banks.

I will not go on too much about this. I wish to return to an issue that was not raised. We do have a crisis, and if I were a seer or a prophet I suppose I would say, “As it was written in the stars, so it came to pass, and the people were sore afraid”. The one question that bothers me is: what is our economy based on? The Government have announced that it is house building. I was a director of a big construction company for a long time. We had to close it down because we lost too much money building hospitals and we could not build houses profitably. Then it was built on public expenditure. The new aircraft carrier provides only 10,000 jobs, and what is its economic value when it is finished? I fully believe in the Navy. The Government then said that the economy was based on financial

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services. Which business in the world has collapsed more severely than any other? It is the financial services. What are we left with?

There is worse than that. I was always involved in trade, which meant that I sat below the salt. My family would not explain to people what I did. Instead, they said, “He is something in the City”, when I was nowhere near it. I sold things around the world. The worry is that we now have a balance of payments crisis. The deficit on visibles or goods this year will be more than £100 billion—that is my estimate, because the Government are late in producing the Pink Book. There is a surplus on services, which are mainly financial services, because we are losing balance-of-payments problems on tourism and so on. We therefore have an overall deficit of around £50 billion, which is the same amount as we have chucked into the banks. That is pretty worrying. The only future for this country lies in being international. It depends on international trade. If the Government would get off their high horse and join people such as me below the salt, we would have no problem.

9.20 pm

Lord Shutt of Greetland: My Lords, it has been a long debate and a fair time since 3.15 this afternoon. I thought that we were being warned that the end of it was another five hours off, and it that it would be 2.15 am before I got cracking. We have heard a variety of views. Before I sum up, there are two issues in particular that I want to raise.

There are two elements to the banking problem: first, that loans have been able to be dispensed to those who may not be able to afford the repayments; and secondly, that loans have been dispensed from borrowed money, not only borrowed short to lend long but borrowed short in bulk to lend long.

Your Lordships will not be surprised that I shall refer again to the H in HBOS. As on the previous occasion, I declare an interest in that my son-in-law is an employee of HBOS in Halifax. The Halifax was formerly the biggest building society in the world, demutualised in 1997. In 2001, the merger with the Bank of Scotland took place, leading to the acronym HBOS. It is interesting that it was 63 per cent H and 37 per cent BOS, but the directors were seduced by the Mound and took the headquarters to Scotland. As a result, all that we have heard about for the past couple of months is “the Scottish bank”.

I asked previously whether the Lloyds TSB merger, or takeover, is really needed. Perhaps it was thought that this was one way out when Mr Brown tapped on the shoulder, but, bearing in mind all that has had to happen since in banking, one wonders.

But who is interested in Halifax? The chairman and the chief executive of Lloyds TSB, Sir Victor Blank and Mr Eric Daniels, have been invited there. The Halifax Courier is running the headline, “Where are you, Eric?”. We have had no visit whatever from anybody to do with Lloyds TSB, even though they have been invited by council leaders and the mayor. It is amazing that the word “Halifax” is now but a trading name of Bank of Scotland.

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It is significant; it is getting all this government money. What is the Government’s view on Halifax? Where is the regional policy? In welcoming the noble Lord, Lord Myners, to his post, I note that we are dealing with a Cornishman. That gives me hope that someone who has regional roots may be concerned about the regions of England, and that financial services are seen as a matter not just of London and Edinburgh but of the English regions.

The Scottish Secretary has announced a mystery bidder for the Halifax, but, yet again, he said that it is all about jobs in Scotland. Today, Lloyds TSB publicised its own proposals for the takeover and referred to £1.5 billion in savings. It is clear that those savings are about people on the payroll. I would be interested to know, as I am sure would your Lordships, where those job cuts are to be.

Are the Government interested in jobs in Halifax and Yorkshire? I have seen the diminution of the regional dimension. Many of your Lordships will remember Martins Bank in Liverpool, Williams and Glyn’s Bank in Manchester, the Yorkshire Bank in Leeds, the Halifax Building Society in Halifax, of course, the Leeds Permanent Building Society in Leeds and five building societies based in Bradford. Amazingly we now have Ministers of State for all the regions. What are these regional Ministers doing in terms of regional financial services and making certain that this is an important feature of our life in this country?

My second and very different point is about the unintended consequences of some of the decisions that the Government have made in recent days. In 1946 I was taken to the Isle of Man with my bucket and spade. Therefore, I have had an interest in that place. I declare the interest as vice-chairman of the APPG for the Isle of Man. Perhaps because of concerns about people going to warmer climes it has moved to financial services and now has a thriving financial services industry.

The Government here have put in administrators at the Icelandic bank, Kaupthing Singer and Friedlander. That has meant tremendous difficulties for its subsidiary in the Isle of Man. That bank was there because the Derbyshire Building Society had a Manx subsidiary. The Isle of Man is a Crown dependency. It has a tiny compensation scheme. What are the Government doing in their negotiations with the Icelandic Government to help it?

Coming back to the debate as a whole, I think that there have been about 20 themes, starting with people wanting an inquiry, the delay in having the debate, the cost of food and oil, banking, overseas implications, inflation, interest rates, debt, boom and bust, regulation and supervision, unemployment, housing and repossessions, small business, tax, national insurance, fiscal policy, pension funds, education, Keynes, prudence and confidence. I have been marking—not on quality but on quantity. It is an interesting feature that, in terms of quantity, regulation and supervision has been raised most in this House. Clearly, there is tremendous concern about regulation and supervision, particularly as that applies to the banking sector. Banking has been raised time and again, as has small business. Keynes is coming up on the ropes as one of the features raised today.

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On specific matters raised by noble Lords, the noble Baroness, Lady Noakes, told us that she was opposed to a spending spree. I hope she is not opposed to an investment spree. That matter was raised by other noble Lords and appeared to be something that several people were interested in. My noble friend Lord Newby raised the issue of banks being thought of as utilities as far as regulation is concerned. He also referred to credit unions. It is remarkable that we are now talking about credit unions at a time when we have said goodbye to so many of those institutions called building societies. I think it is true that not a single demutualised building society is or will be shortly an independent organisation, yet we are having to reinvent a building society and call it a credit union.

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