Previous Section Back to Table of Contents Lords Hansard Home Page

The gracious Speech promised reforms to the banking sector. These are necessary, but here I sound my first cautionary note. In his open letter to President Roosevelt in 1933, John Maynard Keynes said that the President was engaged in,

But—and here is the sting—he said that,

In other words, Keynes’s advice was: “Concentrate on getting the recovery and do your reforms on the back of the recovery”. Those wise words have lost none of their relevance.

How much stimulus will it take to bring about recovery and how is it to be done? There is no doubt that we are sliding into a severe recession, possibly the worst since the war. The latest OECD economic outlook projects a swing in output of about 4 per cent of GDP for OECD countries as a whole, with a decline of 3 per cent or more in the next 12 months. We should notice that these forecasts are lagging indicators; the output figures have had to be revised downwards each quarter for the last three quarters.

Some believe that we can deal with the problem by relying on monetary policy alone, but I do not think that it will do the job. I shall again quote from Keynes. In a lecture that he gave in 1932, he said:

“It may still be the case, that the lender, with his confidence shattered by his experience, will continue to ask for new enterprise rates of interest which the borrower cannot expect to earn ... If this proves to be so, there will be no means of escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidise new investment”.

That reminds us that getting the money to flow is a two-way business. It depends on the expected earnings of the borrowers as well as on the price and quantity of money provided by the lender. A great deal of investment will inevitably be delayed until profit expectations rise, whatever the rate of interest. I think that the Secretary of State indicated the importance of the expectations of the borrower.

The Bank of England’s base rate has come down to 2 per cent; mortgages are stuck at 5 to 6 per cent. Everyone from the Prime Minister downwards is telling the banks that they have to lend, but they will not lend until it is prudent for them to do so for two reasons: first, they fear more losses ahead from toxic assets or recession-induced business failures; and, secondly, the new capital put in by the Government is at such penal rates that they want to repay it as quickly as possible, the easiest way being to stop lending. This flight into cash is a familiar feature of all downturns. It gives people a sense of security. Cash postpones the decision that you have to make to spend. Even a relatively weak currency such as the dollar may at moments of high pessimism seem more secure than any other asset, as we are seeing at the moment.

That leaves fiscal policy. It would have been better had we been able to start the fiscal stimulus from a position of surplus, but, still, this weapon will certainly

8 Dec 2008 : Column 183

be needed. If the output gap figures are right, it will have to be more than the 1 or even 2 per cent of GDP that has so far been suggested; it will perhaps have to more like 3 to 4 per cent of GDP.

In devising this fiscal stimulus, I would certainly put my main emphasis on government spending. When private sector spending falls, the only secure way to get increased spending is for the Government to spend the money themselves. Many projects in the pipeline can be accelerated. I have only one suggestion: will the Government not consider suspending for one year the most important planning regulations that hold up the start of big projects? Many of them are based on worst-case scenarios; now we have a worst case of a graver kind, which should take priority.

That we will come through the crisis I have no doubt. We will need to think seriously and constructively about the kind of political economy with which we wish to emerge at the end of it. I shall make just four short points. First, we need to revise macro policy to be able to take into account asset bubbles and to make use of macro-prudential instruments. Secondly, we need to strengthen banking regulation on an international basis. Thirdly, we need a way of liquidating the huge global imbalances that have been a major cause of financial excess in America. That means talking about exchange rates. We cannot avoid that; it is an essential part of a Bretton Woods 2. Finally, we need to consider whether, as a society, we want to tolerate the extreme inequalities of wealth and income that have built up over the last 20 years, especially at the very top. The emergence of an insolent, largely footloose, financial aristocracy—or, I should say, plutocracy—is the direct result of the dominance of the financial services sector in our economy, the freeing of capital movements from national control and a reversal of the previously equalising tax policies in the Reagan and Thatcher years. A big crisis gives us the opportunity to consider that. But first the recovery.

5 pm

Lord Thomas of Macclesfield: My Lords, this is the first time that I have spoken in public since my severe stroke in 1999. It was only the brilliance of the National Health Service over nine years and the care of my wife over the same period that have allowed me to be here today or any other day.

I would like to take noble Lords back to the early 1980s, as all major disasters have a long track record. At that time I was trying to launch a trade union bank. This was the time when we were told that there was no such thing as society. There was media reference to enemies within. It was during the height of power of Margaret Thatcher’s regime and the unpopularity of the trade union movement.

The supervisory department of the Bank of England was very efficient and demanding in order to ensure that a new bank met all the requirements properly demanded by law. In fact, it gave me a book on the subject. Eventually, I, as a controller, received the licence from the Bank of England and the bank has prospered ever since, making profits of £5 million in each of the last two years; I understand that the

8 Dec 2008 : Column 184

profits continue today. However, although I also attended 10 Downing Street and was seen by a very senior civil servant, the procedure was never foolproof, as a new bank launched at the same time, named after the famous capitalist Adam Smith, failed within some three years.

At the same time I had executive responsibility for group development of the Co-operative Bank, where such building societies as Abbey National and Nationwide, among many others, were our customers. I knew their executives and many board members. I was on record, on television and radio, morning and evening, saying that the privatisation of building societies, moving from being a mutual to a plc, was obscene—that was the word that I used—particularly the possible pay-off to existing members and executives. My argument was, first, about the unfairness of funds built up over generations being distributed to existing members and executives. If it was so good, why had it not been done after the First World War, the great depression or the Second World War? Secondly, the ethos of building societies and their customers was to save before borrowing and this discipline would be lost. Indeed, it has been lost. I was confident because, on my own recent experience, I knew that they would have difficulty in becoming banks, as few were managed by qualified bankers and their business models were perhaps not appropriate for a fully fledged bank.

At this time the Bank of England was the responsibility of a member of the Cabinet. During this period, the executives of those mutuals who would be eligible for a financial reward if the vote was in favour of privatisation were successful. All these building societies were converted and only a few executives that were against privatisation won their case with their members. Societies such as Nationwide and a handful of others survived. Today there are few survivors from those that chose the plc route, whereas many mutuals have survived and operate today.

Then, to my amazement, the same supervisory department at the Bank of England allowed those building societies to become banks. We should not blame the people in 1997, as the decision had been made in the 1980s. It is not for me to speculate as to which political decisions were made at that time, but something fundamental must have happened between the time—only a few months earlier—when I had applied for a licence and when the building societies were let through the same net. No central banker worth his salt would have ever licensed a bank that was going to rely partly on wholesale funds, which some clearly did and do.

The subsequent worst offender was the arrogant Halifax, which, when I last saw the figures, had a mortgage book twice as large as its personal customer funds, so was entirely dependent on wholesale funds, whereas its mortgage book should have been restricted to its customer deposits, plus capital and reserves. This phenomenon was driven by its executive rewards for more and more new mortgages. We were not the first. President Reagan did it first by changing savings and loans into banks although, at the same time, they were heavily involved in fraud. It seems that nothing changes.

8 Dec 2008 : Column 185

The media have been full of the pressure to reduce lending rates but, in my experience, it is more important to concentrate on the savings rates, as there are more savers than borrowers. The banks have too long ignored that fact, which is what led to the need to use and be dependent on wholesale moneys, with all the problems that that has caused.

Most people—and, strangely, many bankers—do not realise that, unlike for all other companies, the first responsibility for bankers is to their depositors and not their shareholders. Banks were recently offering 6.25 per cent for deposits, so their average cost of money would be around 4 per cent and lending to the corporate sector with the current economic situation would be a minimum of 9 per cent. The base rate at 2 per cent is largely irrelevant, because you set the lending rate in relation to your average cost of funds; if banks are borrowing wholesale money at 7 per cent or more, the situation is even worse. Gordon and Alistair have done a good job in saving customer deposits—just imagine if we had all lost our deposits—and trying to finance more expenditure from people who are feeling the pinch just to survive, but they have yet to finish the job.

What is now required is legislation to instruct banks to reduce their exposure to mortgage lending to a lower sum than their personal deposits and no longer to finance their mortgage lending with wholesale moneys—in fact, to return to being like building societies. Wholesale funds were only ever appropriate for corporate customers, never for personal customers. To do this, banks must be compelled to lower their exposure to mortgage lending by selling their overexposure to this market now. This is the fundamental error of judgment, which has taken nearly 30 years to eventually generate these problems.

5.07 pm

Baroness O'Cathain: My Lords, the two opening sentences in the gracious Speech emphasised the overriding priority of ensuring,

and that the,

So many times in the past I have spoken in your Lordships' House in support of families, and it is good to see that they are given such priority here. Sadly, however, it is not just families and businesses that are suffering from the downturn, and from the Government's mismanagement of the economy over the years, which has left us so ill-equipped to deal with the downturn. What about the pensioners? My noble friend Lord MacGregor has already mentioned this, but he is the only person in the debate so far to do so.

For pensioners, there is not a single crumb of comfort in the gracious Speech. They are from that generation who subscribed to prudence and saved and who are now genuinely terrified of what the future holds for them. I have gone through the gracious Speech again, paragraph by paragraph, hunting for just something that might give pensioners just the

8 Dec 2008 : Column 186

smallest whiff of hope that this Government are remotely interested in, or concerned for, them. I cannot find a single word. I suppose, on reflection, that I was stupid even to hope that there might be one. Ever since this Government took office on the “Cool Britannia” ticket, lauding pop stars and other young celebrities, the pensioners have become more and more ignored.

Let us not forget the raid on the pension funds—conservatively, with a small c, estimated to have taken more that £200 billion from pensioners. Of course, in view of the incredible waste of public funds over the past 11 years, that probably seems a pittance, but the effect of that pittance has been that our state pension is now one of the lowest in the developed world. This is an absolute shame. I hope that the Minister will address this issue in his summing up.

That brings me to the Government’s increasing tendency to avoid answering difficult questions. With one or two notable exceptions, Back-Benchers can resign themselves to the certain knowledge that holding the Government to account is becoming very difficult. In the debate on the economy on 3 November, many questions were asked, but how many were answered? Or, to be fair, how many have been answered since? Am I the only person whose work in that debate was not given the courtesy even of one question being answered? I think not.

Pensioners are being given the same brush-off. They are still licking their wounds from the year when the Prime Minister—then Chancellor of the Exchequer—awarded them a 10p increase. How disgraceful. I ask the Minister: is there another plan to squeeze more out of pensioners? And what comfort will the Government give to those who have spent their working lives not only contributing to their ultimate state pension but also saving for a rainy day, which is what the great majority of that generation did?

I turn to saving. We are encouraged to save, but can somebody tell me how? There is a sentence in the gracious Speech that is intended to encourage saving, telling us that the Government will,

What about offering financial incentives to pensioners to compensate for the raid on their pensions; for the fall in value of their contributory pensions resulting from the catastrophic fall in stock markets; and for the impact on their pensions of the maximum 1 per cent interest that they will get on their cash savings, when inflation is at least 4 per cent? What sort of example is that to encourage the younger generation to save?

Acres of newsprint have been taken up with analyses, speculation and second-guessing about the global financial situation. The Prime Minister has time and again expressed his belief that we really do not deserve to be in this situation—it is always somebody else’s fault.

In the debate on 3 November, I mentioned my belief that setting up the MPC was fine, but that the FSA was directing the Government rather than the other way round. The then chairman of the FSA insisted that he should hold the positions both of chairman and CEO, despite the fact that all businesses were being forced to split the roles. The rot set in then,

8 Dec 2008 : Column 187

and the culture was established with the belief that they could do as they liked. How will the FSA be affected by the proposed legislation,

Surely the time has come for the Bank of England, which knows about banks, to regulate them—not the FSA. This, I think, is what the noble Lord, Lord Wakeham, implied.

This debate is not about the social fabric of our country, but the economy impacts strongly on that. There is a lack of credible information coming from the Government. There is deep unease. All the references to global recession do not cut much ice in the towns and rural hamlets of this country. I mention them because they did not warrant one word in the gracious Speech. There have been many comments that Africa was ignored: that was a real shame. But where were British agriculture, British food and British farming mentioned? I will not be fobbed off by the passage in the gracious Speech saying that the Government,

The Government should occasionally read local papers and see what people really think of the grandiose development agencies—I refer to the speech of the noble Lord, Lord Razzall. One of these agencies had taxi bills of more than £45,000 per annum for the two-day-a-week chairman.

The Government should also read how the previous Minister with responsibility for housing visited an area to “listen” to the concerns of local people who had spent a huge amount of time consulting the vast majority of inhabitants about a proposal to put an eco town on 87 per cent grade 1 land. The Minister declined an invitation to walk round the site, saying, “I’ve seen it from my car”. She then spent more than an hour at the meeting place while her driver kept the car running the whole time. How eco is that? Do the Government really think that the words in the gracious Speech about creating greater opportunities for community and individual involvement in local decision-making will be met with anything other than derision in that area, and in rural Britain generally?

I remind the Government that they became the government of this country on the votes of 22 per cent of the electorate. That has given them the ability to ride rough, and rough it has been, over so many of their stalwart supporters, particularly those who have fought for this country. If I felt that we could believe anything that we hear from the Government, I might have hope. As it is, I cannot, because the gracious Speech failed lamentably to give me that hope.

5.15 pm

Lord Layard: My Lords, I am delighted on this side of the House to follow my noble friend Lord Thomas’s fine remarks. Like him, I congratulate the Government on their handling of this extremely serious crisis. As we know, they have led the world in handling the banking aspects of the crisis and have been resolute and clear on the need for increasing fiscal deficits. Since the Opposition do not consider that acceptable,

8 Dec 2008 : Column 188

I shall concentrate my remarks on fiscal policy: first, the rationale for deficits and increased borrowing; secondly, the composition of the increased government expenditure; and, thirdly, the longer-term future of government expenditure within the PBR.

We have, of course, an exceptionally severe crisis, more complicated than any that we have had since the war. We have only one thing on our side: the depreciating currency. Otherwise, very little can help us, any more than any other country in a worldwide crisis. The problem everywhere is sustaining the level of spending, which is why it is not helpful to talk about the need for increased saving in the short run. The ideal, as the Prime Minister has said so many times, would be a worldwide expenditure reflation where every country would gain from the expansion in every other country.

It is encouraging that Mr Obama is now talking about an injection of 3 per cent of GDP, a serious sum. The European Commission has been talking about 1.5 per cent. Yet the Opposition are saying that these deficits, which would be unfunded, cannot work even though they have worldwide support. Instead, they have said that the deficits will simply force up the rate of interest that the Government must pay on their debts. There is absolutely no reason why that should follow. There is currently a worldwide glut of savings looking for safe places to go, which is one reason why the long-term interest rates on British government debt are currently falling. Of course, we have the lowest debt ratio of the G7 countries.

In any case, if it became difficult to fund the deficit from the private sector, it is perfectly respectable for the Government to borrow from the Bank of England. Printing money in a slump is a totally respectable policy. Of course, eventually, when the private demand for liquidity starts coming down, you must reduce the supply of money and the bank must mop up the excess supply of money by selling the government bonds that it previously bought in the immediate crisis. However, that time comes only after the crisis is over.

I have some specific points on the composition of the fiscal reflation. The Government’s policy is to cut VAT and bring forward capital expenditure, but they have also shown great wisdom in giving extra money to Jobcentre Plus. There could be no bigger mistake than giving up on welfare to work in this crisis. That would lead only to a ballooning of long-term unemployment, as we saw in the early and middle 1980s when the noble Baroness, Lady Thatcher, abolished the requirement for unemployed people to sign on at jobcentres. These are the kind of mistakes that we must absolutely avoid.

In that connection, speaking as a labour economist, I warn the Leader of the Opposition that we know that, if you want to stimulate employers to employ long-term unemployed people, it is much less effective to do that through tax relief than through some well administered system of financial inducement in the hands of Jobcentre Plus. That is a worldwide fact well established in the experience of many countries.

I come back to the other issues to do with expenditure. The Government are mainly bringing forward physical capital expenditure, but I understand that they are also now considering bringing forward some human capital expenditure, which I would very much welcome.

8 Dec 2008 : Column 189

I mention two candidates. One is the guaranteed apprenticeship, which the Secretary of State mentioned. At present, this is scheduled to come in in 2013. Why not bring it forward to 2011? The second is the help given to people suffering from depression and anxiety, whose number will inevitably grow as a result of the recession. The Government are committed to implementing NICE guidelines for that unfortunate group of people by 2013. Why not bring that forward to 2011?

As regards the long-term future of government expenditure, by 2013 the Government aim to return the share of government expenditure in GDP to the same level as in 2008, which will mean that from 2011 government expenditure will have to grow very much less than national income. I wonder whether that will be a viable policy. We know that the demand for health, education, social services and the police grows faster than income. This is a worldwide experience. That is what people want as their income rises. On top of that we have a new factor in the labour market arising from the impending decline of the financial services sector. That sector has grown and over the past 20 years has been a major competitor with the public services for labour. It will now shrink—in my view, permanently. If at the same time there is a big public demand for skilled labour to deliver smaller class sizes, better healthcare, better social workers and more police, it seems at least possible that public pressure will force the Government to increase expenditure on public services at a faster rate than is allowed for in the PBR.

I wonder how we are to achieve our climate change commitments without more green taxes. However, that is speculation as regards the future. For now, we can only praise the Government for the way in which they have tackled this crisis. I sympathise with what the noble Lord, Lord Skidelsky, said. We may find that we have to do more by way of reflation than we have allowed for in our plans, as Mr Obama is planning to do. However, we have made an excellent start.

5.23 pm

Viscount Trenchard: My Lords, I am grateful to the Secretary of State for introducing the debate.

Next Section Back to Table of Contents Lords Hansard Home Page