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On the other hand, when banks themselves are in difficulty, they expect Governments and taxpayers to behave generously toward them. They bleat about their innocence and claim they are victims of a world-wide crisis which is not of their doing. Nonsense! Toxic assets did not just appear in their balance sheets by magic. They were high-yield investments approved by the banks' management and purchased willingly. They are not innocent bystanders, yet they want central banks, Governments and taxpayers to behave in a far more generous manner than they do—and we have to because, if we do not, the entire banking system might collapse and we will all lose our deposits.

Why are we in this position? Simply because we in the West have become almost wholly dependent on debt finance. Banks are the custodians of our money and lending is their business. When we need money, we go to our banker and he lends to us. We have become accustomed to borrowing. We borrow to buy things we would like but have not yet saved for. Besides banks, we borrow from shops and on credit cards. Borrowing has become a way of life for so many of us. Business and economic cycles are a product of our present way of life, to which we have become addicted. These cycles of boom followed by bust arise and are perfectly natural by-products of our reliance on debt finance.

Furthermore, bank lending is the principal producer of inflation. When a bank lends money to a client, it deposits money into its client’s account. Thus, total deposits increase. The money supply is the sum of total deposits and cash in circulation. Therefore, the money supply increases, causing inflationary pressures.

We have embraced a debt-based monetary system because banks lend depositors’ money rather than simply storing and distributing it for them. They can lend it because when we put our money into our bank account, the instant it enters the bank, title to our money is transferred to the bank. The money then belongs to the bank and not to us and we are no more than unsecured creditors of that bank. Secured creditors have first call on what many still believe is their money in their current accounts. But it is no longer their money. The money belongs to the bank and it can then gamble with it if it so chooses. To my knowledge, there is no specific law which authorises this transfer of title. Can the Minister confirm my view? Although he is not in his place, I welcome the noble Lord, Lord Myners. It is the first time I have spoken in a debate with him. It is good that there is a second Treasury Minister in this House, for I think the first time in 19 years.

It seems that the banks have been getting away with removing money from depositors' accounts and lending it for so long that the law of precedence now applies. Perhaps because what they have always done is now legitimate, the prudence and circumspection which

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previously was always the hallmark of respectable bankers—so that depositors would not suspect that banks might be removing money from their accounts and using it to earn interest for themselves—seems no longer to be necessary. Now, to our horror, we have discovered that what banks call loans or investments are proving to have been some very big gambles indeed.

The net result of all this imprudent behaviour is that too many in the West have now reached the point where their levels of debt are too high and few people, businesses and Governments can continue to borrow more. Yet the only solutions on offer to our current economic slowdown seem to be to encourage everyone to borrow more. Monetary and fiscal policies are now wildly loose. Financial experts, economists and self-appointed opinion-formers are all calling for lower interest rates to encourage more to borrow. I suspect that lowering interest rates will not work this time. There is simply too much debt in the system. While some may be able to borrow a bit, they will soon reach their limit and western economies will be back in the doldrums again. Governments themselves are now so dependent on debt that, in competing with each other for funding, they will be the prime force driving up interest rates. Our own Government need to sell £150 billion of debt in each of the next three years—more than triple the recent annual average. These government-driven increases in interest rates will place more strain on those who have borrowed to the hilt, and more businesses will fail, leaving Governments with less income and greater expenses.

Contrary to those who fear deflation, I am confident that we are more likely to experience stagflation. The Federal Reserve bank in America has now created $8.2 trillion of new money in its attempt to bail out the banking system. The Bank of England has created more than £1 trillion in its attempt to save our banking system. I agree with my noble friend Lord Higgins that these increases in the money supply will inevitably produce inflationary pressures. When these are combined with the current economic slowdown, we will have the classic conditions for stagflation.

Let us be honest about the so-called success of these bail-outs. While they have stemmed the immediate collapse of the system, banks still face substantial potential sub-prime losses, losses from failures of derivatives and losses from credit card defaults and defaults of ordinary loans now being serviced when businesses cut back or fail. We need a new approach but I see nothing in the gracious Speech that heads in that direction. I introduced the Safety Deposit Current Accounts Bill in this House on 30 January. It was designed as a first step in leading the banking system to safety. Sadly, the Government were not remotely interested. Given what has happened in the past 10 months, does the Minister agree with Sir Ronald Grierson’s letter in the Financial Times on Friday, which stated:

“A bank is a bank and if the security of its depositors is not its main concern, it should be required to adopt another name. Members of the public are entitled to take this for granted”.

If the West is serious about fixing the system so that it will not collapse again, we need also to consider a massive conversion of debt to equity. If, as the noble Lord, Lord Mandelson, said when he opened the

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debate, the same mistakes are not to be made again, we and other western Governments must stop just putting a plaster over the cracks in our monetary system, and properly reform it. Without that reform, there will be another bust.

A little before Gordon Brown boasted to us that there would never be another bust, I predicted in this House that the cycle would continue, but that next time we would start deeper in debt, with a burden harder to carry. I make the same prediction today. Unless we change our banking system, we will leave our children and grandchildren a legacy that I doubt they will be able to overcome.

7.32 pm

Lord Cotter: My Lords, today we get the chance once again to address the issue of business and the economy. We have had much activity in recent weeks, with Statements, the Pre-Budget Report and the Queen’s Speech; but still there is much to do in a continuing scenario. I will concentrate on the small business sector, which provides six out of 10 jobs. My whole working life outside Parliament has been in that sector. Business needs work, a job to do. But small business also needs a fair chance. The Government still have much to do.

One in five small firms is spending more than 10 per cent of its annual turnover on energy costs. Utility bills have become the second biggest expense for companies. There has been a concentration, rightly, on banks; but recent surveys have shown dissatisfaction with energy supply within the business sector. None of the big electricity companies received even a “satisfactory” rating in a recent survey of more than 2,400 small firms. There are complaints about costs: prices go up but take a long time to come down again. There are many examples of inaccurate billing, infrequent meter reading and pressure for payment even when errors have been made. Complaints to utilities are often dealt with poorly. This adds to the pressure on struggling businesses. The Government have called the banks together. I hope that they are doing the same with the utilities.

In the past few days, a report from the OECD showed that in October British energy bills rose at the fastest rate of any EU nation—by twice as much as the second fastest rate in the EU. We have seen great competition day by day at the petrol pumps among those delivering petrol to the consumer; but in the energy field, not so much.

The Queen’s Speech was light in many respects, and in others somewhat concerning. Under the latter heading I would place the Business Rate Supplements Bill, which many see as a burden on small and medium-sized enterprises. The British Chambers of Commerce, along with other small business organisations and we on these Benches, are concerned. It does not seem to be a good time to introduce an additional cost for businesses that are struggling to survive in a time of economic crisis. Business rates are seen as a big burden for small businesses. I refer to our small shops sector in particular. Small shops provide much employment and are vital to local communities. That is why this year I introduced my Retail Development Bill, which has passed through

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this House and is being supported by the Federation of Small Businesses and many other small business organisations. One of the Bill’s main proposals calls for the Government to implement an examination and assessment of the proportionate costs of business rates on small shops and large supermarkets. It is said that small shops can pay anything from 15 per cent to 35 per cent of their money on rates, as opposed to 5 per cent for supermarkets. I hope that Ministers will look at this with urgency, and at least, as an interim measure, re-examine rate relief schemes for small, local shops.

A government Minister recently called for business to use this difficult time to provide training opportunities for the workforce. It is a very welcome idea; better to do something than nothing. I respond by saying that the Government are going to introduce the education and skills Bill, which will provide a statutory basis for the apprenticeship programme referred to by the noble Baroness, Lady Sharp. Apprenticeships are vitally needed and, as I have said previously, it is crucial that small businesses get genuine financial help to enable them to carry on the apprenticeships scheme.

There is a continuing need in business finance for support from the banks. There is much still to be done. However, I was encouraged to hear from Lloyds Bank—the Minister referred to this—that it is stepping up lending to small businesses. This is something that I have confirmed through my local commercial department of Lloyds Bank in Weston-super-Mare. I hope that this trend is maintained, and that other banks follow suit.

Payment of bills is vital. This has been raised before, and I hope that the Government are monitoring their welcome commitment to payment within 10 days, and also ensuring that this payment practice extends to all government agencies and departments.

It must be emphasised that many firms need help to understand money and finance. The Association of Chartered and Certified Accountants points out that a large proportion of small businesses lack skills in this area. The ACCA has called for support and mentoring. I hope that the Minister will recall his announcement of 22 October on assistance for small businesses in which he talked about advice being delivered through Business Link. I again put to the Minster the concerns out in the wider world that the Business Link service is variable. In some areas it is very good; in others, not so good.

Financial advice is of key importance. I saw for myself as a Member of Parliament how banks can help small businesses to understand finance through seminars. I understand that such seminars are currently planned. I hope the banks can be helped or encouraged not to put a further burden on this sector, but to have seminars so that the key ingredient for business—understanding finance, and how to run businesses financially—is carried forward.

7.40 pm

Lord Sanderson of Bowden: My Lords, I do not suppose that it is terribly popular to declare that for six years, up to 2004, I was chairman of a bank—not

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only that, but a Scottish bank. Fortunately, it was the Clydesdale Bank, part of the National Australia Bank, which has a policy of prudence rooted in some terrifying experiences in the United States mortgage market 10 years ago. I am happy to say that last week’s Clydesdale Bank results show good, firm cost control and strong credit management, leading to the most important thing for a bank: the confidence of its customers. In passing, let me say that I am glad that I am not the chairman of a bank in which the Government have now taken an interest, where they are demanding a 12 per cent coupon on their preference shares. That may be overkill when one considers the comparisons with Holland and France.

I shall raise three matters with a bearing on today’s problems: first, the regulation of banks; secondly, pensions; and, thirdly, savings. I trust that my own party may listen to what I am saying, looking to the future. In the case of Northern Rock, I wonder whether, if the regulator had been the one that I experienced—that is, all of us joint stock banks under the cosh of the direct control of the Governor and court of the Bank of England—this sad tale would have happened. I think not. I am not a believer in the regulation changes made to the banks in 1997, although I fully approved of the introduction of the MPC. I know just how tough the regime was in my time; the experience of the noble Lord, Lord George, and his team at the Bank of England was second to none and left very little room for us to have errors. I ask my party to revisit this matter in due course.

Perhaps Lloyds TSB could have taken Northern Rock under its wing if it had been given enough notice. That might have prevented the sad sight of queues in Newcastle and a government bail-out. Personally, I do not believe that the three-legged-stool approach—the Bank of England, the FSA and the bank concerned—is the correct answer for the regulation of joint stock banks.

On pensions, my time as chairman of the Clydesdale Bank pension fund from 2000 to 2004 was not enjoyable. No doubt the Chancellor of the Exchequer of the day wished to spend much more money on health, education and other deserving causes. However, removing ACT was not the way forward, as it completely destabilised our pension funds. We ran a good final salary scheme at the bank, non-contributory as it was, where all the employees were well provided for. This was blown sky high by the changes at the end of the 1990s and we had to move at a stroke to a defined contribution scheme, which is not nearly as attractive a situation for the employees concerned.

What is the situation of pensions today, as has been mentioned earlier in the debate? The pensions industry is having a very difficult time. Recent estimates are that UK pension funds have a deficit of almost £100 billion, as one would expect when the stock market falls have been so enormous.

One thing to help that the Government might consider would be to issue more long-dated gilts to help out pension funds which need to hold on to investments that match their liabilities. Recently, the Government stated that they would issue additional gilt sales of £34.4 billion in this fiscal year, but only £5.3 billion of

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these bonds will be long-dated. I hope that the Minister might consider what I am suggesting as a helpful suggestion in these difficult times for pension funds and pensioners.

Thirdly, on savings, the gracious Speech indicated that there would be a Bill incorporating savings gateway accounts. That is welcome, but it affects a relatively small number of people. It is not nearly enough for many people who rely on dividends and interest from their savings to see them through. Surely tax-free savings limits could be raised to help savers hit by these sharp falls in interest rates. In the case of shareholders in some banks—such as the Royal Bank of Scotland, Lloyds TSB and HBOS—no dividends will be paid in the coming year.

Living on such a reduction in savings and investments will be devastating for many people. Surely savers could be allowed to hold more money in tax-free ISAs, as has already been mentioned, where there has been no increase in limits in recent years. An announcement on this issue would be a far more welcome Christmas present for these savers than the 2.5 per cent reduction in VAT announced in the autumn Statement.

At a time when we are looking at unprecedented national indebtedness for the next few years, and a similar situation with personal debt, it is up to the Government to set an example by reining in unnecessary and unproductive government spending. The Minister gave us some hope of this in his opening address. Was it not the Prime Minister who said in 1993 that Labour must cease to be seen as the tax and spend party and, later on, that a rise in top tax rates would yield little? The inference is that it would lead to entrepreneurs being frog-marched out of the country. Yet he has allowed the Chancellor of the Exchequer to do just that: raise the top rate for certain people.

Perhaps we should remember the old Presbyterian saying that was drummed into us as children: “Pay as you go and, if you can’t pay, don’t go”. This is as true for Governments as it is for individuals. There must be a national return to the virtue of living within our means. Being overborrowed and overspent is a dangerous cocktail.

7.47 pm

Lord Sheldon: My Lords, I shall refer briefly to the absence of a Civil Service Bill, which we have expected every time the Government have come into office. The Government have dominated the Civil Service. There have been 10 years of commitment to produce a Bill, but we have not seen it. In every Queen’s Speech, I look for the legislation. Our Civil Service used to be assessed as the best in the world. It has become subject to the more powerful Governments, which is very sad.

I turn now to the European Union, which has grown to be a large part of the economic world. Of these large parts of the world, there is China with its 6 million graduates, which will obviously be even more powerful than we had anticipated, there is India, there is the United States and, of course, there is the European Union.

On 26 June 2003, Tony Blair referred to a referendum on euro membership before the next general election. This referendum is a problem that will need to be

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addressed in some way. My noble friend Lord Mandelson told the Labour Party conference that our goal should be to enter the single currency, before adding that the Government have no plans to move towards joining the euro.

In 1957, we were the richest major country in Europe, but we decided to go it alone. In the following years, France, Germany and the Benelux countries overtook us. We are still trying to close the productivity gap. If once again we fail to join the European leaders, we risk falling behind them. Recently we have seen a depreciating currency. On 1 August 2002, an important document by Richard Layard—now the noble Lord, Lord Layard—entitled, Why Britain Should Join the Euro, was published. The main purpose of joining the euro is to retain a high standard of living. In France, Germany and Benelux, the hospitals, schools and transport systems have higher standards than ours. We can achieve such standards only if we improve our efficiency by becoming a member of the European market.

High unemployment in some European countries is not an argument against joining the euro. The argument that we should wait for unemployment rates to converge is like saying that the south-east of England should have its own currency. Nor does linking our currency to that of a high unemployment country such as France mean that we would risk higher unemployment here. The Netherlands has only one-third the unemployment of Belgium. Within the single currency area of Britain, the south-east has one-half the unemployment of the north-east. The link to the north has not increased unemployment in the south.

To join the euro the Government have to recommend entry and there has to be a vote in a referendum. In addition, we have to agree with our European partners the date of entry and the rate at which pounds will be converted into euros. This rate is therefore a political decision. Once markets know what the entry rate will be, the current market rate will move close to that level, depending, of course, on how likely a successful outcome to the referendum is. The exchange rate was too high earlier this year and made Britain less competitive than it needs to be.

In France, Germany, Benelux and northern Italy, productivity per hour worked is considerably higher than in Britain. This is true now and was true 20 years ago. Over that period Britain has failed to catch up with those other European countries despite all the talk about our superior economic system and the obvious scope for copying what others do better. Britain was Europe’s only oil economy but the position there has declined substantially and the situation is rather different now.

Belonging to a large single market should raise living standards through larger economies of scale. Europe is by far our largest market, taking half our trade compared with only 16 per cent with the United States. A single market and a single currency increase trade and eliminate exchange rate fluctuations. Now that the single currency is so much more prominent in Europe, we are in a more exposed position.

Manufacturing activity has been shifting to the area of currency stability and there is some danger that the City’s predominance in wholesale financial

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services will not be helped if Britain is outside the euro in the long term. Five years ago there were calls for a euro referendum. However, exchange rate fluctuations have increased as capital is moved around the world. For a medium-sized country such as Britain, such fluctuations are extremely damaging. We need to start considering our future relationship with the other European countries.

7.53 pm

Viscount Eccles: My Lords, it is a great pleasure to follow the noble Lord, Lord Sheldon, because he clearly shows that there is a rich mixture of opinion in this House.

We have not been much good at forecasting lately. I wonder how much confidence we can have in present forecasts. After all, the noble Lord, Lord Mandelson, says that we are in unprecedented times and then prays in aid his experiences in the 1980s. That is no more helpful than the false antithesis between those who want to do something and those who allegedly do not.

During the build-up of the debt mountain the banks have been like children in a vast game of pass the parcel, storing away parcels of uncertain value and, when the music finally stopped, refusing to play with each other any more while they tried—unsuccessfully so far—to assess their losses, hardly daring, I suppose, to open many of their parcels.

At the same time Asia, particularly China, was building its mountain of United States Treasury bills to offset $500 billion of annual trade deficit, which has been a second trend going unsustainably in one direction. Meanwhile, we were also building two smaller mountains, the first being household and personal debt, the second rising public expenditure—for example, the rising cost of public sector pensions, topped up with the largely off-balance-sheet deferred PFI debt, which will cost more than £180 billion to repay with another £70 billion of repayments in the pipeline.

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