Malcolm Wicks made a thoughtful and constructive speech, and I am sorry not to follow his theme, but I want to talk about the economy.
The Chancellor of the Exchequer said in his Budget in March:
"Britain is better placed than other economies to withstand the slowdown in the economy."
He went on to say:
"I am able to report that the British economy will continue to grow throughout this year and beyond."
Later he underlined the point by saying that
"we enter this period of uncertainty better placed than any other major economy."—[ Hansard, 12 March 2008; Vol. 473, c. 285-287.]
Since then, of course, the markets have blown the Government a decisive raspberry. The pound has fallen 26 per cent. against the dollar and 14 per cent. against the euro. The Government have clearly got this completely wrong, and the situation is dire. For 10 years, they have been boasting about their brilliance, notably the current Prime Minister with his glutinous self-satisfaction in his Budgets. How did they get away with it for 10 years? The truth is that during that period we have had a tailwind of globalisation, with first, the Asian tigers, and then the BRIC countries of Brazil, Russia, India and China. They have had 9 to 14 per cent. growth, and the rising tide of prosperity has covered the horrors that this socialist Government have imposed on us.
There are two main issues: first, we are over-taxed; and, secondly, we are over-governed. Both are equally important. Tax is cumulative—we pay direct taxes, indirect taxes, fuel duties, excises, and council tax. The burden of tax is too high, unfair and, in many cases, too complicated. We are over-governed, with all kinds of legislation under the umbrella of human rights, European legislation, health and safety, freedom of information and the ghastly tax credits system. We are being micro-managed, and too many public sector jobs and pensions have been created. The situation was really quite bad, but it has taken this Government to make it dire.
Dr. Cable tried to think of a doppelganger for the Prime Minister and came up with Stalin and Mr. Bean. I have been pondering this, and I think that I have come up with a better one. Think of a big guy, a bit overweight. He is a Labour Member of Parliament, difficult to work with, thinks that he is brilliant and the rest of the world is stupid, tells us that black is white and white is black, and goes around stealing from pension funds—yes, it is Robert Maxwell. I mention pension funds because the two legacies that this Prime Minister will leave are the damage to the economy and the damage to the hopes of many people in their thirties and forties who have no chance of enjoying the level of dignified and comfortable retirement that current pensioners have. The Prime Minister is responsible for that serious problem, which results from the loss of and damage to pension funds together with the weakness of the stock exchange and assessments on longevity.
I want to turn to the banking crisis and where we stand now. The diagnosis of the problem and the analysis of how to work our way out of it have been very unsophisticated. In the United States, the concept of putting together a $700 billion fund to buy out toxic assets was completely wrong. Similarly, in this country, pumping money into the banking system has been unsophisticated. Why should anyone invest in an asset of uncertain value? The best analogue for our present situation is the situation at Lloyd's of London in the early 1990s—it was called the spiral. Lloyd's underwriters would underwrite a risk and pass it on to sub-underwriters, and it went round in a spiral, with sometimes the same risk being insured several times—not just twice or three times but many times more than that. The spiral caused Lloyd's immense problems. I was there. Following my time as a director of a secondary bank in the 1970s, I sat on the Council of Lloyd's—in fact, I sat on its audit committee as an outside name—trying to put the situation right.
I have made this comparison before, and I am pleased that others have now made it. The Financial Times reported on
"Lloyd's, the insurance market that almost collapsed under heavy losses, survived through a restructuring that was the 'prototype of the bad bank', offering hope to financial institutions grappling with toxic debt, said Lord Levene of Portsoken, chairman of Lloyd's."
Lord Levene went on to explain how this was done. Banks should create a subsidiary to accept the assets that cannot be confirmed to be of a certain value; for the sake of shorthand, I will call them toxic debts. The toxic debts are put into the toxic subsidiary, and then the purged entity—the parent company—is a bank that can demonstrate its value and the fact that it is worthy of investment. As I said, why should anyone invest in an institution if its assets cannot be confirmed to be of a certain value? That is why people have been so reluctant to invest in the City and in banks, and why all banks are now reluctant to pass on credit to other banks and make loans.
That approach can work out extremely well, as it did in the case of Lloyd's. The subsidiary in question was called Equitas. Each of the insurance underwriting syndicates delegated its toxic assets to Equitas, which was managed separately. As Lord Levene said in his interview with the Financial Times:
"'If you have got this great boulder hanging over your head you need to concentrate on that all the time', he said. It makes it easier to move on, 'if you say we will let someone else concentrate on that and we will carry on running the ongoing business.'''
In the case of Equitas and Lloyd's of London, the asset was eventually sold off to Warren Buffett. The toxic assets had been "managed on". The great advantage of doing it in that way is that by pulling together the spiral of collateralised debt obligations and other assets that have been loaned on from bank to bank and identifying the weakness in the market, one finds that the loss had provision made against it by more than one institution, so the provision against loss is not only duplicated but multiplied many times, and the loss is less than one originally expected.
The Government have completely failed to identify the main problem, which is the banks' unwillingness to lend. The Conservative Opposition are exactly right in proposing a scheme that would guarantee lending and carefully target action where it is most needed. This Government are floundering. I have never felt more strongly that workers and advisers in the Treasury and the Bank of England should argue their point strongly with the Government. Above all, however, it is crucial that we have the opportunity to give the voters a chance to vote this Government out and a competent Government in.
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