The Economy

Part of Opposition Day — [8th Allotted Day] – in the House of Commons at 4:38 pm on 18th March 2009.

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Photo of David Davis David Davis Conservative, Haltemprice and Howden 4:38 pm, 18th March 2009

It is always a pleasure to follow Mr. Meacher because he matches eye-watering damage to the economy with eye-watering honesty, and we always know that he means exactly what he says on these issues. I suspect that many Opposition Members agreed with probably three quarters of his analysis, although perhaps not the last few words.

We are not unused to hearing people now argue that this is the end of free market capitalism or the fault of free market capitalism. We are also used to hearing people refer to the 1930s and cite Keynes as the solution. With that in mind I had a look back at what I remembered from a biography of Keynes and found one of the last things that he said about resolving some of the economic problems of his day—not that dissimilar from those we face today. He said:

"I find myself more and more relying for a solution to our problems on the invisible hand which I tried to eject from economic thinking 20 years ago."

So he, after two world wars, the tragedy of the gold standard and the tragedy of the 1930s, during which many of our grandfathers spent their time on marches or hunger marches, he came back to the thought that whatever we do, the answer to a recession, the answer to a depression, is to make the economy grow again. What we must not do, in curing one of the problems that we have, is poison the whole economy.

I shall go through Keynes's analysis, but come to a slightly different conclusion. He also recognised, probably more than any economist before him, the importance of confidence; he first referred to it as "animal spirits", the driving part of the economy. He recognised that confidence was ephemeral, but that it was not irrational.

If it is difficult to raise capital and get loans, if markets are uncertain and if there are problems of demand or lack of demand—indeed, if there are prospects of high taxation in the future—confidence is enormously harmed. My point is that the Government's management of this issue in the past year or two has added dramatically to our problem; it has reinforced the position highlighted by the IMF—that we will probably face a longer recession than anybody else. There are many other structural reasons, but that is one of them.

At first, that was almost inexplicable to me. Why were the Government so slow, timorous and ham-fisted about their handling of the banking crisis? After all, there is no shortage of examples of how—and, indeed, of how not—to handle one. Anybody who understands capitalism will recognise that banking crises are not that unusual. They happen quite a lot, and there have been a few in the past decade or so. This is not a new point, but it is now widely recognised that the Swedish banking crisis was handled well and that the Japanese one was handled badly. Interestingly, the Government have mimicked not the Swedish example, but the Japanese one. What is the difference? Each country started—like all Governments, ours included—by underwriting the bank depositors. That was quite right; that is how to stop a run on a bank. It is straightforward, although expensive in some senses, and it has to be done. There is no choice about that stage.

It was in the second stage that the Government deviated from the Swedish example. I hope that the House will forgive me if I recount that example. The Swedish Government said to their banks, "You will identify the full extent of all your losses and liabilities before anything else happens. If you do not, there will be no support." That is a clear and brave thing to do; perhaps our Government did not do it because it is so brave. What is the advantage of that approach? First, it makes the shareholders meet the losses first, as is entirely proper in a capitalist economy; that also reduces the taxpayers' loss. Secondly, it pre-empts all the problems of bonuses, pensions and pay-offs that shame all of us who believe in a free market economy. Shareholders who have just lost their entire wealth are not about to stand for that sort of behaviour; Lord Myners might, but those shareholders, I am afraid, will not. Thirdly, the approach identifies the banks in three categories: those that do not need help; those that can reasonably use help to serve the nation's needs for borrowing and industry capital formation; and those beyond recall—those now known in the parlance as the "zombie banks", which are the dead banks to which we are still giving transfusions of taxpayers' money.

The approach is tough, but it is a necessary precursor of what we should have done in this crisis. That shock action in Sweden stopped what is known as a liquidity asset spiral—the continuing reduction of the assets on which the banks base their value and activities. It was predicted that the disposal of toxic assets in Sweden would take 10 years; the vast majority was done within three years. What was the cost to the nation? If we count interest, it was 2 per cent. of GDP; if we do not, it was nothing—zero—because the issue was addressed up front. The action stopped, throughout the whole Swedish economy, what is known by the technicians as payment uncertainty: the fear that the next customer will not pay the bill, and the fact that someone cannot get credit insurance. Such things vanish when the problem is dealt with.

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