The Economy

Part of Council Tax Rebate – in the House of Commons at 7:12 pm on 31st March 2009.

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Photo of Michael Meacher Michael Meacher Labour, Oldham West and Royton 7:12 pm, 31st March 2009

I have listened to the speeches made from both Front Benches, and the yawning black hole in this debate is the Opposition's lack of any serious positive alternative way of handling the crisis. Having said that, I think also that the Government's policies are not working adequately in accordance with the objectives that they have set, and that is what I want to address.

The Government have now committed at least £1.2 trillion to shore up the banks to get lending flowing again through the economy to businesses, jobs and home owners. They have tried reducing interest rates to their lowest rate since the foundation of the Bank of England in 1694. They have thrown gargantuan sums of taxpayers' money at the banks through special liquidity, credit guarantees, bank recapitalisations and asset protection schemes. They have provided a huge fiscal stimulus, which I support, even when the deficit on the public accounts was already enormous. They have now started to print money—the so-called quantitative easing—even at the risk of severe inflation in years to come. I respect the huge efforts that they have made to get on top of the crisis, but the truth is that the purpose of all that action—lending—has deteriorated sharply. It is not increasing at all.

In August 2007, when Northern Rock collapsed, lending by the banks and building societies to businesses and home owners—I am referring to the M4 money supply—was growing at an annual rate of 17 per cent. In September 2008, a year later, when the Wall street banks collapsed, the rate of growth had fallen to 9 per cent. Last month, despite the eye-watering sums committed to the banks to get lending going again, it was down to a disastrous 4 per cent. None of the policies, sadly—tragically—is working or at least working adequately.

The House must ask whether there is an alternative. There certainly is, but despite this being the biggest crisis that Britain has had to face for nearly a century, the Government—so far, at least—appear unwilling to consider it.

Why has bank lending largely stalled? All the policies employed have been based on the premise that the banks are keen to extend credit and that the real problem is a lack of sufficient reserves. That might have been true initially—it probably was—but it certainly is not true now. They are reluctant to lend now because they fear that they might not have enough capital to meet the losses from their existing loans. Indeed, given the liquidity scares of the past year or two, they may well prefer to hold more reserves in relation to their deposits. For that reason, the latest boost through quantitative easing might prove rather limited in effect. Even if the supply of money were increased, as the Government desperately hope, the velocity of circulation, which they cannot control, might fall. That would leave spending unaffected.

We have committed £1.2 trillion—a sum equal to 80 per cent. of our GDP, which, if fully called in, would almost bankrupt the country. Moreover, any further major fiscal stimulus has now effectively been ruled out by the comments of EU leaders in advance of the G20 meeting, let alone by those of Mervyn King. However, the state, on which the banks utterly depend, is still not requiring the banks to raise their lending to businesses to the level necessary to contain unemployment and save the real economy, which is the whole aim of the exercise.

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