My Lords, no doubt like many other noble Lords, I accumulated in the run-up to the Summer Recess a great pile of unread submissions, reports and analyses on the economic situation, which stood as an accusatory heap at the side of my desk. I put off reading them as long as I could, because most of them were worthy but extremely dull. Economic events, however, during September and early October rendered virtually all these tomes redundant. The economic map had irrevocably changed and I could safely ignore my pile; it belonged to history.
Economic events over the past two months have been the most dramatic and alarming of our lifetimes. The global banking system came within days, if not hours, of total collapse. Whole sectors of the economy, led by but not limited to construction, have collapsed. There is consensus that, if we are really lucky in the UK, unemployment will rise by only 1 million over the next 12 to 18 months. In these circumstances, we must ask not only why our much vaunted system of Anglo-Saxon capitalism has been found wanting, but what action is now required to minimise the costs of the recession and build a more robust system for the future.
As to why all this has happened, there is, of course, no shortage of villains. Depending on where you stand, they include venal bankers, dodgy credit-rating agencies, supine regulators and hubristic Governments. Between them, they encouraged an almighty bubble of debt that would inevitably burst and which, indeed, now has burst, with devastating consequences.
How did this happen? Why did so many sophisticated economic actors so dramatically fluff their lines? As in so many cases, the newly rediscovered guru of such things, John Maynard Keynes, got it right in a phrase. He described as "animal spirits" the phenomenon in which a herd mentality develops, which assumes that current trends will continue indefinitely and which sneers at any questioning voice.
Such irrational bursts of exuberance and subsequent collapse are of course not new. Some world-weary cynics argue that this is just the way of the world, that booms and busts come and go and that the upward graph of human progress quickly resumes. There is obviously something in this argument, but it would surely be irresponsible to simply shrug our shoulders and treat this as a blip. Apart from anything else, the human misery that a recession, let alone a depression, brings compels us to act wherever we can.
Unlike the noble Baroness, I do not intend to dwell too long on the contribution of the Government to the current crisis, but I want to mention three points. The first point is hubris. The Prime Minister boasted of the end to boom and bust. He has also repeatedly said that we were better placed than other countries to withstand a downturn. Although he has acted decisively in recent weeks, this arrogant cast of mind has found Britain particularly ill prepared in many respects to deal with the current situation.
The Government's second mistake was to persist with a large budget deficit during the boom, so that now the cupboard is relatively bare when government expenditure is bound to rise and tax incomes to fall even without a further fiscal boost.
The third shortcoming was dilatoriness in dealing with the unfolding crisis. The first manifestation of this was the six months that it took to deal with Northern Rock—ironically, in the light of later events—largely because the Prime Minister was afraid to be seen to be nationalising a bank. During the first half of the year, we saw a series of half-hearted, or worse, attempts to deal with the growing problems. For example, attempts to revive the construction sector have been pathetic. The Government equally did nothing to rein in the ever more irresponsible levels of lending and borrowing. For example, it is now clear that, despite knowing that the Icelandic banking system was on the verge of collapse for months before it happened, the Government said and did nothing—and this was when many local authorities thought that they were being encouraged by the Treasury to put money in Iceland.
That is, however, all in the past and our focus must now be on the future. If we are to make sound judgments in economic policy making going forward, we need to accept a number of fundamental realities. The first is that, on a global level, the balance of economic power has irrevocably shifted. As we see Barclays being rescued by funding from the Gulf or the Prime Minister begging the Chinese and the oil-rich Arab nations to support a new global financial bail-out fund, it is clear that something has fundamentally changed. The world's financial institutions need to reflect this change.
As we discussed in your Lordships' House last week, it is no longer possible to deny China, India and the other resource-rich nations a full role in the world's financial institutions, or, for that matter, at the UN. It is not clear to me that the Prime Minister, President Sarkozy or the US fully realises that it will be impossible to get these countries to make the contribution that we are now asking of them without giving up the dominance of our power in the Bretton Woods and UN bodies that the West has enjoyed since their inceptions. However, we will have to do so.
Secondly, banking is not like any other sector of the economy. With such a small number of banks in the UK, it is abundantly clear that the Government cannot allow any of them to fail. This has major implications for bank regulation. It argues strongly for treating banks as utilities and regulating them in a way that makes it impossible for them to act in the reckless manner of recent years. One way of doing so would be to segregate retail banking and any day-to-day business banking from investment banking and the more esoteric financial products that have caused so much recent grief. I realise that there is nothing new in this; the Glass-Steagall Act in the US sought to do roughly the same in response to the Wall Street crash. I am not necessarily arguing for something identical to Glass-Steagall, but there is now an extremely strong prima facie case for ring-fencing those aspects of banking that constitute the utility and isolating them from more risky banking activities.
My reasons for thinking that we need a fundamental look at banking regulation are reinforced by the response of the upper echelons of the banking sector to recent events. I have no doubt that the vast majority of those involved in providing banking services are perfectly honourable and responsible citizens doing a good job. However, this attitude does not extend to the highest echelons of the profession. The top bankers still seem to think that they can carry on as they were, despite the fact that without the government action—let us remind ourselves that it amounts to support of various kinds totalling half a trillion pounds—they would in many cases be bust.
The attitudes of the banks to the statement of the Government a couple of weeks ago that those getting a capital injection would not pay bonuses and would continue lending to small business at previous rates seem to be verging on contempt. Bonuses are still being paid and small businesses are still going to the wall because the banks are withdrawing support. At the same time, Barclays is prepared to pay almost anything to avoid having any controls on the way in which top management behaves. Northern Rock, wholly nationalised, is the most aggressive of all banks in repossessing from people whom only months ago it encouraged to take out 125 per cent mortgages. I ask the Minister why, when the Prime Minister said that he expected banks to pass on the recent half per cent interest rate cut, Northern Rock failed to do so.
The Government are now negotiating a revised banking code. Can the Government give us any assurance that it will go beyond platitudes and include firm, specific provisions? How do the Government plan to police such a voluntary agreement, given the previous track history of the banking sector?
One consequence of the banking crisis is that there will be fewer independent high street banks and competition will be reduced. We need to look, in the light of this, at how we can help to diversify the sector, particularly for people at low income levels who will always be relatively unattractive customers for the big banks. We need an urgent look at how we can strengthen the credit union movement and the possibility of developing a new tier of community banks.
It is clear that the banking crisis is but the precursor to a crisis in the real economy, which is now starting to unfold. The collapse of the housing market and the construction sector is becoming more widespread as the contagion spreads to other sectors, such as retail and vehicle manufacturing.
What measures are now needed to mitigate these effects? The first must be a rapid reduction in interest rates. There seems every prospect that the MPC will indeed reduce rates again this week but, with rapidly falling inflation and rapidly rising unemployment, there seems little reason why it cannot do so dramatically, arguably even within the remit of the existing legal framework. There is a strong argument at this point for a change, if it is necessary, in the terms of reference of the MPC under the Bank of England Act. I shall be interested to hear the Minister's response to the proposal of the noble Lord, Lord Saatchi, in that regard.
Secondly, we need to cut taxes for those on low and middle incomes. We can do this without increasing government borrowing by ending upper rate relief on pensions, clamping down on avoidance, harmonising income and capital gains tax rates, increasing green taxation and trimming overall government spending. These measures would help those who are struggling the most to pay for essentials and to keep spending money in the high street.
We must ensure that mortgage repossessions are a last resort. The Government have made some positive steps on this front, but we do not think that they have done enough. For a start, they could stop Northern Rock behaving in such a belligerent manner. There are already nearly 2 million families on housing waiting lists. We can help them by allowing councils and housing associations to buy unsold properties and land from construction companies. That would replenish the social housing stock, stimulate the housebuilding industry and provide homes for people who desperately need them.
On the Government's general fiscal stance, they may be able to bring forward somewhat some building projects in the public sector. If possible, they should do so. However, turning the tap on quickly is in reality impossible and should not be attempted unless the quality is maintained and cost levels kept in check.
One of the constraints on the Government's bringing forward capital projects is a shortage in some sectors of adequate engineers and other skilled staff. More generally, it is clear that, if we are to compete more successfully in the new economic circumstances, we need many more skilled maths, science and engineering graduates. If necessary, financial incentives should be given to those wishing to study these subjects.
Of course, one area of economic activity offers the prospect of many new jobs and investment—namely, reducing our carbon emissions by the 80 per cent to which the Government are now committed. This should start with an expanded programme of home insulation, with a view to bringing all homes up to high standards within the next decade. This can be funded through arrangements with the energy companies, which received a £9 billion windfall from the European Emissions Trading Scheme and could employ many of the property surveyors and construction workers currently on the labour market. There is also a great opportunity for employment in the construction of wind turbines. That offers particularly valuable prospects for dock communities such as Hull and Newcastle.
Finally, we need a fundamental reappraisal of how we ensure the future prosperity of our economy. I am not at all gloomy about our potential as a country to thrive in a global marketplace. We have many strengths derived from a combination of reputation, creativity, innovation and the English language, and I am sure that the City will play a big part in this future success. However, we need a more balanced approach, in which we are no longer in thrall to the world of finance but give equal priority to those other services and high-tech manufacturing sectors in which Britain has been, and can remain, a successful global player.