My Lords, I draw attention to my declaration of interests in the register. I congratulate the Minister on his appointment; we served together on a board in the 1990s, and I know him to be a robust and resilient character who will not be the slightest bit dismayed by this afternoon's quite modest parliamentary assault.
Most of the speakers so far have focused on the impact on the UK economy. I want to range a bit more widely and look at the broader international impact. None of us yet knows how deep the economic downturn is going to be or how long it will last. You sometimes hear it said that it is just another recession of the sort we are used to; it will last four or five quarters and then we will be recovering by the last quarter of 2009 or early 2010. That is surely too optimistic. Almost anyone in business will tell you that it feels worse than that, and it is going to get worse still. At the other end of the spectrum, some people refer to it as a once-in-a-century event. President Bush, talking about the US economy, said in his inimitable style:
"This sucker could go down"— which can be more politely translated as, "We may be heading for a slump".
Is it going to be that bad? It should not be, given that we now have more sophisticated policy instruments than in the past and much better international co-operation. However, we do not yet have a clear view of the scale of the overhang of fiendishly complex credit derivatives, credit default swaps and other instruments that still have to be unwound. All that one can really say is that, first, the damage to our western economies is already substantial and it is going to get worse before it gets better. Secondly, it is affecting not only the UK, the United States and Europe but just about everywhere. I have visited seven countries in the past two weeks, ranging from Brazil to China and the US, and everywhere I have found pessimism about the prospects. The idea of "decoupling" simply does not work. Thirdly, we are still at an early stage of the crisis. It is far too soon for any self-congratulation about saving the world financial system.
In fairness, we must allow the measures already taken time to work through. Action to recapitalise the banks has gone some way to stabilising the situation but it is probably not enough, and more government money will be needed as the crisis continues to unfold. Normal lending has not resumed; companies, particularly small ones—I agree very much with the noble Lord, Lord Bilimoria—are still finding it extremely hard to obtain credit. The impact on insurance companies and on credit card issuers has yet to be fully felt. As poor company results come in for the fourth quarter of this year and beyond, they will add to the difficulties, leading to mounting job losses and bankruptcies. Beyond that, we have to expect that some countries in eastern Europe, in Latin America and possibly even closer to home will buckle and renege on their debts. That is the gloomy scenario that, in all probability, still lies ahead of us.
I shall reflect for a moment on some of the possible wider implications of the crisis and how we should respond. One is the issue of direct government involvement in business. It is fashionable at the moment—not without justification, in some areas of banking and finance—to talk of the excesses of the free-market system. Clearly there is going to be a backlash after the crash, and it will probably go too far; in fact, that always happens. But before people get too hung up on the evils of the free market, it is worth recalling the disasters inflicted on our economies and our well-being in the past by nationalisation, public ownership and government interference in business. I really cannot imagine that anyone wants to go back to that. Yet there are increasing demands, in mainland Europe especially, for more state intervention and more subsidies. I hope very much that the United Kingdom will fight a strong rearguard action in Brussels to ensure that the European Union's competition laws remain firm.
Similarly, we need to make sure that increased regulation does not go beyond the prudent to the punitive and simply increase the cost of capital, thus hampering rather than facilitating the recovery of the economy. While it is good news that Governments are co-operating internationally in response to the crisis, we should not confuse process with substance. You can reach bad solutions multilaterally just as easy as nationally. We do not need vast new bureaucracies for regulation, but simple principles, adopted internationally, and applied through clear rules at national level.
Another risk is that the present crisis will give globalisation a bad name and set countries on course to erect new barriers to trade and investment. Shamefully, one is hearing echoes of this in the US presidential election campaign, particularly in relation to trade with China, but also in parts of mainland Europe. "Beggar my neighbour" policies only worsened and prolonged the great depression of the 1930s. We have to avoid that. Trade is the way out of recession, and although the climate is not exactly propitious, an attempt even now to breathe life back into the Doha round is worth considering.
Then there is the impact on the world's poorer countries, which is only just beginning to be felt. If foreign investment slows or is withdrawn and export markets decline or even close, the considerable progress made in recent years in lifting millions out of poverty will be halted or reversed. The consequences of that are stark in themselves but also as breeders of turbulence, instability and extremism—and, at worst, fresh conflicts.
I have a specific point on China, which I visit frequently. China showed commendable steadiness in the Asian economic crisis in 1997, refusing to engage in competitive devaluation. Like every other country, it is feeling the effects of the spreading recession, and they will be severe for a country which still ranks only 121st in the world in per capita GNP. But because of prudent financial policies, China has the means to expand domestic consumption and invest even more in infrastructure; it has also announced measures to increase rural incomes. These measures should enable it to maintain growth at a tolerable level. It would be unrealistic to expect China to be the locomotive for global recovery, but it will be among the first to recover, and that will be positive for the rest of us.
There are many other possible consequences, including widespread disillusion with our western model of society in the eyes of much of the world as a result of the wanton damage caused by the convulsions in our financial system. At the least, our failures may be quoted as an excuse for various sorts of authoritarianism and government control of economies.
Our Governments are bound to be preoccupied with firefighting the immediate problems of keeping our economies afloat. Doing that effectively is crucial to minimising and avoiding the wider dangers and salvaging the reputation of our system. We must demonstrate that we can repair the damage without jettisoning the fundamentals of our free market system.