Economy

Part of the debate – in the House of Lords at 5:15 pm on 3rd November 2008.

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Photo of Lord Smith of Clifton Lord Smith of Clifton Spokesperson in the Lords, Ministry of Justice, Spokesperson in the Lords (Northern Ireland), Scottish and Northern Ireland Affairs 5:15 pm, 3rd November 2008

My Lords, there can be no doubting the seriousness of the current economic crisis that the UK faces along with many other nations. Other noble Lords have spoken, and will speak, on the causes of the crisis and how best it may be managed. Which thinker we should now turn to for guidance, whether Marx, Colbert or Keynes, is a matter that I shall leave to others, except to say that it is unlikely to be Milton Friedman.

Like the right reverend Prelate, I shall concentrate on the behaviour of the institutions that comprise the UK financial sector and those who have led them and contributed greatly to the present parlous situation. They bear great responsibility for what has happened and should be exposed and punished.

Since 1997, many noble Lords, including me, have regularly questioned the Government about their policies towards the excessive remuneration packages received by the directors of large companies. Most of those were out of all proportion to what was merited and were received by competent, mediocre and very poor performers alike. Numerous studies revealed a weak correlation between pay and performance. The reward packages were not just a symptom of what was going wrong, but one of the direct and immediate causes that brought about the maelstrom that has been visited on the UK economy. Widespread corporate and individual greed and the wholesale looting of investors' money explain much of what has occurred.

The famous American sociologist Thorstein Veblen analysed the rapacious behaviour of the owner-managers of capitalist enterprises in the late 19th and early 20th centuries, referring to them as the,

"red in tooth and claw", robber barons with their displays of "conspicuous consumption". Later, in the years of Butskellism, we were assured that, with the divorce of ownership and control, the consequential managerial revolution would produce a new breed of directors who would put the naked pursuit of profit maximisation in a more socially responsible context. They would recognise the legitimate claims of other stakeholders, including employees, neighbourhoods, the environment and wider society. It did not last long. Reaganomics and Thatcherism gave the all-clear to directors to emulate the robber barons of yesteryear, although this time they would do it with other people's money. We shall await the assessment of a future breed of sociologists and historians as to how this occurred and was allowed to continue for so long.

When questioned in this House about the overgenerous remuneration of company boards, the Government were complacent in their response and revealed almost no awareness of what was going on. Perhaps, in the words of the noble Lord, Lord Mandelson, they really did not care how "filthy rich" people became. Invariably, successive Ministers parroted that it was for company shareholders to deal with any excessive payments to directors. Belatedly, mild reforms requiring greater transparency were introduced, but it was all too little and too late. I stress that the Government were regularly alerted by noble Lords about the seriousness of the problem, but to no avail.

The Government now say that in return for bailing out the banks they will insist on more modest levels of executive pay and that the Financial Services Authority will monitor the situation and see that it is complied with. My honourable friend Dr Vince Cable, who alone among politicians predicted the coming of the present crisis, recently observed that the Royal Bank of Scotland had no intention of curtailing directors' pay and bonuses and was "making monkeys" out of the Government as a consequence. It has been asked whether the motive behind Barclays Bank's preference to pay over the odds for funds from the Gulf states is to avoid any government constraints on directors' remuneration. The truth is that, whether or not they have accepted government money, the banks seem hell-bent on carrying on much as they did before. In the light of that, I ask the Minister in winding up to state precisely how the Government will prevent the banks from flouting their expressed policies.

Jeremy Warner, in his column in the Independentlast Friday, commented that in the United States corporate wrongdoing and excesses are subject to severe formal investigation and prosecution. The UK Government and regulators seem much less resolute in this respect, as the noble Lord, Lord Owen, speaking on "Straight Talk" over the weekend, reiterated. It really is not good enough. The guilty must be named, shamed and punished. The Serious Fraud Office should be closely scrutinising the activities of failed banks.

As the UK seems to be moving, regrettably but inexorably, towards becoming a totalitarian state, where vast sectors of industry and commerce are owned by the Government and the rest owned by French nationalised industries, and the whole of society is subject to total government surveillance, the future seems dismal. The growing gap between rich and poor may, in the circumstances of a collectivist state, give rise to a populist demand that other totalitarian methods be employed.

Perhaps I may be allowed a moment of whimsy. It could well be that Mr Arthur Scargill is asked to preside over a people's tribunal to flush out, in short order, say, the 50,000 people most responsible for the present crisis among the banks, rating agencies, hedge funds, auditors, private equity companies and the like; after all, he has a nose for sniffing them out. In such an eventuality, I hope that he would be parsimonious in his use of military firing squads, although I accept that some examples may have to be made. The rest should be served with ASBOs, requiring them to be in the stocks every Saturday for three years, to be pilloried by the jobless and homeless, and on Sundays forced to help to deep cleanse our hospitals. Of course, such punishments would do little to restore the nation's fortunes but, at a time of widespread gloom, they would add a little gaiety and would be immensely popular. To avoid such a scenario becoming reality, the Government must act to arraign those guilty of malfeasance.