Economy

Part of the debate – in the House of Lords at 5:22 pm on 3rd November 2008.

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Photo of Lord Lamont of Lerwick Lord Lamont of Lerwick Conservative 5:22 pm, 3rd November 2008

My Lords, I join others in congratulating the noble Lord, Lord Myners, on his post and his arrival in this House. He and I were colleagues many years ago. He has a most distinguished career in business. I hope that I will not be giving away any secrets—I am sure I am not—if I disclose that he regards himself as old Labour. However, as a very successful businessman, we none the less entrust him and trust him with the policy towards the banking sector, and we look forward to hearing him again.

This is a very different recession from others we have experienced since the war. It is different in two particular ways. First, previous recessions have, to some extent, related to policy. They have been slowdowns that have often happened when Governments have felt it necessary to regain control of inflation. This recession is more of a market-driven recession. It is, pace the Prime Minister, an old-fashioned boom and bust recession. The fact that it is a cyclical recession does not mean, though, that it will be any easier to deal with or that recovery will be quicker.

The second way this recession is perhaps different from other recessions since the war is that it has been accompanied by a very serious banking crisis indeed; more serious than the previous secondary banking crisis and probably the most serous since the 1920s and the 1930s.

The banking crisis has caused many people to talk about a return to the 1920s, the 1930s and a depression. I do not believe that the crisis will go that far. Policy is more accommodating than in that period; the banks have rightly been rescued; and I do not believe that we are heading for 20 per cent unemployment or a 15 per cent fall in GDP.

I want to concentrate today on the Government's relationship with the banks. I want to talk about three issues—transparency, lending and pay, although in a rather different tone from the noble Lord, Lord Smith. The Government find themselves likely to be the major shareholder in the Royal Bank of Scotland, a significant minority shareholder in Lloyds TSB and HBOS, and the only shareholder in Northern Rock and Bradford & Bingley. I am not an admirer—surprise, surprise—of state involvement or stakes in banks. As far as I am concerned, the sooner the Government can get out of their holding in the banking sector, the better. I am encouraged by what the Chancellor of the Exchequer has said about that.

It is interesting that Barclays bank, with its injection of capital from Middle-Eastern investors, has been prepared to pay no less than a 16 per cent coupon in order to be out of the Government's clutches. Some regard this as something to be criticised. I do not regard it as such in any way. It is a commercial judgment for the shareholders of Barclays.

I say as forcefully as I can that I hope that the Government, in their new position as shareholder in these banks, will use their influence towards the maximum, earliest disclosure of losses on complex derivatives, sub-prime securities and all the other types of assets that have caused such problems. It was the failure to disclose early on that made the Japanese banking crisis much worse. For all the Government's helpful and correct intervention in the inter-bank market, we will not get banks lending their own money to each other—as opposed to the Government's money, or with the Government's guarantee—until there is a full understanding of what must be disclosed and what losses have been made.

That is linked to International Accounting Standard 39 and "marked to market", as opposed to holding securities to maturity or as available for sale, thus influencing whether losses go through the PNL or just remain on the balance sheet. The accounting standards authority has allowed some new flexibility in this. Deutsche Bank has recently been the first to avail itself of this new flexibility, and has consequently been able to make a €180 million saving, thus turning a loss into a profit. I read that the Royal Bank of Scotland—RBS—in which the Government have the majority shareholding, will do the same.

I am not saying that that is wrong; it is not an issue on which I feel competent to make a judgment. However, I urge the Government to ensure that the basis on which these losses are disclosed is crystal clear, and that the maximum pressure is put on the banks to reveal the maximum losses as quickly as possible. Whether an asset is valued at $100 or $600 does not alter the cash a bank has, or how much it owes and has to repay. Maximum transparency is extremely important.

Secondly, my noble friend Lord Blyth referred to lending policy and government influence on lending. We do not want political lending from the banks. It was not encouraging to read that, within a short time of the stakes being taken in banks, pressure was being put on them to participate in the Government's shared equity scheme to a larger extent that the banks had wanted. As my noble friend forcefully and rightly pointed out, it is easy to say that lending should be maintained at 2007 levels. Actually, the Government's wording is very precise: the "availability"—not "lending"—of lending will be at 2007 levels.

While bearing in mind the needs of small businesses—which I understand well; I experienced them at first hand—we have a serious need to repair banks' balance sheets. We must not have the banks being forced into a new series of problems thanks to political problems. RBS had its whole profit of £5 billion wiped out in the first half of this year because of the impairment losses. It is extremely important that the balance sheets should be rebuilt.

Lastly, it may be surprising for a Conservative to mention pay. I do not think that the level of pay is the issue; it is the structure of remuneration packages and the alignment of pay and risk which has sometimes been wrong. Too many bonuses have been paid on a short-term basis, whereby people have been encouraged to take large bets. Sometimes, they have been given extremely large rewards and have walked away leaving chaos behind them. There has to be a closer alignment between remuneration and risk management. There has not been a close alignment and that has contributed to the present situation.

I agree with many of the points that have been made more generally. I do not think that we are better positioned at the beginning of this recession than we were in the previous one. We go in with a weaker position in terms of the current deficit in the public accounts. We should have put more aside in the good years. There has been a failure of regulation. The Government's own fiscal rules are in tatters. The distinction between capital and current was always dubious and the rules were always open to criticism because the Government were able to define the length of cycle themselves. We face a very painful period, but I am sure that we will get through it. If there is any consolation, it is that which Joseph Schumpeter used to offer; namely, "It is in recessions that economies recreate and reinvent themselves". I am sure that we will come through it stronger in the long run.