My Lords, I have two disqualifications for intervening in this debate. First, my great-grandfather was a blacksmith in Blairgowrie. As the Scots know, the Carse of Gowrie has a very clement climate and provides a lot of the soft fruit which is sent down to Dundee to make jam. My grandfather, like many others who were not involved, used to speculate on the raspberry crop. If the raspberry crop was good, he used to buy it up in advance, and he and his family did very nicely over the winter. If it did not do well, I suppose noble Lords on the Conservative Benches would say that it was all Gordon Brown's fault, given a century or two of décollage.
My second disqualification is that I was chairman of the Select Committee on Regulators, and we got it all wrong—it is no consolation to me that nobody else got it right either—because we pursued almost trivial objectives rather than realising the real crisis in regulation which is now upon us. Noble Lords have referred to the Royal Bank of Scotland. I remember that bank saying to us that the problem was that regulation in Britain was one of the most onerous in the world and that that threatened competitiveness. We finished our report before Northern Rock's situation came about. Since then, it has not needed me to criticise the FSA; it did it very thoroughly itself in its internal audit in February this year, and in Hector Sants's response to that. John Tiner, the chief executive of the FSA, said in evidence to us that our regulation contrasted very favourably with the USA's very severe rules-based and inspection-based approach. That did not work very well either, but I do not think that it was much of a defence of the FSA.
So what went wrong not just in this country but with capitalism anywhere in the world? There was a fundamental misunderstanding of the nature of risk. Alan Greenspan said in 2005 that the increasingly complex financial arrangements meant that the markets were more flexible, more efficient and hence more resilient than those which existed just a quarter of a century ago. I remember Alan Greenspan dining in the Treasury five or six years ago and making, as usual, a very opaque speech. Like most people, I did not understand it, but I thought I saw in that speech a defence of hedge funds, and I thought at that time that was wrong. Some people got it right, or came close to understanding. Oddly enough, the financial stability report of April 07 was perceptive. Members of the Select Committee did not read it, but we ought to have done. It stated that,
"macroeconomic stability is encouraging greater risk-taking".
However, it went on to say that those who assess risks are,
"less inclined to assess credit quality ... if they bear less of the ultimate risk".
That backs up the point that the noble Lord, Lord Lamont, made that transparency is a prime requisite. The problem with transparency is that even if those responsible wish to be transparent, they do not really understand the risks themselves.
What will be done about better regulation? I hope I do not need to say that as regards the wider field of macroeconomic policy I agree with the Prime Minister, and so does everybody else in the world except those on the Conservative Benches. However, that is not an issue with which I shall concern myself today. Certainly what the financial services report now calls "macroprudential"—a word I did not know—means that, contrary to everything that people were saying to us only 18 months ago, we must have much more regulation and much more intrusive regulation, which must be undertaken globally.
The financial services report of October this year reaches the very valid and very discouraging conclusion that the remedies which are necessary in the short term for the banking system will be severely detrimental to the real economy. The financial services report says that in the seven years 2001-08, there was £700 billion more bank lending than saving. That bank lending was financed with securitised assets, which were insured by credit default swaps. The point about that is not the deliberately obscure language but the fact that these figures are very much greater than anything which Government can put in to deal with the problem. If there was an undesirable increase in balance sheets—and there was—shrinking balance sheets will be a very painful process because banks are different from the real economy, although they very much affect it. Financial markets are inherently unstable. They involve speculation which is sometimes skilful, like, for example, studying racing form, or may sometimes be based on a real misunderstanding of probability, like gaming. You cannot pick them apart in the way bankers think. They do not understand the difference between skill and luck, and we are all suffering as a result.
Therefore, I am afraid that we are only at the beginning of being able to decide what should be the future of regulation. Matthew Parris said:
"The market must be the engine of our economics and therefore our politics. That argument is over. But now another starts. What about the accelerator, the brakes, the gearing, the emissions control?".
That is a big challenge for us.