My Lords, I look forward to hearing more in future from my noble friend Lord Myners, whom I welcome to the Front Bench. I also look forward to reading his memoirs in due course to discover how this job compares with the others he has had.
I am quite sure that the instinct of the British public at the present time is that the Government have shown courage and good judgment on the handling of the crisis and the recapitalisation of the banks. I regret that the support from the Conservative Party seems now to have been withdrawn, but I suppose it was only a matter of time. A comparison has been made several times today with the crisis of 1929-31 but, in practice, I never detected any Labour anxieties that this time round we could be in for a rerun of the Ramsay MacDonald episode. I do not recall bank nationalisation featuring in the programme of the National Government.
This may or may not be the time for a public inquiry into the banks' suicidal leverage policies, but that time will come. In the past few months, we have seen in the financial sector the nemesis of the casino, to use Keynes's metaphor, whose players have leveraged their way to the biggest fiasco since 1929-31. One could spend all one's speech pointing the finger at those responsible. The fact that Wall Street has done something similar in no way absolves the City of London. As the chief executive of, I think, Citibank admitted, they were all dancing faster and faster until the music stopped.
The banks seem to have had a herd instinct. Paradoxically, that seems to be a consequence of the oligopolistic competition between them so that they have all gone over the cliff together, like the Gadarene swine. It is no defence to say that they were trying to take on sub-prime commitments to help the lower paid in the mortgage market; mutual building societies did that for years and did not get into trouble. It is the doubling and trebling of the leverage ratios that did the damage, and I have to echo other speakers by saying that the Bank of England and the FSA appeared to stand idly by. The Americans have just discovered that rates as low as 1 per cent are not doing the trick on the recovery, so the manifesto of the right-leaning gang of 16 economists in last week's Sunday Telegraph is not proven, even by the Federal Reserve.
The present conjunction of circumstances is precisely what Keynes had a lot to say about in the General Theory—namely, the ineffectiveness of monetary policy when banking failures are triggered by falling asset prices. His solutions, including greater public spending funded by borrowing, have been criticised on the ground that they increase long-term public debt. They were not calibrated, as I think the noble Baroness, Lady Shephard of Northwold, stated, on crude surpluses. That is not really the problem, though, if one looks at the reverse scenario; namely, economic collapse. In a mixed economy welfare state society, debt in Keynesian recovery will first go up and then go down again when, after the downturn, we get back to an economy working at high levels of employment, producing the spending power and the tax revenues that will enable productivity to go forward. The key is aggregate demand. That is one reason why demand management is good also for people in developing countries, and we provide them with the market. Here we are faced with the most obvious demonstration of the fallacy associated, rightly or wrongly, with the noble Baroness, Lady Thatcher, and dutifully followed today by the noble Lord, Lord Forsyth of Drumlean, that the finances of the economy in aggregate can be regarded like the finances of an individual household.
What are the people of Burton-on-Trent supposed to make of all this? They are bewildered and short of confidence in the motives and actions of the financial services industry. They see a grotesque inequity in the rewards for top executives in the sector and the average man and woman in the street. When you boil it down, it was the average household that was paying for those £20 billion bonuses last year and the year before. To add insult to injury, the figures jack up the average earnings index due to the way that the ONS does that arithmetic, sending out perverse signals about inflation. I have not yet heard anyone say that this crisis is all the fault of the workers, but I am reminded of the old dictum; "It's the poor what gets the blame".
Another dictum, which has obviously occurred to the noble Lord, Lord Smith of Clifton, who unfortunately is not in his place, is that in "The Mikado"; "Let the punishment fit the crime". I do not know who the noble Lord had in mind for the role of Lord High Executioner—maybe Arthur Scargill, but I think Arthur Scargill would have been far too squeamish. The serious point is this: we have not heard too many apologies from the City of London, have we? Frankly, some apologies are long overdue. Instead, though, we have had the not atypical speeches from the Conservative Benches saying that, whoever's fault it was, it was certainly not the fault of their friends in the City. There have been some exceptions to that, but that is the tone coming across from the other side.
One the macroeconomic side, with the debate raging about the merits of what John Maynard Keynes may have said, having read my economics at Cambridge all those years ago and being in the presence of distinguished economists inter alia on these Benches such as my noble friends Lord Peston and Lord Eatwell, I presume to point out that Keynes did not say a lot of the things he is caricatured as having said. What is true, though, and what is central to the Keynesian revolution, is that when there is a lack of confidence and the prospect of a deep recession, simply relying on cutting interest rates is like pushing on a piece of string.
I strongly welcome the fact that the UK, and Gordon Brown in particular, is helping to give strong direction to the European Union. The EU should play a central role in drawing up global rules, and it is welcome that the Labour Government are giving a lead in Europe and in the world to bring some better co-ordination and order to financial markets. I agree with the implication of the noble Lord, Lord Taverne, that the City of London could remain as a financial centre of Europe as part of the euro-zone. We cannot in this country for ever go on having our cake and eating it.
My final point is about new banking assistance to small firms and so on. Some years ago, I had a hand in writing a TUC Labour Party policy statement setting out the case for a national investment bank. Of course this was howled down with derision in the City pages of the newspapers. I welcome the new initiatives by the European Investment Bank. A national investment bank, however titled—the noble Lord, Lord Bilimoria appears to recognise that a new publicly accounted facility is needed—could work in conjunction with it. I note that the TUC and the CBI in Wales are in fact now working towards that idea.
We have to avoid the recession tearing up the social contract, if I may use that term in the broadest sense. You cannot negotiate a redundancy agreement with a hedge fund. The new capitalism is not one happy family if one does not know even who one's parents are. Let us get back to basics on that as well.