My Lords, one of the most bizarre features of the financial crisis and this debate has been the presentation of the Prime Minister as a leader in the creation of world financial stability and as the man who saved the banking system by means of an original and uniquely bold initiative. The Minister got rather carried away in his eulogy, apparently without embarrassment, denying that the Prime Minister had any responsibility for the creation of the crisis or even for the 25 per cent devaluation of sterling.
That the banking system had to be rescued no one doubts, and the Opposition were right to support recapitalisation. The trouble is that the rescue was carried out in a manner likely to do much long-term damage. The mistakes seem very strange when one considers that there were many precedents to guide us and that other leading players were much more skilful in avoiding them.
My noble friend Lord Forsyth referred to two of the mistakes. However, the most serious was not the much higher rate charge for preference capital than that applied in the United States and in some parts of Europe—Barclays has chosen to pay comparable rates to retain its commercial freedom—but the fact that the Government created so much damage by underwriting the issue of ordinary shares in a way that seemed designed to guarantee that existing shareholders would not, and in many cases could not, participate because of the threat that the banks would not be able to pay dividends for five years. Even if Lloyds finds a way to escape the restriction by repaying preference debt sooner, much of the damage has already been done and the possible routes mentioned by the chairman will not be found cheaply.
Already the Government's terms have achieved three things: they have increased, probably by several billion pounds, the amount of taxpayers' money that is to be tied up in the participating banks; they have ensured that British banks will be placed in a less competitive position than those that offer more lenient terms overseas; and, not for the first time, they have produced devastating consequences for pension funds and savers, for whom bank dividends were a most significant source of income.
The latest government-inflicted blow to private sector pensions comes on top of the damage done by Mr Brown's abolition of advance corporation tax relief in his first Budget. I need not add to what my noble friend Lord Blyth had to say about that lamentable story.
It seems a long time since the Prime Minister enjoyed and took advantage of the benign economic inheritance left him by the outgoing Conservative Government, assisted, for a time, by prudence. Like other noble Lords, I think that he began actually to believe his repeated claim that he had done away with boom and bust. Overcome by hubris, he fed on, encouraged and took part in the reckless surge of borrowing and expenditure that followed, frequently outdoing the financial world in devising off-balance-sheet instruments and manipulating his own golden rules to the point where they were utterly discredited. When the boom ended, the bust was on an almost unprecedented scale; nothing had been put aside in the good years to feed us during the bad.
We now have the spectacle of the Prime Minister attempting to claim credit for borrowing in order to finance cyclical expenditure programmes, when the reality is that he is forced to borrow on a huge scale because of past excess and because tax revenue is falling and will fall much further just when expenditure to fund benefits is rising. Net government borrowing will almost certainly rise to well over £100 billion next year. That is not debt to fund Keynesian expenditure policies. The situation cannot simply be blamed on the Americans or the banks. The British economy has been stagnant since last April and has been falling more sharply than the economy in the United States, where the Federal Reserve has been more aggressive in cutting interest rates. As my noble friend Lord Saatchi pointed out, our interest rates have been the highest in the G7.
Some capital infrastructure projects are no doubt worth while but, as others have said, it is doubtful that big new programmes will produce economic benefits in a relevant timescale. Most are likely to reach completion when the economic priority is to,
"return borrowing and debt to a sustainable level", as the Chancellor told us in his Mais lecture. Past precedents provide little encouragement that such a policy would work. As the Times leader put it last Thursday,
"there is little sense in treating the Government's previous failures of economic management as a model for recovery".
The time has clearly come to use lower interest rates and currency flexibility. Unlike the noble Lord, Lord Taverne, I say thank goodness that we are not tied to the euro or forced to defend a fixed exchange rate. However, if we are to have special expenditure programmes, could not some of them be directed to re-equipping our chronically underresourced Armed Forces?
My noble friend Lord Lawson and the noble Lords, Lord Skidelsky and Lord Lea of Crondall, referred to confidence. Confidence is everything. Lack of confidence in the Government's approach has been a major factor in producing the astonishing 25 per cent fall in the value of sterling—a fall that would have destroyed past Governments. It is one thing to be thankful that we do not have to defend an unrealistic exchange rate against the markets; it is quite another to face a devaluation that could reignite inflation.
It was not a government spending spree that rescued the British economy in the 1930s, or even—I am sorry that the noble Lord, Lord Skidelsky, has left his place—leaving the gold standard. Government policy at that time was austere. The economy recovered and unemployment fell when consumers found the confidence to spend again and fuelled the rapid growth of new industries. Anatole Kaletsky makes a similar point about the US economy in today's Times when he argues that, if the new United States Administration give grounds for fresh confidence, the economy could recover comparatively quickly.
I borrow from the noble Lord, Lord Skidelsky, Keynes's comment that,
"fears and hopes ... take charge of human conduct".
The real disaster would be to fuel the fear rather than hope by continuing the Government's previous policy, devastating to confidence, of reckless and irresponsible spending and borrowing.