My Lords, in the face of the most severe economic circumstances encountered by this country since the 1930s, we need emergency action for the short term and a strategy for medium and long-term recovery. In other words, we need an economic policy road map to ensure that our policies are comprehensive and coherent.
In my search for that road map, I begin with quotations from two major economic policy speeches. The first is that,
"our detailed plan for economic reconstruction ... establishes the target of a balanced current budget and falling debt".
The second is that,
"it would steady the country greatly if there could be prompt assurance that the budget will be unquestionably balanced even if further taxation is necessary", and that,
"the Government credit will be maintained by refusal to exhaust it by further borrowing".
One of those quotations is from Mr George Osborne. The other is from Herbert Hoover. Only some slightly archaic language in the words of President Hoover, the architect of the great depression, allows us to identify which is which.
Mr Osborne did us a great service in his speech last Friday by defining a clear policy demarcation between the Opposition and the Government. It is, as Mr Osborne puts it, a choice between,
"Keynesian demand management and adoption of Conservative fiscal responsibility".
What is the substance of the choice between Keynes and what we must now call the Osborne-Hoover approach? First, the Keynesian approach involves a fiscal policy that contributes to the growth of demand. Of course, it is impossible to envisage fiscal policy compensating totally for the collapse of credit that lies at the heart of this crisis. There are well known timing problems in government expenditure, too. However, where already planned infrastructure projects can reasonably be brought forward, they should be. Fiscal measures that benefit the poorest households will also have a positive effect on demand, as the poor spend everything that they receive.
Secondly, there is monetary policy. Clearly, interest rates should be reduced by as much as is reasonable—a move that has the added advantage of exerting downward pressure on the exchange rate. However, Keynesians know that interest rate policy may not work, especially when there has been a general collapse of confidence. In that case, the Government must take direct measures to stimulate the provision of credit, as this Government have done with their inter-bank lending guarantees.
A further crucial lesson that Keynes taught us is that a credit crisis is above all a co-ordination failure. The inter-war period demonstrates the danger of international co-ordination failure. My right honourable friend the Prime Minister has played a unique role in leading co-ordinated international action in money and credit markets. To these measures must be added a co-ordinated implementation of expansionary Keynesian policies. Without co-ordinated expansion, one country could be left carrying all the world's deficits, and the expansion worldwide would fail.
A similar co-ordination failure exists in banking. It would be all too easy for some banks to sit on the sidelines, while others, perhaps those over which the Government have some direct influence, extend credit in a risky environment. It is therefore vital that the Government require all banks to extend the credit necessary to enable industries, large and small, to maintain their activities and extend their investments.
Thirdly, there must be regulatory co-ordination to prevent the regulatory arbitrage that undermines authority as financial institutions locate their activities in the most lax jurisdictions. My right honourable friend the Prime Minister guided the world in an important step towards regulatory co-ordination when he persuaded the G7 to create the Financial Stability Forum. Now the international community must build on that vital British creation by giving it appropriate powers in an international regulatory environment.
Co-ordination at any of these levels is a problem of political economy—indeed, of politics. I may have been a little unfair to Mr Osborne when I identified him with President Hoover. After all, Franklin Delano Roosevelt was elected on a commitment to balance the budget; then, faced with the economic reality, he had the political flexibility to change his mind and to implement expansionary policies. That is the flexibility and political intelligence that the Chancellor of the Exchequer clearly possesses and Mr Osborne clearly does not. We should be grateful that my right honourable friend Mr Darling is at the helm in these troubled waters.