Part of the debate – in the House of Lords at 8:55 pm on 3rd November 2008.

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Photo of Lord Desai Lord Desai Labour 8:55 pm, 3rd November 2008

My Lords, being No. 42 on the speakers' list and the last to speak from the Labour Benches is either a sign of due punishment for what I have said in the past or it is a sign that my Front Bench trusts me to be, like Franz Beckenbauer, a sweeper. I therefore take it as a compliment. This has been a fascinating debate and I will take my departing line from the noble Lords, Lord Lawson and Lord Lamont. I am surprised at how at how fickle is the belief in free markets. Having read my Marx and Hayek, I am still a believer in free markets. They work exactly like this: there are booms and there are busts, in which people go bankrupt. That is how free markets should work. When companies collapse and people say "The markets are not working" and become moralistic about capitalism, they are completely wrong. Capitalism is neither moral nor immoral; it is amoral. Those who believe in and benefit from free markets should, like responsible adults, be ready to pay the cost when they go wrong.

I am a strong believer that when banks or financial institutions fail, one should not rush to rescue them. The American experience has been good in the sense that it has been one of horses for courses. The Americans let Lehman Brothers go, Bear Stearns was bought out, along with Wachovia and Washington Mutual, while AIG was saved. The point is that one has to be very selective about what one is going to rescue. What my right honourable friends the Prime Minister and the Chancellor have done is right: they have declared a facility available for bank recapitalisation. Unlike what noble Lords opposite think, they have not yet actually signed a cheque for £37 billion. They are encouraging banks, quite rightly, to seek finance themselves. If the banks can get themselves recapitalised privately, that is always to be preferred and is why punitive conditions must be attached to public money. If the banks want public money, they bloody well have to—I am sorry—they have to pay the price. I do not think that one should be kind to bankrupt banks. One should be severe, because the only thing they understand is money, and it should cost them a lot of it.

So far, the way that the banks have been recapitalised has been very good. Equally, the way the bank guarantee has been provided is quite right. I like what the noble Lord, Lord Forsyth, said: we have not spent £500 billion. We have just said that the guarantee is available, which relieves the pressure in the market and allows confidence to return. That is a much more sensible approach to recapitalisation.

There will always be cycles in capitalism, and in a sense one cannot do away with them. It is important to draw the distinction mentioned by the noble Lord, Lord Lamont, when he said that we have had stop-go business cycles for a long time. However, in reality these cycles are often due to mistakes in fiscal policy. There has been a long debate since the 1950s in British macroeconomics as to whether government policy exacerbates the normal cycle or not. My former colleague Professor Phillips wrote an interesting article on this, while Christopher Dow wrote a book. What my right honourable friend the Prime Minister was saying when he was Chancellor was not that he would eliminate the cycle but that he would not exacerbate it through mistakes of fiscal policy. That is what he meant by no more boom and bust. If people thought he would eliminate the cycle, that is just ignorance—I cannot help that—but I clearly saw it as a promise. By declaring a medium to macro economic policy, by not giving rise to surprises, a predictable fiscal stance would lessen the exacerbation of the normal real output cycle which goes on in any modern economy.

What is happening now is not a cycle due to fiscal policy; it is a crisis due to a global financial market meltdown. It is due to the many financial innovations which have happened recently and to the fast IT equipment which leads to quick settlement of deals. Again, as the noble Lord, Lord Skidelsky, said, it is because most people at the top of the banks do not understand the nature of the business they are in. I have said before in your Lordships' House that the chief executives do not understand what the rocket scientists do. They thought they were reducing risks by securitisation but all that happened was they ended up holding each others' risks. Each thought they were spreading the risks to the others and, as they all did it together, they ended up holding each others' risks and did not even know what risks they were holding.

That having been said, what is to be done now? The financial markets will have to do something about Bretton Woods. Again, I back the noble Lord, Lord Skidelsky, who said that we have to devise an instrument whereby excess reserves of countries such as China and others can be banked with the IMF—not with the United States, which would only go on to become spendthrift—give a good yield across different currencies and be recycled in the banks.

As to domestic fiscal policy, expenditure will not work fast enough. We need either a postponement of VAT payments—a promise that no small business has to pay VAT for another two and a half years, or whatever you want—which will reduce the liquidity shortage; or a promise that the threshold at which taxation starts, which is currently about £5,500, would be substantially increased so that a number of people who are lower paid will pay less tax. The Chancellor should then say that that can be implemented now and people will be given lump sum payments calculated at the lower tax rate. That would immediately put money into people's pockets—and my time is up.