My Lords, the opening paragraph of the gracious Speech pledges the Government to give overwhelming priority to ensure the stability of the British economy during the global economic downturn. We would all endorse that.
The Minister outlined several useful measures that the Government have taken or are planning to take, which remind me of the useful measures taken by Ramsay MacDonald's Labour Government of 1929 to 1931, about which I wrote my first book, but which were far too small to stem the economic blizzard that was then sweeping the world.
The gracious Speech promised reforms to the banking sector. These are necessary, but here I sound my first cautionary note. In his open letter to President Roosevelt in 1933, John Maynard Keynes said that the President was engaged in,
"the double business of recovery and reform—recovery from the slump, and the passage of those business and social reforms which are long overdue".
But—and here is the sting—he said that,
"even wise and necessary reform may ... impede and complicate recovery. For it will upset the confidence of the business world ... And it will confuse the thought and aim of yourself and your Administration by giving you too much to think about all at once".
In other words, Keynes's advice was: "Concentrate on getting the recovery and do your reforms on the back of the recovery". Those wise words have lost none of their relevance.
How much stimulus will it take to bring about recovery and how is it to be done? There is no doubt that we are sliding into a severe recession, possibly the worst since the war. The latest OECD economic outlook projects a swing in output of about 4 per cent of GDP for OECD countries as a whole, with a decline of 3 per cent or more in the next 12 months. We should notice that these forecasts are lagging indicators; the output figures have had to be revised downwards each quarter for the last three quarters.
Some believe that we can deal with the problem by relying on monetary policy alone, but I do not think that it will do the job. I shall again quote from Keynes. In a lecture that he gave in 1932, he said:
"It may still be the case, that the lender, with his confidence shattered by his experience, will continue to ask for new enterprise rates of interest which the borrower cannot expect to earn ... If this proves to be so, there will be no means of escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidise new investment".
That reminds us that getting the money to flow is a two-way business. It depends on the expected earnings of the borrowers as well as on the price and quantity of money provided by the lender. A great deal of investment will inevitably be delayed until profit expectations rise, whatever the rate of interest. I think that the Secretary of State indicated the importance of the expectations of the borrower.
The Bank of England's base rate has come down to 2 per cent; mortgages are stuck at 5 to 6 per cent. Everyone from the Prime Minister downwards is telling the banks that they have to lend, but they will not lend until it is prudent for them to do so for two reasons: first, they fear more losses ahead from toxic assets or recession-induced business failures; and, secondly, the new capital put in by the Government is at such penal rates that they want to repay it as quickly as possible, the easiest way being to stop lending. This flight into cash is a familiar feature of all downturns. It gives people a sense of security. Cash postpones the decision that you have to make to spend. Even a relatively weak currency such as the dollar may at moments of high pessimism seem more secure than any other asset, as we are seeing at the moment.
That leaves fiscal policy. It would have been better had we been able to start the fiscal stimulus from a position of surplus, but, still, this weapon will certainly be needed. If the output gap figures are right, it will have to be more than the 1 or even 2 per cent of GDP that has so far been suggested; it will perhaps have to more like 3 to 4 per cent of GDP.
In devising this fiscal stimulus, I would certainly put my main emphasis on government spending. When private sector spending falls, the only secure way to get increased spending is for the Government to spend the money themselves. Many projects in the pipeline can be accelerated. I have only one suggestion: will the Government not consider suspending for one year the most important planning regulations that hold up the start of big projects? Many of them are based on worst-case scenarios; now we have a worst case of a graver kind, which should take priority.
That we will come through the crisis I have no doubt. We will need to think seriously and constructively about the kind of political economy with which we wish to emerge at the end of it. I shall make just four short points. First, we need to revise macro policy to be able to take into account asset bubbles and to make use of macro-prudential instruments. Secondly, we need to strengthen banking regulation on an international basis. Thirdly, we need a way of liquidating the huge global imbalances that have been a major cause of financial excess in America. That means talking about exchange rates. We cannot avoid that; it is an essential part of a Bretton Woods 2. Finally, we need to consider whether, as a society, we want to tolerate the extreme inequalities of wealth and income that have built up over the last 20 years, especially at the very top. The emergence of an insolent, largely footloose, financial aristocracy—or, I should say, plutocracy—is the direct result of the dominance of the financial services sector in our economy, the freeing of capital movements from national control and a reversal of the previously equalising tax policies in the Reagan and Thatcher years. A big crisis gives us the opportunity to consider that. But first the recovery.