My Lords, I have not had the pleasure of listening to a speech by the noble Lord, Lord Marlesford, before, but coming in at No. 25 on the list, it was an absolute delight and I hope that I have the pleasure of hearing him many more times. I was not able to attend the debate on the economy held on
I do not apologise for straying from my usual territory of social policy and mixing it with the big beasts of the economy in your Lordships' House. The global economic turmoil is, after global warming, the greatest challenge facing mankind today. I am not an economist, but it seems incumbent on us as concerned citizens to come to some understanding of what is happening and what we need to do about it. Taking my cue from the exceptionally authoritative speeches delivered by the noble Lords, Lord Layard and Lord Skidelsky, although with much less expertise, I want to enunciate a number of propositions which should command general assent, give or take a few points of detail, in the interest of developing a common understanding and a framework for collective action. It would be unrealistic to suppose that we could take the economy out of politics—we might as well take the politics out of politics—but some themes are emerging around which it should be possible to pull together.
In a recent lecture, the noble and learned Lord, Lord Howe of Aberavon, spoke of the 30-year timescale against which major shifts in our thinking about the economy are measured. We are now at one of those watersheds, this time marking the end of a phase of unrestrained free-market capitalism. We have been working up to this for some time, of course, and it is tempting to understand it in terms of corporate greed; think of Enron. But it is also systemic in that the accumulation of massive reserves of foreign exchange in emerging markets brought interest rates, and hence the return on conventional investments, down to historic lows. Financial institutions lobbied for deregulation to enable them to deal in ever more complex securities in search of higher yields. Borrowing was cheap and banks borrowed heavily to fund their investments and leverage up returns. On
But there has been greed. Something that has been insufficiently remarked upon, although the noble Lord, Lord Smith of Clifton, did touch on it, is the lengthening queue of class actions building up against major financial institutions for knowingly misrepresenting the state of their finances. Merrill Lynch has already made a multimillion-dollar settlement with the State of Massachusetts when faced with the state's evidence that the company had sold it supposedly super-safe products which collapsed the minute the credit crunch arrived.
There is also a 75-year timescale which measures the time it takes to forget the lessons we have learnt in the past. We have been here before, and the Glass-Steagall Act was passed in 1933 to make sure that commercial banking was kept quite separate from investment banking, to prevent a recurrence of precisely the kind of crisis we are experiencing today. That lesson needs to be relearnt in a way that cannot be forgotten in the future.
That is the background, and here are my propositions. First, we need an inquiry, and I would include in it issues of corporate governance, to which the noble Lord, Lord Smith, referred. We understand what has happened in general terms but we need the ethnographic detail. On
Secondly, we need to strengthen regulation, especially banking supervision. In particular, we need to ensure that the core banking system is strong enough for non-core institutions to be allowed to fail if they act imprudently to avoid costly moral hazard. Regulation needs to be internationally co-ordinated and we need to avoid a lurch from too little to too much regulation in order not to stifle all initiative, which is at the heart of the dynamic economy.
Thirdly, we will need to ditch the economic policy paradigm of the past 30 years. On
Fourthly, the role of the state needs to be reappraised. Social democratic interventionism would appear to be the paradigm of choice for the circumstances in which we find ourselves.
Fifthly, as Gavyn Davies said recently, a number of players bear some responsibility for what has happened but the important thing is to understand, not play the blame game—although, of course, I exempt from that anyone found guilty of fraud. The action taken by the authorities in being much more interventionist sooner has probably ensured that a 1929-style depression will be avoided. The level of public debt is sustainable in the short term, especially as we enter a recession. As Peter Morici of the Maryland School of Business said recently, economists, both on the right and the left, admit we need a stimulus package and "a darn big one". Anyone who says otherwise risks being ranked along with Herbert Hoover. But, again, it needs to be co-ordinated internationally. Will it work? The jury is out. There is still a great deal of de-leveraging to unwind; more may be needed. But we can safely pump more money into the system, certainly in the short term, while the banks are still not lending. If we do not, there may not be a long term.