My Lords, if, as the gracious Speech states, the overriding priority is to ensure the stability of the British economy, reform of the banking system is essential. Regrettably, the Banking Bill that we will soon discuss in this House is the wrong one to sort out the problems that we face.
We in the West are accustomed to going to the bank when we need money, and until recently money has been relatively easy to obtain from banks. Of course, we are all aware that if we fail to make our payments on time, banks can foreclose. Some, who believed they had a good relationship with their bank, have recently had a rude awakening. Banks and bankers have little tolerance for people who find themselves in arrears, even though it might be through no fault of their own. Banks often don a cloak of aggressive righteousness and take immediate and detrimental action against those who come to them seeking help. Those facing difficulties can easily find themselves wondering whatever happened to that smiling and friendly banker who wanted to lend them money. He is the same one who is holding up the interest rates that he charges borrowers while the Bank of England lowers the rate that it charges banks.
On the other hand, when banks themselves are in difficulty, they expect Governments and taxpayers to behave generously toward them. They bleat about their innocence and claim they are victims of a world-wide crisis which is not of their doing. Nonsense! Toxic assets did not just appear in their balance sheets by magic. They were high-yield investments approved by the banks' management and purchased willingly. They are not innocent bystanders, yet they want central banks, Governments and taxpayers to behave in a far more generous manner than they do—and we have to because, if we do not, the entire banking system might collapse and we will all lose our deposits.
Why are we in this position? Simply because we in the West have become almost wholly dependent on debt finance. Banks are the custodians of our money and lending is their business. When we need money, we go to our banker and he lends to us. We have become accustomed to borrowing. We borrow to buy things we would like but have not yet saved for. Besides banks, we borrow from shops and on credit cards. Borrowing has become a way of life for so many of us. Business and economic cycles are a product of our present way of life, to which we have become addicted. These cycles of boom followed by bust arise and are perfectly natural by-products of our reliance on debt finance.
Furthermore, bank lending is the principal producer of inflation. When a bank lends money to a client, it deposits money into its client's account. Thus, total deposits increase. The money supply is the sum of total deposits and cash in circulation. Therefore, the money supply increases, causing inflationary pressures.
We have embraced a debt-based monetary system because banks lend depositors' money rather than simply storing and distributing it for them. They can lend it because when we put our money into our bank account, the instant it enters the bank, title to our money is transferred to the bank. The money then belongs to the bank and not to us and we are no more than unsecured creditors of that bank. Secured creditors have first call on what many still believe is their money in their current accounts. But it is no longer their money. The money belongs to the bank and it can then gamble with it if it so chooses. To my knowledge, there is no specific law which authorizes this transfer of title. Can the Minister confirm my view? Although he is not in his place, I welcome the noble Lord, Lord Myners. It is the first time I have spoken in a debate with him. It is good that there is a second Treasury Minister in this House, for I think the first time in 19 years.
It seems that the banks have been getting away with removing money from depositors' accounts and lending it for so long that the law of precedence now applies. Perhaps because what they have always done is now legitimate, the prudence and circumspection which previously was always the hallmark of respectable bankers—so that depositors would not suspect that banks might be removing money from their accounts and using it to earn interest for themselves—seems no longer to be necessary. Now, to our horror, we have discovered that what banks call loans or investments are proving to have been some very big gambles indeed.
The net result of all this imprudent behaviour is that too many in the West have now reached the point where their levels of debt are too high and few people, businesses and Governments can continue to borrow more. Yet the only solutions on offer to our current economic slowdown seem to be to encourage everyone to borrow more. Monetary and fiscal policies are now wildly loose. Financial experts, economists and self-appointed opinion-formers are all calling for lower interest rates to encourage more to borrow. I suspect that lowering interest rates will not work this time. There is simply too much debt in the system. While some may be able to borrow a bit, they will soon reach their limit and western economies will be back in the doldrums again. Governments themselves are now so dependent on debt that, in competing with each other for funding, they will be the prime force driving up interest rates. Our own Government need to sell £150 billion of debt in each of the next three years—more than triple the recent annual average. These government-driven increases in interest rates will place more strain on those who have borrowed to the hilt, and more businesses will fail, leaving Governments with less income and greater expenses.
Contrary to those who fear deflation, I am confident that we are more likely to experience stagflation. The Federal Reserve bank in America has now created $8.2 trillion of new money in its attempt to bail out the banking system. The Bank of England has created more than £1 trillion in its attempt to save our banking system. I agree with my noble friend Lord Higgins that these increases in the money supply will inevitably produce inflationary pressures. When these are combined with the current economic slowdown, we will have the classic conditions for stagflation.
Let us be honest about the so-called success of these bail-outs. While they have stemmed the immediate collapse of the system, banks still face substantial potential sub-prime losses, losses from failures of derivatives and losses from credit card defaults and defaults of ordinary loans now being serviced when businesses cut back or fail. We need a new approach but I see nothing in the gracious Speech that heads in that direction. I introduced the Safety Deposit Current Accounts Bill in this House on
"A bank is a bank and if the security of its depositors is not its main concern, it should be required to adopt another name. Members of the public are entitled to take this for granted".
If the West is serious about fixing the system so that it will not collapse again, we need also to consider a massive conversion of debt to equity. If, as the noble Lord, Lord Mandelson, said when he opened the debate, the same mistakes are not to be made again, we and other western Governments must stop just putting a plaster over the cracks in our monetary system, and properly reform it. Without that reform, there will be another bust.
A little before Gordon Brown boasted to us that there would never be another bust, I predicted in this House that the cycle would continue, but that next time we would start deeper in debt, with a burden harder to carry. I make the same prediction today. Unless we change our banking system, we will leave our children and grandchildren a legacy that I doubt they will be able to overcome.