My Lords, I begin with a quotation:
"This is the first financial crisis of the global age. And there is no clear map that has been set out from past experience to deal with it ... we're learning all the time".
That was the Prime Minister speaking in Davos on
The Government's response to the crisis has been a learning process. The stuttering start in dealing with Northern Rock has been followed by the smooth operation to rescue Bradford & Bingley and, of course, by the development of the special resolution regime to be established by the Banking Bill now being discussed in your Lordships' House. The first investments in the banks were absolutely vital to save the industry from collapse, but they were too expensive and did not go far enough, hence the more recent and better designed investments and the guarantee scheme. The £20 billion boost to demand at the time of the Pre-Budget Report will, I believe, need to be supplemented and developed in the Budget itself.
A similar learning curve can be seen in the United States: first, the allocation of funds to the TARP to buy up "troubled" assets; then, the funds were switched into America's own version of the bank bail-out; then, some of the funds were used to make loans to the car manufacturers; and now, the purchase of troubled assets is back on the agenda again, together with a trillion-dollar boost in demand. In Germany the Finance Minister first criticised British policy as "crass Keynesianism", but then he announced a €50 billion fiscal boost in infrastructure spending, double the size of Britain's Keynesian programme. But there are still some carping voices which appear to have learned nothing. Mr George Osborne, for the Conservative Party, remains wedded to the idea of a balanced budget, just as some in the Republican Party oppose the very concept of President Obama's stimulus package.
Of course the new policy measures involve risks. Direct purchase of assets by the Bank of England, guarantee schemes, financial stimulus by quantitative easing, large fiscal deficits—all these carry very well known economic and financial risks. However, I am convinced that the risks associated with doing too much are as nothing compared with the risk associated with doing too little. If anything, the Government have been too cautious and too constrained by now irrelevant economic orthodoxies. Today, while value for money is a virtue, prudence is a vice. But even as the Government battle the immediate financial mayhem, it is important both that the social consequences of the recession are kept in mind and that we begin to develop a strategy for the future. There must be no "return to normal" if by "normal" we mean the economy of 2006.
I shall comment on just three important social consequences of the recession, the first of which is unemployment. Unemployment will inevitably rise over the next year or so. The Government's policy for the past several years has been to encourage the unemployed to seek work by introducing a range of new training opportunities while reducing the scale and availability of benefits, particularly for those who are not proactive in their search for work. While this may be a productive approach at a time when employment opportunities are rising, this policy has far less value as vacancies fall and unemployment rises. It is important for social cohesion and for the maintenance of demand in the economy as a whole that the costs of the recession do not fall disproportionately on those who are its innocent victims.
The second concerns housing. The Government's measures on housing were described just a few minutes ago by my noble friend Lady Andrews. The repossession of houses belonging to those in mortgage arrears due to loss of jobs and other factors associated with the recession is personally costly and socially inefficient. The banks repossessing homes recover only a small proportion of the value of loans made, at the cost of considerable human misery, and then the burden of housing the newly homeless falls on hard-pressed local authorities. In the face of the crisis in housing finance, what is needed is a special resolution regime for housing to accompany the special resolution regime that we are creating for the banks. A wide variety of measures—temporary payments holidays as proposed by the Government; shared equity; purchase by local authorities and housing associations with conversion of mortgaged property into rented accommodation, aided by the funding proposals advocated by Sir James Crosby—could be part of the housing resolution regime, together with the intention to return properties to securely funded home ownership in the future.
The third, and I suppose that several of us could declare an interest here, concerns pensioners. The fall in share prices and the cuts in interest rates are having a devastating effect on pensioners. It is vital that pensioner living standards are supported and that future saving for retirement is not discouraged. A good place to start would be to build on the old National Savings scheme of "granny bonds"—government-backed bonds offering inflation-proof rates of return to pensioners, hence taking the fear and uncertainty out of saving.
Tackling these social problems will contribute to tackling the recession itself. However, we face a challenge far greater than learning how to deal with the current emergency. If there is no acceptable "normal" to return to, then what should be the shape of our economic future, and how do we get there? One aspect is clear. The growth of financial and business services to more than 30 per cent of gross domestic product has seriously unbalanced our economy. The main reason is that those financial services are not primarily a product of British savings. Instead, the City of London is an offshore trading centre for the rest of the world, uniquely skilled at repackaging risk and return into ever more attractive and ever more complex financial products. That is fine when everything is going well, but Britain is consequentially exposed to enormous overseas risk as UK banks borrow short from abroad and lend long. This must not be allowed to happen in the same way again. From now on, the argument that a particular policy is good or bad for the competitive position of the City will no longer be decisive. Instead, advocates will need to show that any particular policy is good for the competitiveness and the stability of the UK productive economy taken as a whole.
How did these dangerous imbalances arise? Thirty years ago, most loans to businesses and individuals were made by banks or specialist institutions such as building societies. The deregulatory fervour of the 1980s changed all that. Credit markets were "disintermediated", which means that instead of banks acting as intermediaries between savers and borrowers, the markets took over. Investment banks such as Lehman Brothers, Merrill Lynch, Goldman Sachs, RBS and Barclays Capital were all at the centre of this, taking on massive amounts of debt relative to their capital base in order to deal profitably in the complex web of international markets. Guiding their operations were their mathematical risk models: statistical models that assessed the riskiness of their operations against patterns of past market behaviour. The firms claimed that they could manage risky markets by and for themselves, and the Finance Ministers, central bankers and regulators swallowed that claim and let them get on with it. Faith in transparency, disclosure and risk management by firms has been at the heart of financial policy. One of our most urgent tasks is to rid ourselves of this false philosophy. We now know that the biggest risks are systemic risks, such as a general failure of liquidity—risks that no firm alone can manage. In the face of systemic market failures, even the most transparent market is inefficient.
What is needed is what is now called macro-prudential regulation, which tackles the system as a whole. For example, financial institutions must undertake pro-cyclical provisioning. That means forcing banks to raise their reserves in good times—an unpopular policy that we will be told will be bad for competitiveness—and using those reserves as a cushion in bad times. To be truly effective, macro-prudential regulation must escape from the present archaic focus on the legal status of institutions. Commercial banks are regulated differently from investment banks, which are regulated differently from insurance companies, and so on. Hedge funds are not regulated at all. Instead, regulation should be targeted on highly indebted, highly leveraged institutions, whatever their formal legal status. Debt can play an important positive role in the economy, but there can be much too much of a good thing. Excessive debt threatens stability. However, if there is less debt, less lending and less borrowing, there will be less spending. How are we to maintain demand while urging banks, firms and households to take fewer risks?
In the short run, only the Government can do the heavy lifting. Policies to maintain demand by cutting taxes—especially taxes on the poor, who have the great macro-economic benefit of spending every pound they get—and increasing government expenditure are vital if the economy is not to slide into depression. This is recognised around the world. In the medium term, demand must be driven by innovative industrial and commercial investment, changing the balance of the UK economy and winning markets at home and abroad. Government spending on infrastructure now will aid in this drive for competitiveness. A new pro-industry approach will focus on skills, on the exploitation of new technologies and on creativity, and there must be funding to do the job. That is the proper role of the financial sector.
This will have important consequences for the structure of the labour force. One of the negative outcomes of the growth of the City has been that so much talent has been sucked into financial services. Now the brilliant mathematicians and physicists, who have spent their time enhancing the complexities of financial engineering, must do some real engineering. We must ensure that they are supported and incentivised in the transition.
There is, however, a serious barrier to short-term economic recovery and sustained economic progress in the medium term. In a global economy, the success of all these policies—creating a stable financial sector, boosting demand in the face of recession, maintaining medium-term growth—depends on international co-operation and co-ordination. That is why the G20 meeting in London in April is so important.
In all areas of the economy new international economic relationships must be forged, backed by new international institutions. Here we are lucky because there is a map to guide us. The principles developed by the late Lord Keynes and embodied in post-war institutions hold good today, even though the actual application of those principles will be completely different. In the light of the bitter lessons of the financial instability of the 1930s, Lord Keynes sought to devise a system that would deliver stability and maintain the growth of demand.
To achieve the same today, the G20 must tackle three major problems. First, the serious international imbalances that saw the United States running ever larger balance-of-payments deficits with China, and hence accumulating ever larger indebtedness, were unsustainable and indeed were a major cause of our current woes. It must be accepted by all that running major balance-of-payments surpluses is a seriously destabilising policy for the world. Countries with persistent surpluses must accept measures that will reduce those surpluses, preferably by exchange-rate revaluation.
Second, national stimulus to demand in the face of the recession must be a common strategy. There must be no free-riders. If nations do not act in concert then those that do expand will be left holding the world's deficits—again, an unsustainable position that will undermine the whole recovery. Thirdly, as far as finance is concerned, international markets require international regulation, with rules not only agreed upon but adhered to and enforced both nationally and internationally.
In 1998, in the aftermath of the Asian financial crisis, it was this Government who persuaded the G7 to set up the Financial Stability Forum, the intergovernmental think tank for international financial regulation. Now the G20 will need to construct an operational counterpart to that forum that can monitor and co-ordinate measures implemented in individual jurisdictions. The Prime Minister has suggested that the IMF could fulfil that role but I am not convinced that this would be the best approach, since what is needed is an organisation that has a new sort of relationship with authorities in systemically relevant countries. The new authority must be able to tell the US Government when they are making mistakes, something the IMF is unlikely to do.
I am optimistic. In the face of the most serious economic and financial turmoil since the war, Governments are acting and learning. The determination to tackle short-term and medium-term problems is evident around the world, and our Government are part of that international consensus for action. The economy is not an immutable force that we can do nothing about. It is a set of social institutions devised by individuals, firms and Governments. We can fix it, and we will. I beg to move.
My Lords, I am sure the whole House is grateful to the noble Lord, Lord Eatwell, for introducing this debate. It is a difficult debate, but it has to be timely to call attention to the Government's plans—I would, of course, say "successive Governments' plans"—to counter the social and economic impact of the current financial situation. I will try to look at this Motion more from the point of view of a member of the public than from that of a politician, and perhaps more from the point of view of a Lindsey striker who has returned to work. For many years I was in the construction industry; I managed many construction sites and negotiated with many construction workers.
I start as an Edmund Burke Tory. I believe we are beneficiaries of the people who came before us and trustees of the people who come after us. Since it is common for us to see six generations and shortly, given medical science, it will be quite usual to see seven generations, continuity is of the greatest importance. I believe in evolution not revolution. Any crisis is most unwelcome, as it would have been to Edmund Burke.
This crisis had a dress rehearsal—Northern Rock, the freezing of credit and the withdrawal of wholesale market finance. It seemed strange at the time but what were the other banks doing? I was brought up to believe that they helped each other. What did the banks say to the FSA, each other and the Treasury? Was it just that they wanted the new kid off the block?
It seems that no plans were made in the light of Northern Rock. All those involved were in denial. Then came Iceland and Bradford & Bingley, and still there was no plan and still there was denial. It is impossible to have a plan when in denial. Denial is the unwillingness to analyse and then to tell the public where we are. Maybe, as the noble Lord, Lord Eatwell, suggested, it could be an inability to do that which is holding us back. Our understanding of where we are increases by the day.
Denial 1 is: "It started in the United States". These are typically careful words. Although they are true to a degree they are woefully economical. We have three out of the five largest banks. Why did they join in? Second is: "We have plenty of room to take on more debt". This is an historic statement dependent on out-of-date comparisons. Where does the PFI come into the statement? Where does household debt come into it? We are never told in any of the statements about the totality of debt, only about the historic public debt.
Then there is: "We need to regain confidence in the banks". Yes, but how about the banks' loss of confidence in themselves? Their risk models in this digital age did not work. They are in a state of trauma and there is no way we will be confident in the banks until they are again confident in themselves. Meanwhile, what is happening is tactical. Everything is being done, according to the Government, for those who are in trouble—mortgage trouble and the potentially unemployed—but what about the effect of low interest rates on elderly savers? What about the savings ratio, which when the statistics come out may well have been negative in the last quarter of last year?
We are told of the advantages of the flexibility of our labour market but where is the public sector flexibility? You only need to look at private sector pensions and what is happening to them versus public sector pensions. This is an illustration of some of the tensions which are building in society and which make the Motion of the noble Lord, Lord Eatwell, so important.
We have been riding two horses—first, markets, financial services and light regulation; and alongside that, social engineering bringing rapidly rising public sector employment and contingent liabilities and commitments into the future. This is a stunning outcome from 11 years of mindless risk-taking by all who entered the big tent of Blair and Brown.
The noble Lord, Lord Eatwell, spoke about risk now. There will, however, be a great aversion to risk in the light of the way that risk has treated us and got us into the situation in which we find ourselves today.
Is it possible, therefore, to have a plan to limit the impact on the social structure and the economy? There is one essential ingredient—leadership. This is the willingness and ability to come in front of the people and tell them the score: this is where we are, this is the direction of travel and this is what the journey will be like. I know that that is a very unfashionable view; it is probably regarded as an out-of-date approach to the sophistication of the chattering classes and the people. But perhaps it is not wrong; maybe it is just unavailable.
In any plan it is necessary to know what to leave out. There are things which are for tomorrow, and there are things over which we have no realistic control. The first of those, pace the noble Lord, Lord Eatwell, is the Bretton Woods regime. There are three problems, the first of which is our record. We have always been against any sensible reform of the Bretton Woods institution, and we have sidelined the IMF for years. Secondly, this is for the next time—it does nothing for this crisis. Thirdly, the central issue, as has been said, is the trade imbalance between China and the United States of America, and we do not have any control over that.
We should leave out a simple, unstructured Keynesian "borrow and spend our way out" approach. There are three problems, the first of which is human nature. Many people will not even attempt to join in—they are savers, not spenders. Secondly, we are trustees, and there must be some limit. Thirdly, our economy is not well placed; the period of easy credit concealed underlying longer term issues, and we have a great propensity to import. That is why the IMF has given the judgment that it has, another thing about which we are in denial.
In outline, what do we need? First, and most importantly, there must be shared responsibility: no one saw this coming and we all contributed to it—and I mean "all". Secondly, there must be an understanding that we do not have the room to manoeuvre to regain economic growth and stability on our own—we rely on others, principally the United States of America, and God bless Obama. Thirdly, there must be a willingness to accept that when an upturn comes, as it will, it will take years to rebalance our social and economic affairs. Meanwhile, we need to do all that we can for each other.
Such a plain man's approach may seem to be nothing but a cliché, to be fleshed out with lots of detailed measures which, we hope, will meet its theme. I do not agree with that. We need a simple theme because we need to pull together in times which will affect different people very differently and when it will be all too easy for society to fall apart. Northern Rock was a warning of a falling apart, which we did not heed; Lindsey could be another. Let us not be caught twice.
My Lords, I rise to speak too long after taking my seat following the passing of my late noble friend, Lady Darcy de Knayth. It is a great honour to return to the House and I look forward to contributing more in the future.
The state of the national and global economy is reported on in our papers daily. Without a doubt, we are still in an extremely serious situation, with no immediate chance of recovery. However, we do not see much in the media about the Government's plans for the support of small business, although I notice that the Real Help with Finance package is being managed by the Department for Business, Enterprise and Regulatory Reform.
The real long-term impact of this recession is extremely destructive to the small business sector—here I declare an interest, as I am involved in the sector. That is particularly true in rural and far-flung corners of the country and in areas of high unemployment, where even the loss of 20 jobs is significant. In Stranraer, in south-west Scotland, a town where unemployment seldom falls below 5 per cent even in good times, the demise of Baby Deer, a long-established clothing company, was directly as a result of problems experienced on the high street and particularly with Woolworths.
Some years back, when the foot and mouth disaster hit the United Kingdom, in the south of Scotland, the then Dumfries and Galloway Enterprise and the Dumfries and Galloway Council managed, with financial help from the Scottish Executive, to organise an excellent business support scheme which, without doubt, helped many small and tourism businesses to survive in what would otherwise have been a catastrophic time.
I am particularly interested to hear how the Government intend to manage the real help with finance programme. The website for the Department for Business, Enterprise and Regulatory Reform assures the reader that the Action for Business programme and Real Help with Finance programme are United Kingdom initiatives. Can the Minister explain how these will be implemented in the devolved areas and rural sectors?
My Lords, I thank my noble friend Lord Eatwell for introducing this debate and making such an excellent speech. I suppose by "excellent" I mean that I agree with everything that he said. To begin, I would welcome a comment from the Minister on how interest-rate policy is working or, rather, not working. Certainly, the cuts have adversely affected lenders, whose income from past savings has fallen. Equally certainly, borrowers have not gained from lower interest rates since there appear to be no funds for them to borrow in the first place. It looks as though nobody has gained. Is my noble friend able to throw any light on this?
Next, since large parts of the banking system are, to all intents and purposes, in the public sector, what influence can the Government exert on how banks behave? For example, how many non-executive directors have been sacked? What view do we take of auditors who appear not to have noticed the existence of toxic assets? Above all, the bankers, despite being the cause of the catastrophe, still seem to regard self-preservation as their priority, rather than getting the economy moving forward again. I, for one, look on with amazement as the senior bankers, who are the villains of the piece, are invited to Downing Street for consultations. Equally, given that the Monetary Policy Committee of the Bank of England was almost the last to recognise the need for expansion in macroeconomic policy, on what rational grounds can it be thought right to place banking supervision—again—under the aegis of the Bank of England?
It has been said that we need a new Maynard Keynes. We do not. As my noble friend Lord Eatwell said, all we need to do is apply the principles of economics that Keynes laid down 70 years ago. We really need a new George Orwell; only a satirist of his quality could do justice to all of this.
This brings me to straightforward economics. What I find embarrassing is the large number of economists who have learned nothing from recent events. Indeed, many academic economists are still publishing articles that prove that what has happened in the past 18 years could not possibly have happened. It is apparent to almost everybody else, when the economy is subject to a major shock and moves significantly away from full employment equilibrium, that Keynes's analysis was entirely right: the automatic path back to full employment is so slow as to be indiscernible to almost everybody. Indeed, it is so slow that it probably does not occur to them at all. That is why expansionary fiscal policy is needed and why Governments, with our own being the earliest to act, are right to adopt an expansionary fiscal approach.
Turning away from economics, I refer now to the social impact of what has been going on, by which I mean the need for fairness in our society and economy. What has been discredited, apart from some of the economics, is the trickle-down theory, which was put forward during what we are told were the good years. That is, if we support enterprise and let the rich get richer, everyone else will gain. In the US that has simply turned out to be completely untrue. The median worker in the US gained nothing over the 20 good years. Even in our economy, inequality has risen in broad terms. The time has come to call a halt and to ask how any policy intervention will affect the poorest in our society. It is as important that Ministers are obliged to make a declaration on how the poorest are affected by any policy as it is that they make a similar declaration on the human rights effects. Fairness to the poor is at least as important as human rights.
We should stop demonising single mothers. I do not doubt that children would be better off with two parents being there for them, but the children are not at fault when there is only one. Furthermore, if we are to encourage single parents to return to the labour market when the children are old enough, which is right—Orwell would really have appreciated that being a central plank of government policy when unemployment is rising at an unprecedented rate, and would have felt that it was taking satire too far—three conditions need to be met. One is that the jobs have to be there to go to; secondly, there should be incentives—namely, people should be better off by taking the job; and, thirdly, even when children are older, we need to make sure that proper arrangements exist for emergency childcare. More generally, we should compare the attitude of some people—I cannot exclude Ministers from this—to single parents who work the benefits system to their advantage with their attitude to the fat cats who use every possible means to avoid paying tax altogether. The distinction is dreadful.
On the latter, my right honourable friend the Prime Minister worked extremely hard when he was Chancellor to close tax avoidance loopholes, but he discovered that, whenever he closed one, two more sprang up. The best way to deal with this is to reverse the burden of proof when it comes to tax avoidance; namely, the avoidance scheme needs to be demonstrably legal. Until it is demonstrated as such, the full rate of tax should apply.
My main conclusion is that the Government are right to pursue an expansionary fiscal policy and deserve everybody's support for it. Things will get worse before they get better, but that is not a reason for flinching. The Government must go on acting with determination and reinforcing the policies so that they will work.
My Lords, the Banking Bill which we are currently discussing in the House is very complex and detailed, but it does nothing to resolve the current banking crisis, which lies at the heart of our economic problems. The noble Lord, Lord Peston, has just said that it is the fault of the bankers. I agree with him up to a point, but would go further and say that the fault that really needs correcting is our whole banking system. I am therefore grateful to the noble Lord, Lord Eatwell, for bringing forward this debate.
The Banking Bill fails to address the fault which has led to every major banking and currency crisis during the past 200 years, including this one. It merely, lazily and weakly, papers over the cracks. Like Lilliputians, we are trying to tie down Gulliver with ever more strands of rope. It did not work then; it has not worked since 1811; and it will not work now.
In March 1997, I warned in this House that our failure then to address the banking system would lead to greater hardship. I said:
"The cycle will continue, but the next time, as before, we will all start deeper in debt and with a burden harder to carry".—[Hansard, 5/3/97; col. 1871.]
We did not act then in the good times. However, I am reminded of Milton Friedman's observation that it takes a crisis for real change to occur. So what better time than now?
By January last year, I could see that the imprudence of bankers had exceeded even my worst fears and I introduced the Safety Deposit Current Accounts Bill to try to defuse the explosion that I could see coming.During the Second Reading debate in April, I asked under which Act of Parliament the current banking system had been established. I got no reply from the noble Lord, Lord Davies of Oldham, whom I am glad to see in his place. I asked again in November, in the debate on the Queen's Speech. Again, there was no reply. I understand that no Act has been passed by Parliament. The current crisis, like previous ones, emanated from a base of judicial decisions. Prior to 1811, title to the money in depositors' accounts belonged to the depositor. However, in that year, decisions in Carr v Carr and, in 1848, Foley v Hill gave legal status to the banking practice of removing depositors' money from their accounts and lending it to others. Since then, title to depositors' money has transferred from the depositor to the bank at the moment when the deposit is made.
Bankers have always seen it as their job to invest as much of their depositors' money as they prudently can, in order to earn income for themselves while, at the same time, maintaining sufficient cash flow to be able to honour depositors' cheques when presented and to meet withdrawals when demanded. If new deposits fail to materialise in sufficient strength or if borrowers fail to repay on time or at all, banks need to be rescued or they will fail. Historically, bank failures then led to a demand for central banks to act as lenders of last resort to save imprudent bankers who got caught short.
These judicial decisions meant that, from then until now, money deposited belonged to the bank and not the depositor, thereby allowing bankers to use customers' deposits as they saw fit, always provided that they could manage cash flow so as to meet depositors' requirements. In good times, that enabled them to take greater risks. Then, with the advent of central banks as lenders of last resort, the bankers soon learned they could take even greater risks with virtual impunity. When their lending became too aggressive and their reserves and deposit receipts were less than required to meet cash flow, they began to lend to each other. Banks with excess reserves would lend on the overnight market to those with a shortfall. With all these supposed safety mechanisms to protect them, bankers came to believe they could become even more aggressive in their lending, enabling them to make increased profits for themselves.
The provision of these safety mechanisms had, in some cases, merely encouraged them to take excessive risks. Further, these two judicial decisions overlooked or failed to consider the fact that when banks lend depositors' funds, more than one receipt for the same deposit is issued. This was not done intentionally by individual banks or it would immediately have been seen as fraudulent. Rather, it was done by the system as a whole. This process continued to the present. It is as a result that our UK money supply has grown from £31 billion in 1971, when President Nixon closed the gold window, to in excess of £1,700 billion today. Let us consider the implications of those last two figures. They mean that every year since 1971 the banking system has created, on average, for its own use, in excess of £44 billion. That is more per year than the entire money supply which had, until 1971, sustained our economy since recorded history and through two world wars. Is it any wonder that we have suffered such serious inflation over that period? It is clear that the normal, everyday onward lending of depositors' funds by retail banks has been the principal producer of inflation.
When paper money was backed by gold, this same production of new receipts by the banking system increased the number of claims for the gold held in reserve without in any way increasing the amount of gold available to meet them. Therefore, the amount of gold available for each receipt became smaller and the value of paper money decreased. The normal, everyday banking practice of onward lending of depositors' funds led to such a continued increase in the number of claims for the gold available that it caused a series of revaluations of paper money with respect to the amount of gold each could claim. The rates of increase varied from country to country, creating complexity in foreign exchange markets and leading to a series of international agreements to try to determine the correct relationship between various national currencies and gold. The last of these was the Bretton Woods agreement in 1944. It was breached in 1971, when the huge increase in the number of dollars created since 1944 forced President Nixon to close the gold window.
The same banking mechanism, which destroyed the gold standard, is now destroying the central banking system. Central banks can no longer cope. The Treasury and the taxpayer have now to try to pick up the pieces. In fact, the failures are so serious and banks have been so imprudent that they are now unwilling to lend to each other and Governments had to ask to kick-start inter-banking lending. In Davos recently, the world looked at the imperilled state of the western monetary system with shock, and there is so little faith in paper money that cries are heard for a new Bretton Woods. All that has occurred because of the failure of Governments, economists, the press and the public to recognise the faults in the banking system that were given legitimacy by those early judicial decisions.
Even today, the Government are striving to save this discredited system with still more legislation that attempts to control the degree to which this fraudulent but legal mechanism can continue to operate. Why are we trying to save a system that, since 1811, has overcome every attempt to harness it? Now is an excellent time to revisit the question of the banking system. We should consider in detail a system to correct the faults that I have identified by creating accounts that do not transfer title to depositors' money from depositors to the banks. Banks must not be allowed to continue to lend depositors' money without the consent of the depositor. This will immediately stop the issuance of two receipts against the same money. Depositors would have to pay for the storage and distribution of their money in accounts and banks would have to compete and earn their income through storage and distribution charges.
For those who wish to earn an income with their money and who wish banks to invest their savings for them, savings accounts are available. With those actions we can completely remove the duplication of receipts from the banking system and stabilise the money supply. Banks will no longer be able to lend depositors' funds. Depositors' funds will then be safe. There will be no further need for lenders of last resort. Taxpayers will no longer be required to bail out future bank failures and inflation can be halted in its tracks. Can it happen? Yes. Will it happen? That depends on the Government's response. My noble friend Lord Eatwell said, when he opened the debate, that we cannot return to the norm. We will, however, unless the Government grasp the nettle and cease throwing taxpayers' money at a faulty system and stop trying to control the uncontrollable. There can be no better time to act than now.
My Lords, I am pleased to be able to contribute to the debate and I congratulate my noble friend Lord Eatwell on the way in which he introduced it. As he indicated, the situation that the country finds itself in is exceptional. The Government have announced a substantial package of measures to ensure that those facing redundancy and those seeking employment are helped back into work as quickly and successfully as possible. They have encouraged all sectors to play their part. I will focus my brief remarks on what the higher education sector can do and is doing to support the Government's endeavours and emphasise the importance of a high-skill innovation strategy for economic recovery.
The higher education sector is playing an increasingly important role in helping British businesses to survive the economic downturn and build for the future. Universities and higher education colleges have an unparalleled record in fostering innovation, enterprise and skills and in helping to create wealth and job opportunities. Universities are by their nature long-term organisations. World-class research, the development of a highly skilled workforce, consultancy work and the creation of new ideas, products and industries are all examples of their long-term benefit. They will be crucial in delivering the highly skilled talent that my noble friend Lord Eatwell emphasised. However, this does not mean they have not tried to meet the needs of business and learners in the short term.
Indeed, Universities UK, in which I declare my interest as chief executive, along with GuildHE and the Higher Education Funding Council for England, produced a leaflet called Standing Together, which highlights the services that universities have to offer business. This includes the use of consultancies within business schools, access to relevant sources of knowledge, and reskilling and upskilling through postgraduate courses, to name just a few. The leaflet, which has been sent to a huge range of business organisations, provides a contact point within each university in the UK so that businesses can go straight to whom and what they need. It has also been sent to Members in both Houses as a signal of the contribution that higher education can make.
A number of initiatives have been supported by the Government. Knowledge transfer partnerships, supported by the Technology Strategy Board, enable companies to access knowledge and skills from higher education institutions to use in the strategic development of their businesses. I understand that the Technology Strategy Board has agreed to double the amount of KTPs between 2008 and 2011. That should enable a wider coverage of the scheme to include the service sector, which has been hit particularly badly by the downturn. As of March 2008, there were more than 900 live partnerships, with many more in the pipeline.
Universities already have a track record in supporting business, from developing science and research parks next to university campuses to promoting businesses at the start-up and early development stage in incubation centres. An area where increased government funding is having real effect on the ground is through the Higher Education Innovation Fund. HEIF is a £400 million scheme funded by the English funding council and supports universities and colleges in reaching out to businesses and providing the ideas and skills that are needed for innovation and improved productivity.
It is often forgotten that higher education institutions are also significant players in their own right within regional economies. Through both direct and knock-on effects, they generated more than £45 billion of output to the UK economy, which is more than the pharmaceutical or aerospace industries. After the NHS, universities are some of the largest employers in a particular town or region and, as such, they are major purchasers of products and services. The Government have said that their departments and agencies should aim to pay small firms within 10 days of the receipt of an invoice. That is something that a growing number of universities are trying to achieve.
Many universities are involved in building projects to update 1960s infrastructure, with their contractors often working with small firms as subcontractors. Universities are now looking to their contractors to achieve the same turnaround time for invoices and, by bringing forward capital funding planned for 2010-11, the higher education funding councils are helping universities to create or protect hundreds of jobs in construction. Higher education institutions are also responding to fears about a drop in graduate employment by developing a number of schemes, such as creating their own internships for recent graduates, which will provide talent pools for local business and industry. They have introduced graduate start-up schemes, where funding for training and business support is given to graduates to start up a business, and they have improved information, advice and guidance for new graduates entering the job market. That is a clear difference from the last recession; businesses have now learnt that cutting back on graduate recruitment during the downturn costs them a great deal more three years down the line.
As I mentioned, universities are large employers in their own right. UK higher education institutions employ more than 360,000 people, which equates to 1.2 per cent of total UK employment. That level of employment provides an important lifeline in many areas that have suffered during the economic downturn. However, to continue to maintain this important lifeline, it must also be remembered that public money is necessary to underpin higher education. As we enter a very tight spending review process, whether before or after a general election, I urge Ministers to continue to maintain the unit of funding for teaching and ensure that research excellence is funded wherever it is found. With these two key areas supported, it is then possible to build on the successes of schemes such as knowledge transfer partnerships and the Higher Education Innovation Fund, which have already proved their worth, so that higher education, business and government can work together to ensure that the UK pulls out of the downturn and is well prepared to maximise opportunities for the long-term growth and development of the country.
My Lords, we are all grateful to the noble Lord, Lord Eatwell, for initiating this interesting debate. I very much enjoyed his speech, and found interesting the way that he described the measures that were taking place in the USA and his comments on the trade imbalances and the need for exchange rate re-evaluation where there were large surpluses.
I shall focus mainly on the Government's plans to counter the economic impacts of the financial crisis, as I have more knowledge in this area; I shall leave others to discuss the very important social effects. I wish to look overall at the measures taken by the Government in reaction to the financial crisis.
It is too early to judge how successful the bank bailouts have been. They were definitely necessary, as the banking system was on the verge of collapse last October. It is clear that at the moment the taxpayer is sitting on a substantial loss from the Government's purchase of RBS shares, which I calculate at being some £10 billion. I wish the Government well on their stimulus packages, but I am uncertain how successful they will be and whether several banks may have to be taken into national ownership.
There have been a plethora of announcements on bank and business bailouts, but an article in today's Financial Times is interesting, with the headings:
"Uncertainty over £310bn in support", and:
"Brussels yet to receive submission".
The article states:
"The UK has yet to apply to Brussels for the ... approval required for more than £310bn of promised state support for banks and business—in spite of ministers stressing the urgency of the initiatives ... Businesses warned on Wednesday that the delays and uncertainty surrounding the Treasury and Department for Business support packages were exacerbating the effects of the recession.
Jobs could be lost unnecessarily because of the lack of clarity surrounding the government's proposals, the leading employers' organisation suggested.
Government packages unveiled last month that support the car industry, lend to business and bail out the banks for the second time cannot be fully implemented without state aid approval for at least some of the elements.
But the government has yet to submit the notification to the European Commission needed to start the formal approval process for any of the schemes announced recently that need state aid clearance.
Other elements of the government's recessionary packages are also being hit by delays. The Treasury pledged on January 19 that a £50bn scheme for the Bank of England to buy corporate paper and other assets 'will come into effect from February 2'. But officials told the FT yesterday that a Bank notice on asset purchase this week will be of a 'consultative nature' and the scheme will not start immediately".
I ask the Minister why the Government are being so slow in implementing their support schemes, which are so vital to the recovery of the economy, and whether all other sectors of the economy, like the motor industry, will be bailed out by the Government.
On the subjects of uncertainty and the banks, I should highlight two areas where government policy appears to be uncertain and contradictory. The Chancellor on Tuesday, in front of the House of Lords Economic Affairs Committee, is reported by the Financial Times to have suggested that a bad-bank approach might be necessary. Yet, as recently as
"we concluded that an asset protection programme, which is sometimes described by the media incorrectly as insurance, was better than a whole purchase of assets—the good bank, bad bank model".—[Hansard, 27/1/09; col. 240.]
The same confusion has been apparent with the Government's running of Northern Rock. Last year it was aggressively running down its mortgage book, but now the Government have done a U-turn and encouraged it to lend again. Does the Minister agree that there is no consistency to the Government's policy on the banks, which is adding to the general financial crisis?
The early Northern Rock management style also ran totally contrary to the £200 million mortgage rescue scheme unveiled in the Pre-Budget Report. The Government also appear to be considering quantitative easing. While I accept that this may have to be done, and I emphasise that I am no economist, it seems very risky and shows how bad things have become.
Next, there have been the Government's fiscal actions. They are planning to stimulate the economy by £20 billion in the short term but raise revenue by around £40 billion in the medium term.
The lowering of the VAT rate will cost £12 billion in lost revenue and is unlikely to work due to the cautious nature of consumers at present. Leading accountancy firms, Grant Thornton and Ernst & Young, have criticised it. Leading retailers, including the chief executives of Next and Marks & Spencer, have done the same.
Turning to the Pre-Budget Report, the £3 billion advancement of capital spending seems to be a sensible measure, which I can support.
I shall now look at the tax-raising measures that the Government are going to adopt to raise their £40 billion. The big question in my mind is: are they doing this too soon? They are making bold assumptions about the timing of the economic recovery but, if these tax rises are badly timed, they could choke off that recovery. They are planning to collect £20 billion by, yet again, increasing their favourite stealth tax: national insurance. The decision has been made to increase the employee, employer and self-employed contribution by 0.5 per cent from April 2011, but surely it is not sensible to tax business further when times will still be difficult. Our party has put forward more sensible measures to give firms hiring workers who have been unemployed for three months relief from their NI contributions. We have also proposed a 1 per cent cut in national insurance for six months for firms with fewer than five employees.
The Government are planning a top rate of income tax of 45 per cent, thus breaking a promise since 1997 not to increase the top rate. They have temporarily deferred, until April 2010, a rise in the corporation tax rate for smaller companies but they still wish to penalise small businesses at the very time that they need help. What signal does this give to that vital sector of our economy, the smaller business?
Our party is offering positive measures: it would help those trying to get on to the property ladder with a stamp duty holiday for first-time buyers on house purchases of up to £250,000; it would help old-age pensioners, as suggested by the noble Lord, Lord Eatwell, by increasing their tax allowance; and it would help savers with a suggested abolition of the basic rate of tax on savings.
The Government's plans to counter the economic impact of the current financial situation are in many ways praiseworthy but I am concerned that they are being implemented in a not very timely fashion and, in many ways, they seem to be contradictory.
My Lords, I, too, congratulate my dear and noble friend Lord Eatwell on initiating this debate and I also congratulate him on his speech. I start, as he did, with a quote:
"From time to time in human history there occur events of a truly seismic significance, events that mark a turning point between one epoch and the next, when one orthodoxy is overthrown and another takes its place ... There is a sense that we are now living through just such a time: barely a decade into the new millennium, barely 20 years since the end of the Cold War and barely 30 years since the triumph of neo-liberalism—that particular brand of free-market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time ... The global crisis ... has called into question the prevailing neo-liberal economic orthodoxy of the past 30 years—the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us".
The free-market economic consensus of the past 30 years is crumbling around us. We indeed live in changed times that demand radically different solutions. Already, we can see the consequences of economic recession: people losing their jobs; families facing the loss of their homes; household brands going to the wall; more people in poverty; and, this week, the advent of industrial unrest and increased insecurity. On the economy and the future of our wider society in the months ahead, there will be stark and difficult choices for all of us, including those in government.
However, in all the choices that we make, there can be no going back. We are not in 1979, 1989 or even 1999; this is 2009 and we must never make the same mistakes again. We can no longer afford simply to leave it to the market. Last week in Davos, David Cameron said that we needed a return to a 1980s style "crusade of popular capitalism". However, it was the pursuit of that popular capitalism of the past that led us to the poor regulation that got us into this almighty mess in the first place. Let us not forget that it was that so-called truly popular crusade of capitalism in the 1980s that sold off our council houses without replacing them, that allowed building societies such as Northern Rock to demutualise to their eventual peril on world markets, and that privatised energy utilities, which now exploit their consumers and employees alike. The country is not bankrupt but the mantra of free markets—the neo-liberal economic consensus of the past 30 years, which I am afraid seduced my Government too—is bankrupt.
I am not against the market but what is government for if it is not to inject the moral component into the market? Just as we witnessed with the Government's intervention in the banking sector—an important step change—we need a wholly different approach to the wider economy.
This week, following on from the banking crisis, the impact of the recession took an equally ugly turn, with industrial unrest growing across the country. But let us be clear: these strikes are not about xenophobia; they are about global corporations and unfettered free markets gone crazy, and it is that which fundamentally needs to be addressed.
These new times demand a radically different approach in government economic policy. We cannot simply go back to some so-called golden economic age of increasing consumption, spiralling consumer debt, and cheap and increasingly deregulated labour. What our country needs now more than ever as a response to the economic recession is not a crusade of popular capitalism but a new crusade of popular social democracy. We need a bold new economic consensus which promotes well-being, social justice and environmental sustainability, and which takes our country in a new direction towards the good society. I believe that a good economy can deliver a good society. However, that should not mean nationalising our banks on the one hand and privatising Royal Mail and the Post Office on the other; nor should it mean setting ambitious carbon reduction targets and then building a third runway at Heathrow.
There are alternatives to the failed neo-liberal economic policies of the past 30 years. There are better ways. When the wealthiest 1 per cent own 21 per cent of the nation's wealth, and when the bottom 50 per cent own just 7 per cent, the good economy should ensure tax justice, greater redistribution of wealth and income equality. It should ensure that those at the top pay their fair share. It should also tackle the irresponsibility culture of the super rich, and that could include a new tax on bonuses, with revenues used to fund tax cuts for those on lower and middle incomes. With millions facing the prospect of unemployment, the good economy should be about embarking on a green New Deal to create hundreds of thousands of new jobs in a green industrial revolution and investing in energy for the future. The good economy should be about making sure that businesses pay their fair share of taxes, and we should close loopholes that enable corporations to avoid paying.
With the biggest banking crisis in our history, the good economy should be about setting up a people's bank, using the existing Post Office network. Now is the time to guarantee every local community access to safe, secure and dependable banking services. We should not be afraid of imposing a maximum APR for loan and credit card companies and ending rip-off credit. Why should companies such as Provident Personal Credit be legally allowed to exploit the poorest in our society and charge 189 per cent APR for a loan of just £50 when the Bank of England base rate is just 1.5 per cent? It is loan sharking and a disgrace.
We should be ending the gender pay gap in a specified timeframe. The good economy should be about insisting on not just a minimum wage, but a living wage for the entire country, just as we have here in London. We should also insist that all companies awarded government public procurement contracts meet a standard maximum ratio of difference between the most and least well paid among their employees. When the Joseph Rowntree Foundation says that child poverty could double in the next decade if we do not find more money to tackle it, the good economy should be about prioritising and finding all the money needed to end child poverty for good.
With that in mind, we should scrap plans for Trident. Spending £70 billion on a nuclear weapons system designed for the 1980s is not a good use of taxpayers' money. We should immediately scrap plans for ID cards, which could cost £18 billion over the next decade. When 6 million of us are faced with fuel poverty this year, the good economy should be about imposing a windfall tax on the greedy energy and oil companies to ensure social and environmental justice and to raise £6 billion to enable the Government to honour their commitment to end fuel poverty by 2010. On student funding, it is absolutely right for Labour to rule out lifting the cap on fees. We should instead be looking at introducing a graduate tax that is fair to everyone. In the good economy of the future, we should allow councils to build the millions of new social houses that are desperately required.
The Government need to seize this moment and make the choice fundamentally and radically to renew our country. The opportunity now exists to usher in a new social democratic economic consensus with the values of equality, social justice, security, and sustainability at its heart. If we choose, we can create a good economy and a good society. We can work together to enable greater freedom for all our people by giving real power to the many, not to the few. I hope that we can rise to the challenge.
My Lords, I thank the noble Lord, Lord Eatwell, for initiating this debate and for his opening remarks, which I will return to if I can. I want to focus on an area in which I have an interest: the great north-east of England. I declare an interest as I am involved with and a director of a few businesses in that area. They are listed in the Register.
As I was listening to the noble Baroness, Lady Kennedy, I happened to glance at the speech given by David Cameron in Davos. I tried to find the reference to popular capitalism, but could not. The only thing I could find was a headline, "Capitalism with a conscience". David Cameron said:
"So I think it's time to update the free market orthodoxy that has dominated the past few decades. It's time to assert a fundamental truth: that markets are a means to an end, not an end in themselves. Markets are there to serve our society, not to suck the joy out of it or trample over its values. So we must shape capitalism to suit the needs of society; not shape society to suit the needs of capitalism".
I would have thought that the other side of the House would have applauded those sentiments rather than caricatured them.
There was much that I agreed with in the opening remarks by the noble Lord, Lord Eatwell, but he caricatured the Conservative Benches' approach as a do-nothing attitude, a desire to let things take their course. Nothing could be further from the truth. It would appear that, had that been the case, the Labour Government would have been bereft of any initiatives at all because they have been picking up the suggestions of George Osborne and David Cameron at an alarming rate, and we are delighted that they have done so. In fact, David Cameron has said that he wishes we could do more, but unfortunately this country's level of indebtedness restricts us.
There are a couple of points to be made about the system. I agree that it is fundamentally important and that we need to have some understanding of where risk lies. The response to the Asian financial crisis was obvious: the establishment of the Financial Stability Forum. That set up a range of international financial standards and codes that were to be adhered to by central banks. They covered areas such as central banking principles and monetary and fiscal transparency. Had they been implemented and monitored when they were proposed 10 years ago, perhaps some of the Enron economics that have been occurring on our watch might not have happened. The notion that we could get to a situation where financial derivatives are estimated at $863 trillion—about 16 times the value of the world economy—is clearly ridiculous. We need to get back to some sanity. We need to understand where risk is in the market. That has been the uncertainty, so every measure that can be taken to help the market understand and know exactly where risk is held is going to steady the nerves and stabilise the situation. There are some grounds for optimism in the financial markets, the equity markets and the exchange rate markets. There is a growing feeling among investors that they are beginning to get to the bottom of the level of indebtedness and to where the risk is held.
I turn to the north-east of England and take probably a counterintuitive view of these things. I have spoken in this House on a few occasions about the tragedy faced by people who are losing their homes. I am particularly concerned about Northern Rock repossessing homes at a rate four times the national average and, despite being in state hands, deciding to award £9 million in bonuses. That is unfair and should have been avoided. I have spoken about the loss of jobs at Nissan and about initiatives that could be put forward to stimulate demand in the car market.
However, an essential ingredient is missing from this debate. As we talk about economics, accountancy and finance, we must not lose sight of the fact that most organisations and people respond on sentiment, on how they feel about their prospects and the market. There is no doubt that we have moved from a period of irrational exuberance to one of irrational pessimism. As we are pummelled by the media every day with more bad news, we fear that things are worse than they are. Do not get me wrong; I am not saying that things are not bad or that there is not more to come, but although unemployment rates in the north-east of England have risen by 40 per cent over the past year—and I do not want to minimise the tragedy for the people involved—it still means that 90 per cent of people, one million people, are in work. People in work are probably finding that their mortgage payments are lower than they were and their fuel costs have come down. Their disposable income is probably better than a year ago, yet their spending patterns are remarkably different. That is something we need to temper.
We do not want to return to the credit card, debt-ridden culture of the past, but we need to encourage people to return to normal spending behaviour in the markets. That requires something that does not cost billions: leadership. It is called inspiring people and giving them hope. It is something that people desperately need. We have seen the impact of Barack Obama's election in the United States. It lifted my spirits, and I am in the United Kingdom. It has done immense good globally and in the United States. It shows what leadership can do, what vision can do. Barack Obama was delivering a message captured in the title of his book The Audacity of Hope. He was saying, "Listen. Things are bad; of course things are bad; but we have been through worse". We have been through the great depression of 1919 to 1931, when the economy contracted by 25 per cent. We have been through tough times, including two world wars, but we have come through and we will come through this.
The question is: what shape of society will we come through with and how can we rebuild our society in a positive way? That sense of optimism and hope is missing in the current public discourse. It may have something to do with the fact that this is the first economic crisis to occur in a media age: 24-hour news demands, consumes and forces things and blows them out of proportion. We need a sense of proportion, a sense of optimism and a sense of hope.
An initiative has been taken by a regional newspaper in the north-east of England, the Journal. Again, it does not cost billions of pounds. It is just called "Think North East First". No, it is not a call to protectionism; it is simply saying: think about what you can do locally. When you talk to people about trillion-dollar debts and complex derivatives, they feel powerless. You can give people some sense that they can do things to help the local economy by supporting local businesses, buying their food locally, taking their holidays locally, paying their debts to local suppliers on time and encouraging the public sector, which accounts for two-thirds of the economy of the north-east, to ensure that it biases its procurement policy towards the north-east of England. All of those are good, healthy things. Not only do they help local businesses and the local economy, they help the spirit of hope and optimism that we can do something, that sense of community, the sense that we are in this together and can come out of this together stronger.
We need that sense of hope and optimism, which David Cameron has referred to, that sense of a vision for how the economy can be restructured, but also a sense of reality to come through to our consumers through initiatives such as "Think North East First", practical self-help promotion, optimism-led initiatives. They would do companies and individuals a huge amount of good in the present straitened times.
My Lords, I, too, thank my noble friend Lord Eatwell for introducing this timely and incredibly important debate. To be honest, when I first heard of it I expected that there would be at least double the number of speakers. However, what we have lacked in quantity I suggest that we have more than made up for in quality, although the next few minutes may well throw that assertion into doubt.
If I may, I shall start with what I hope will be a bit of helpful context. On
"never had it so good".
At the time, the average wage in Britain was £14 a week and the cost of the average house was £2,300—yes, £2,300. Therefore, the average price of a house represented a little more than three times annual income. Last year, the average wage stood at £466.50 per week and the average house cost approximately £225,000, requiring a buyer to stretch to 9.3 times their average annual income to purchase it, well beyond what anyone would have considered prudent 50 years earlier.
Far more important from the perspective of this debate, government debt at the time at which we had never had it so good stood at 122 per cent of annual GDP. Today, it stands at 47.5 per cent, allowing me to contend that the real problem is not with anticipated levels of government borrowing to support public investment—as an unrepentant socialist, I applaud that—but with the level of unsustainable private debt. At present, that stands at an unprecedented £1.4 trillion, which is £23,000 for every man, woman and child in this country. It is the highest personal debt figure per capita of any of the G7 nations and probably the highest in the world.
My purpose in straying into what is for me unfamiliar territory is simply to underline the affordable case for very significant levels of government investment in infrastructure—levels that, even a year ago, would have made most of your Lordships' eyes water, and could have induced heart attacks among those ideologically opposed to large-scale government intervention.
Today, in common with my noble friends Lord Eatwell and Lady Kennedy, my single greatest fear is that anyone will be foolish enough to believe that the answer lies in turning the clock back and somehow returning things to the way they were in 2005 or 2006. As I said in a debate in this Chamber last year, a great deal of what was complacently celebrated as success in 2006 was illusory. Much of it has done enormous damage to the objective of what I would see, in every sense, as a sustainable society. In fact, to move forward with confidence and purpose, it will be necessary to all but reinvent ourselves and our entire approach to life, both as consumers and as citizens.
I started with one Prime Minister, Harold Macmillan. I will go back a little further. In January 1946, just across the square in Central Hall, Westminster, the very first meeting of the nascent United Nations took place. In his welcoming speech, the then Prime Minister, Clement Attlee, suggested to the delegates that they would succeed in their new venture only if they brought with them the,
"same sense of urgency, the same self-sacrifice and the same willingness to subordinate sectional interests", with which they had fought the recent war. Of course, he was right; he would be just as right today.
This is not a war. This is self-inflicted, but we are still going to have to get out of it in a very old-fashioned way, by digging inside ourselves and readdressing the basics, by seeking ways to improve our creativity and productivity, by saving more, by studying harder, by doing all the things that we always knew that we had to do but were somehow too ill informed, too complacent or simply too stupid to remember. Successive Governments must accept their share of the blame but, in the end, the truth is unavoidable. As individuals, we have behaved in ways that were mind-numbingly foolish for far too long. In doing so, we have succeeded in wrecking our economy and mortgaging the future of generations yet to be born.
In hindsight, we made any number of embarrassing misjudgments. We embraced globalisation without remembering that it was a two-way street. We could and should have taken the time to think it through. We could and should have been far smarter about crafting ways to cushion its more harmful effects and to share its benefits far more equitably. As the American commentator Bob Herbert recently put it in the New York Times:
"We were living in a dream world. The general public, and to a great extent the press, closed its eyes to the increasingly complex and baffling machinations of the financial industry, which kept screaming that oversight would ruin everything".
If I seem a little angry, it is, rather like the noble Earl, Lord Caithness, with good reason. As the Minister may remember, for several months last year I was pressing for a very modest amendment to the then Energy Bill. All that I sought was the introduction of a public interest test in the event of significant mergers, takeovers or acquisitions in the energy sector. Why? Because even then you had to be wilfully stupid not to realise that any collapse of a major supplier in that sector would result in a public bail-out. Surely, I argued, if the public are to be the effective guarantor of last resort, they should be offered the security of knowing that the companies that supply their energy are adequately capitalised and run for the public good by decent and honourable people. Should not a reasonable set of checks and balances be in place to ensure that the regulator asked all the right questions and was unambiguously acting in the public interest?
A casual flick through Hansard will show that in Committee and at Report I was very politely swatted away with phrases that have since taken on an extremely hollow ring. "Disincentivising capital" was one. "Light touch" was another. If I were really cruel, I could go on at some length on the subject, but I shall not. All that ideological claptrap was based on the false and deadly assumption that protecting consumers and individual investors unduly limits profits and hinders financial innovation.
In fact, the reverse is true. Had processes been put in place to determine the impact on savers of inappropriate financial products and practices, the current crisis may well never have happened. I would be grateful if, in his reply, the Minister would give the House the benefit of his or the Government's thoughts. Perhaps recent events have made him, like me, feel like Boxer the dray horse. Towards the end of George Orwell's Animal Farm—George Orwell has had two mentions this afternoon—Boxer says:
"I do not understand any of it. I would not have believed that such things could happen on our farm. It must be due to some fault in ourselves".
Or could we have reached the point in the same book at which no one dares to speak their mind—at least not from the Dispatch Box? That would be tragic, because if there is one thing that the electorate are seeking, it is authenticity in their politicians and a far greater degree of truth in their dealings with one another. That is not the faux truth sought by sections of the media in the hope of winkling out the latest two-bit scandal, or the type of story that one of my favourite political commentators, Matthew d'Ancona, may have been referring to last month when he wrote, of the sensationalist media:
"This has nothing to do with guilt or innocence and everything to do with our 21st century political culture ... These same forces abhor stability. They feed on precisely the opposite: the twists, turns, sensations and careening shifts in political fortune that keep the story alive".
At the very moment when we need Barack Obama to be a remarkable success, in exactly the same way that we needed Winston Churchill to be a success in May 1940, the carrion are already circling, in the hope that his fall from grace will sell a few more grubby newspapers. Angry? Yes, I am angry. Why would I or anyone else not be, if our dream is of a society that becomes more deeply human, more satisfying and more hopeful? Not much chance of that with a media environment that abhors stability.
In conclusion, anyone who has heard me speak in this Chamber over the past 11 years will know that I am almost obsessed with the fragility of British democracy and believe that we take far too much for granted. What have I learnt from these recent crises, both in the country and in your Lordships' House? I have learnt that there is no democracy so strong that it is invulnerable to the greed and ambition of ill motivated men and women. I have been reminded that, to nurture and sustain democracy, its beneficiaries must serve also as its guardians. I think that that was essentially the point made earlier by the noble Viscount, Lord Eccles. It would be hard to blame the people of this country if, over the past week, they had come to the conclusion that this House was unworthy of that responsibility. The way in which parliamentarians of all parties, and both Houses, respond to the present crisis will offer a once-in-a-lifetime chance to prove that we have a political culture worth preserving.
My Lords, I was delighted when I saw the wording of today's Motion from the noble Lord, Lord Eatwell, because it seemed to provide an opportunity to review an aspect of the present crisis that has not been properly discussed: how, when we emerge from this crisis, as in time we shall, will we restore morality and responsibility to the process of lending? I apply those phrases of concern to both borrowers and lenders, and it is to that subject that I will direct my comments today. I declare a couple of interests from the past. I worked for Lloyds Bank on two occasions, with a 30-year interval, and for the Ford Motor Company. I shall draw on those experiences as I go.
I have now been working for 53 years. I went to work for the first time in the week when Jim Laker took 19 wickets to win the Ashes in 1956. I should have recognised then that life could only go downhill, and it has. I did not expect it to go quite this far downhill, but I suppose that Lloyds Bank would say the same, as I was working for it at the time. I have seen seven recessions in the course of my career—one every seven and a half years. I strongly believe that in every recession something that is done with good intent by the Government sows the seeds of the next recession. I commented on this for the first time in the Bradford & Bingley debate, when I said that the draconian hire purchase control orders that had been introduced by Mr Harold Wilson's first Government, in October 1964, which required a 50 per cent deposit and 18 months to pay, had brought about the nationalisation and ultimate demise of the British motor industry. One can only hope sincerely that the present Government do a better job of running nationalised banks than Mr Wilson did of running a nationalised motor industry.
When we look at the consequences that flowed from that, we see that it was those seeds that led to our present catastrophe. People thought, "We have these dreadful control orders that have ruined the motor industry; we must never let this happen again". The cross-party concern to do something about it—this is not a party-political point—led to the Consumer Credit Act 1974. We forget today that the Act effectively outlawed secured lending. That is where we destroyed the morality connection between lending and what you do with the money that you have borrowed. Instead of purchasing a direct asset and knowing, to paraphrase Oscar Wilde, the price of the thing and its value, we ended up knowing the price of it but not being concerned with its value. We could use the money not to buy intrinsic assets like motor cars and things that we needed to enhance our lives—"Take the waiting out of wanting" is a phrase that still makes me feel ill when I hear it today; instead, we could use the unsecured fountain of credit flowing from the banks to buy packets of white powder, set up a mistress or pay gambling debts. We have never recovered that connection and we have had a massive amount of borrowing, driven by rising house prices.
Recently, we had an excellent debate, initiated by the noble Lord, Lord Harrison, on the future of the motor industry, which still employs 910,000 people in this country. There is an opportunity here for the Government. They should look seriously at the repeal or suspension of the Consumer Credit Act 1974 and the reintroduction of the principle of secured lending. Think of the advantages. First, there would be a direct incentive for the banks to start lending again, on a secured basis, which would remove from the Government much of the responsibility for giving the guarantees that they are giving to the banks. Secondly, it would give a direct impetus to the stimulation of British manufacturing industry, which we desperately need. Thirdly, it would restore the morality of buying what you want in the certain knowledge of what it will cost, and forming a view as to its value for you. There is real merit in looking at the repeal of the Consumer Credit Act 1974 as a way of leading the flock back to the ways of responsibility and morality in how to use credit. The point is worth considering and I hope that the Government will have a hard think about it.
My Lords, I am grateful to the noble Lord, Lord Eatwell, for initiating this debate. I was not so grateful when he first tabled the Motion last week—an extremely busy week, with economic debates of various sorts—as I was rather looking forward to a day when we would not be foregathering to discuss the economy. But today's debate has taken us beyond the ones we have had on what I was going to call the "sterile" details of the Banking Bill. That is a slight exaggeration, but not much of one. This has been a very interesting debate.
In many respects, all the speakers have coalesced around a common analysis. There is an acceptance that it is difficult to overestimate the scale of the downturn and the extent to which we will have to do things differently. There is, as many speakers have said, a growing consensus about the kind of society that we would like to see. Who said the following last week, for example, and who among today's speakers would disagree with it?
"So this is what too many people see when they look at capitalism today. Markets without morality. Globalisation without competition. And wealth without fairness. It all adds up to capitalism without a conscience and we've got to put it right. Business helping to create a society that is greener, safer, fairer—and where opportunity is more equal. Business helping to create a society that is more family-friendly, where responsibility and power are decentralised, and where we value and build up the institutions of the public realm and civic society".
Who said that? It was David Cameron.
The other area of consensus today is that we look to Barack Obama to lead in a way that we have not seen from America in recent times. The noble Viscount, Lord Eccles—somewhat surprisingly, I thought—said "God bless Obama". The noble Lord, Lord Bates, talked about Obama's success in instilling a sense of hope where otherwise there is fear. I do not want to break up the consensus we have seen up to now, so all I will say is that although Conservative policies attempt to a certain extent to reflect what David Cameron said, in terms of a fiscal stimulus they certainly do not, and in terms of supporting what Obama is trying to do, they also certainly do not. The Conservatives have a major job on their hands in seeking to reconcile the heady rhetoric with the backward-looking policies. The noble Lord, Lord Puttnam, talked about turning the clock back. Some of the rhetoric from the Conservatives in terms of fiscal stimulus has, to my mind, been seeking to do exactly that.
The noble Lord, Lord Eatwell, identified three major consequences of the downturn, the first of which is unemployment. We know that it is going to rise very significantly whatever steps the Government take in the short term. What is particularly depressing is that unemployment will rise most in those parts of the country which have traditionally had high levels of unemployment and where over the decades Governments have sought to put in place measures, instruments and institutions to redress regional imbalances. An interesting report published last week identifies Hull, Liverpool and Belfast among the cities most likely to see the highest levels of job losses. The only thing stopping the unemployment rate in the north-east rising even more quickly is the very high level of public sector employment there, providing a natural cushion above which unemployment rates cannot go. Here the speech of the noble Baroness, Lady Warwick, is so important. In the northern cities that I mentioned, as well as in Newcastle and Leeds—I declare an interest in that I have a son at the University of Leeds—there is a substantial subsidisation by students from the south who bring their purchasing power with them. That will in itself have a minor cushioning effect on unemployment. We are in for a very bad time in terms of unemployment, and we need to expend maximum effort, not only at the university level but at every level, to up-skill our people. We debated that issue many times following the Leitch report. All I can say is that we must retain a focus on it.
The noble Lord, Lord Eatwell, talked about housing, particularly the threat of repossession, which is a major problem. An equal if not greater problem is that the housing sector is in almost total collapse. Large private builders borrowed huge sums and are literally on the verge of collapse. Almost every listed builder is in that situation. At the other end, the housing associations also borrowed huge sums to build mixed-use developments in which the private sector component was to fund social housing. Unfortunately they cannot sell the private sector component to fund the social housing one, so they, too, are in huge difficulties. Although this is not the day for a detailed debate on housing, I believe that the institutions through which we seek to manage particularly social housing are completely unfit for purpose. The Housing Corporation is slow and bureaucratic, and, as I say, the whole system is in real jeopardy. We need the impetus of a new institution to take a grip on the issue. The noble Lord, Lord Eatwell, talked about a special resolution regime for housing. Perhaps that is what I have in mind. We may need a new title for the proposal, but it is definitely required.
The noble Lord also talked about pensions, an immensely complicated issue. However, what is absolutely certain is that the private sector will not be able to afford the kind of pension provision that it has made in the past, and this will inevitably mean a growing disparity in pension provision between the private and the public sectors. As that is both politically and morally unsustainable, I fear that we will have to take a lot of hard decisions on pensions.
Everyone seems to be in favour of rebalancing the economy, and I absolutely agree that what is good for the City is not necessarily good for the UK. Equally, however, the City will be part of the solution, just as it has been a large part of the problem. Let us look at what we do best. I turn to the old economic question of where we have comparative advantage. The answer is that it still is in financial services, despite all the problems. We have not only a sophisticated financial services system, despite its many flaws and unacceptable greed, but also a regulatory system that, despite its flaws, is significantly better than almost anywhere else in the world. The City must be part of the solution.
However, we must also expend much more effort in encouraging our children and young people to believe that the highest attainment one can reach in life is not necessarily to be a banker. I know of children from poor backgrounds who have been the best in their class, the best in their school and the best at university, and what is it that they aspire to? They want to work for Lehman Brothers. I know of one individual, the pride of his family, who did that; he is not there any more, of course. To me it is a sadness that he thought that working for Lehman Brothers was the best thing you could possibly do in life. Part of the rebalancing should be to promote other forms of occupation where the contribution one can make is rather larger than even as a merchant banker.
Today's debate has demonstrated what a wide range of issues we are going to have to fundamentally re-examine. I look forward to contributing in the months ahead to debates in your Lordships' House on those revisions and reviews.
My Lords, like other noble Lords, I congratulate the noble Lord, Lord Eatwell, on securing this debate. I do not want to damage the noble Lord's reputation with his Benches, but I have to say that for the second time this week I agree with quite a lot of what he has said. I also agree with the noble Lord, Lord Newby, that we have had an interesting debate on the economy which has introduced some new angles that I was not expecting. I single out the contributions of my noble friends Lord Caithness and Lord James for their lateral thinking.
As the noble Lord, Lord Newby, said, it was only last week that we had a debate on the Pre-Budget Report and gave a good airing to the Government's economic policies. I will not repeat what I said then at length, save to say that we believe that many of our economic woes are of the Government's own making. We enter the current crisis with one of the largest structural budget deficits in the industrial world, and we have done less since 1997 to reduce debt and borrowing than most other countries. The IMF, the OECD and the EU have all in their own ways warned that countries like ours, which have entered the recession with shaky public finances, do not have the same range of opportunities available in terms of action to stimulate their economies compared with those countries with healthier economies.
I start here because our weak position reduces the Government's scope for action. The cost of the Pre-Budget Report, including its fiscal stimulus, is a massive expansion of debt to more than £1 trillion, which as the Institute for Fiscal Studies has pointed out, could take until 2030 to unwind and will involve tax hikes or expenditure reductions of £20 billion. The noble Lord, Lord Eatwell, suggested that my honourable friend George Osborne has advocated a balanced Budget, which he has not done for the short term. We accept that the automatic stabilisers will increase debt in the short term, but we do say that because we have a weak economy, we have to fund any additional stimulus out of reducing wasteful expenditure. We also say that we have to reduce our debt. On this we are on all fours with Germany, which accompanied—
Yes, my Lords, because there is wasteful expenditure. We have never suggested cutting front-line services but we have said that there is waste. I challenge any noble Lord to say that there is no waste in public expenditure that cannot be cut out.
My Lords, the noble Baroness was not asked whether there was any waste; she was asked to outline an economic analysis that explains how cutting waste finances an expansionary public expenditure policy. I know of no economics that could possibly lead her to that conclusion.
My Lords, I shall have to give the noble Lord a private version of how we would do that. We shall arrange a seminar for the noble Lord, Lord Peston.
As I was saying, we are in line with Germany which accompanied its fiscal stimulus with a constitutional amendment to ensure that it reduced its debt. We are with Germany on that.
The VAT cut was supposed to be the centrepiece of the fiscal stimulus but it has had no discernible effect on retail sales. It is not even clear that it is always being passed on, especially by retailers who have price point policies that cannot accommodate reductions of 2.1276 per cent, which is what the reduction amounts to. It is difficult to see what is happening on the ground with the acceleration of capital expenditure. There are many stories of projects being frozen, not accelerated.
Oxford Economics produced a report on the impact of the fiscal stimulus. It shows an initial positive impact on GDP of 0.4 per cent in 2009, but this is more than outweighed as both VAT and capital spending unwind from 2010 and the tax rises and national insurance increases already announced start to bite from 2011.
Its analysis is even worse for jobs. It calculates that the fiscal stimulus will save 35,000 jobs—which is a drop in the ocean because we are losing more than that monthly at the moment—but the package in the PBR then produces a reduction in employment of 200,000, and that is on top of the natural effect of the recession. This is why many commentators are now talking about unemployment going well over 3 million.
There is understandable concern about those who have lost their jobs and we of course support the Government's efforts to assist those who find themselves without work in a job market where vacancies are shrinking at a record rate. One of our policies was for a £2,500 tax rebate for firms which take on people who have been unemployed for three months, which is not a million miles away from the proposals that the Government have recently announced.
We also support policies which help people to stay in their homes where that makes economic sense. Unfortunately, that will not always be the case. We are concerned that the Government's homeowner mortgage support scheme, announced in a flurry of headlines late last year, will not do much. The mortgage industry remains deeply concerned about the details, the practicality and the cost of the Government's proposals, and the scheme is not yet available on the ground to help anyone.
We do not support the calls from some companies and trade unions for subsidies to keep people in jobs. That way lies market distortion and a subsidy dependence habit which would be difficult to break. I shall listen with interest to what the Minister says on this.
When he replies, I hope he will address also the issue of hidden employment. The number of young people not in employment, education or training, the so-called NEETs, has risen by nearly 100,000 in the past four years. More young people are facing the start of their working lives without jobs and, in the current environment, the number will increase. This will cause more economic and social problems down the line, but we have not heard of any policies to deal with that.
At the end of the day, the best thing the Government can do for the economy and society is to create an environment in which businesses can succeed. The noble Earl, Lord Stair, was right to emphasise the needs of businesses, particularly small businesses. We need businesses, not public sector employment, to provide sustainable jobs. Businesses will need help if they are to survive the recession. My noble friend Lord Bates emphasised, in an original way, that hope and optimism was one of the ways in which help can come to local businesses. We want to help them to save jobs—not necessarily all the ones that they currently have but those that will provide long-term employment. We will certainly support anything that the Government bring forward to that end, but we do not think that their policies go far enough.
As has been referred to in the debate, getting credit restored is a big but essential task, but the Government are not yet succeeding in that. Bank rescue 1 did not do the job; bank rescue 2 has a lot more complicated elements to it, but the Treasury Select Committee in another place has said that the government response may not be adequate.
As my noble friend Lord Northbrook pointed out, these policies are taking a long time to be delivered on the ground. For example, the asset protection scheme was revealed to the world in a form which was almost unformed and it still does not exist.
Our £50 billion national loan guaranteed scheme proposals are simpler and less bureaucratic than the Government's schemes. We also propose credit guarantee insurance in order to support non-bank credit. We have heard nothing from the Government on that. We propose that small businesses should be allowed to defer their VAT payments for six months and we would not increase their national insurance contributions as the Government plan. We plan a permanent reduction in the small companies' corporation tax rate to 20 per cent to give those businesses greater planning certainty.
Before I conclude, I should like to turn to the issue of savers, as did my noble friend Lord Eccles. While we have been having this debate, the base rate has been reduced to 1 per cent and the plight of savers is extreme. This particularly affects pensioners, but pension credit does not take up the slack. We have policies specifically designed to help savers, in particular to take them out of the basic rate of tax and to increase age allowances. The Government have merely suggested that they might think about it in the Budget.
The Motion of the noble Lord, Lord Eatwell, calls attention to the Government's policies to counter the social and economic effect of the financial situation. We on these Benches are not sure that the Government's policies stand up to close scrutiny. Until the needs of business, without which we cannot have jobs or economic prosperity, are fully dealt with, we will continue to have the gravest fear for our economic and social future.
My Lords, like all other noble Lords, I congratulate my noble friend Lord Eatwell on securing the debate and, even more, on his speech, which ranged broadly but accurately across all the big challenges which the Government face in dealing with the extremely difficult economic position. In responding to the debate, it is important that we follow the pattern set by my noble friend, both looking at how the Government can help to reduce the deleterious impacts on people in need in our communities while addressing ourselves to the international crisis, which is reflected and which occasioned the problems in the banking industry and, subsequently, in the wider economy.
We live in difficult times. We are facing unprecedented global challenges, caused initially by failures in the US banking sector, and we require global solutions to them. This is why the UK is leading the response of developed nations to the underlying problem of decreased credit flow within our economies. We must remember that behind the headlines of rising unemployment and struggling businesses, real people are suffering. We must do everything we can to help in the coming weeks and months to minimise the effects of this global situation on families and on businesses in our economy. This help includes additional support from the moment someone is made redundant, which increases the longer they are unemployed; help to pay the mortgage and to avoid repossession, issues which have featured in the debate; help with retraining and developing skills; and a range of changes to tax and benefit levels to help people cope during the downturn.
As has been recognised in the House by the sombre approach to these issues, it appears that the worst is still to come, and we know that unemployment is destined to grow and more jobs will be lost. However, through strong and proactive leadership the UK is well prepared to make sure that the downturn is as shallow and as short as possible. We are coming from an unprecedented period of sustained growth and low inflation and we start from the second lowest unemployment rate in the G7—only Japan has a lower rate than ours. Of course we have to address ourselves to minimising growing unemployment in this country but we should recognise the strength of the position from which we start. My noble friend Lord Eatwell outlined aspects of the fiscal boost necessary to support the economy at present. I was enjoined by my noble friends Lord Peston and Lady Kennedy in rather more extensive terms that it would be necessary for the Government to spend in order both to boost the economy in this downturn and to deal with those who potentially will suffer greatly.
That is why £900 million has been made available to pay pensioners, carers and others a £60 one-off payment on top of the annual Christmas bonus; £1.4 billion has been provided for a £145 tax cut for basic-rate taxpayers; £380 million has been devoted to increasing child benefit and child tax credit; and we have brought forward £3 billion of infrastructure spending to create and protect jobs and support the economy now. My noble friend Lord Puttnam discussed the energy matter. I will come to his specific point a little later, but he will know that we have put a £1 billion package of energy-efficiency measures into operation, with more than 11 million of the most vulnerable households qualifying for these free of charge. Reference has also been made to the problems of savers and we all recognise that low interest rates mean that returns for savers are low, but the national saving gateway scheme will from 2010 provide an additional incentive for those on a low income to save and 8 million people will be eligible.
Since 1997, households are on average £1,250 a year better off in real terms. The poorest fifth of families with children are £4,100 better off and the poorest third of pensioners are £2,100 better off. My noble friend Lord Peston identified that we have to make sure that we concentrate on the most vulnerable, particularly the poorest in our community. I put it to him that over the past decade the Government have shown their clear ability and determination to deal with these issues. Even during this downturn we have made it quite clear that aspects of our fiscal boost in terms of benefits and support for the less well-off in the economy will be accentuated.
The noble Lord, Lord Eatwell, introduced the issues of small businesses and he was supported subsequently by others who contributed to this debate. Of course the Government are concerned about the issues of small businesses. That is why very great efforts have been made to increase the flow of credit, and measures were announced some time ago by the noble Lord, Lord Mandelson, directed towards the assistance of small businesses because we know their particular vulnerability at this time of economic downturn.
For larger businesses, too, access to credit has been at the root of the problem. Support for the motor industry is not an aid package; it is support for an important industry which, as several noble Lords clearly identified, not only provides very substantial numbers of jobs in this country but is at the centre of research and development and high-value-added products. That is why it is important that we look at how we can support the motor industry during this period and why the package was announced.
We also have the very pressing matter of unemployment. It is clear that unemployment is destined to rise. We are investing heavily in a system of support through Jobcentre Plus. The UK still has a highly dynamic labour market. It is well publicised that unemployment rose by 78,000 last month, passing the 1 million mark. What is less well publicised is the fact that more than 230,000 people came off jobseeker's allowance in the same period. Claims are up but so is the rate at which people are leaving benefit in contrast to the falls seen in the 1980s. Maintaining this trend will be a key factor in the UK's ability to minimise the impact of the downturn on those who will ultimately suffer, unlike in previous recessions, when people were left to slide into long-term unemployment. I am grateful for noble Lords' contributions, including that of my noble friend Lady Kennedy, which identified previous recessions that were far less global and serious than this one in which a Conservative Government presided over a very high rate of unemployment and were neglectful of the policies which might have minimised that. We are investing in those areas to minimise the impact of unemployment.
I accept the point made by my noble friend Lady Warwick about the skills improvement that we need in our economy. We know the universities have a crucial role to play at the higher level of skills. The House will appreciate the increased expenditure over this past decade in all sectors of education, including the universities, and the doubling of expenditure in that sector which is particularly related to skills—further education. That together with the more than doubling of the number of apprenticeships in this country reflect the fact that the Government have been concerned to improve the capacity of the economy to develop so that Britain can earn its living in the world and not be totally or excessively dependent, as has been contended in this debate, on aspects of the financial sector.
There is not the slightest doubt that we have a very big task to do. Although the Opposition produce some detailed responses to different ways of spending money effectively in the economy, and the noble Baroness, Lady Noakes, places great emphasis on the ability to reduce waste—my noble friend Lord Peston made his point on that—I am not sure just how much of a stimulus that would provide. The noble Lord, Lord Newby, was right to pick up the theme which started this debate, which is that we need an international response. There is no doubt that we are in unprecedented circumstances. That is why returning to the rubrics of the past will not do. A fresh approach to the nature of the global economy is clearly needed. Within this framework the Conservative Party is distant from the argument and the British Government have a crucial role to play.
The Chancellor has written to members of the G20 outlining British objectives for the important meeting that will take place in April, which will set the pattern for the future. The objectives are clear—we need to return trust and confidence in financial markets and we need to reform and build on the benefits that open financial markets bring to the world economy—but we need to reduce the likelihood of systemic failures in the financial services industry and to prepare better for failure within financial markets. We need also to increase the efficiency of the operation of financial markets so that they perform better in their tasks of capital allocation, and we will need increased regulation.
That is a perspective that the major countries of the world will be asked to respond to, and to which they will bring their own constructive strategies on how those objectives are to be realised. One thing stands out, though: from President Obama's United States to the major European countries and the rest of the world, a substantial fiscal boost is necessary. It is clear that Governments have to spend because there is a collapse in demand in all these economies, and only government can provide the response that generates that demand. For the Opposition to sustain their criticism of details of the Government's strategy, while not being prepared to sign up to the concept of the fiscal boost of the size that we are anticipating and intend to implement, is to be out of step with the major economies of the world and not to address the real issue of how we restore the health of this economy. As my noble friend Lord Eatwell said at the beginning of the debate, and this was reinforced in a number of speeches, it is necessary for the Government to act in this way.
The noble Viscount, Lord Eccles, said that his approach was that of a Burkean Conservative. There do not seem to be too many of those in the Conservative Party at present; as I understand it, Burke represented the responsibility of those with power and resources to take care of the wider community. In the modern day and age, that can be interpreted in only one way: it must mean, if not big government, then government big enough to act and prepared to look at the global picture and to take the initiative. The Government alone can produce the strategies that will give businesses the resources they require, and will reform the financial system on the basis of a number of recommendations that have been made in this debate. I appreciated the points made by the noble Lord, Lord Northbrook. I will look again at the point put forward by the noble Lord, Lord James. The noble Earl, Lord Caithness, also spoke in detailed terms on these points, and we will look at that—within the framework that the Government have to create. We have to make resources available within the economy.
That is the difference between the positions taken by the Government and Her Majesty's Opposition, and it came through clearly in this debate. I maintain that, against a background where it is clear that the Government need to look after the vulnerable, ensure that the banking system provides businesses with the resources they require and, above all, act on the international stage to find global solutions to global problems, the Government are showing that we intend to fulfil those obligations. I thank my noble friend Lord Eatwell for identifying constructive ways to meet those responsibilities.
My Lords, I am always grateful to the noble Lord in these debates. He speaks in broad terms while asking highly specific questions. I am conscious of the fact that in limited time it is difficult to deal with very specific questions, but I will write to him.
My Lords, it has certainly been expunged from my vocabulary in the sense that I have not used the term and I am not going to be tempted into using it now. I know my noble friend will press for a great deal more effective regulation with regard to energy supply; he made that point on several occasions in the previous two energy Bills of substance that the House has considered. He will appreciate that I opened this debate by saying that we live in challenging and, indeed, changing times, and a lot of rethinking has to be done.
My Lords, I am grateful to noble Lords who have taken part in this debate. I am not going to make any attempt to summarise, answer or conclude in any way. As I said at the beginning—this was a theme, I hope, of what I had to say—we are in a learning environment. We do not have a road map to guide us through the current turmoil, and the learning process can be shared by all.
I have a couple of comments on the speech by the noble Baroness, Lady Noakes. First, study after study has shown that the least effective way of stimulating business is cutting business taxes. The most effective way is to use the same resources to stimulate demand. The stimulation and stabilisation of demand, providing an environment where people spend and firms can sell, is much better than cutting taxes in an environment where firms have no market at all.
Secondly, I understand the enormous difficulty under which the noble Baroness labours, because I used to be the opposition spokesman on Treasury and economic affairs. One always has to strike the difficult balance between criticising the Government and not talking down the economy, and the Opposition have got the balance wrong. The continuous harping on the weakness of the British economy is a caricature of our current financial position. I agree with the noble Lord, Lord Bates, that more optimism, confidence and positive views would go a very long way. I repeat my position: the risks involved in doing too much are as nothing compared with the risks of doing too little. I reiterate my view that the Government are being too cautious.
I look forward to the opportunity to debate the Government's proposals to go forward to the G20, and I hope we have the opportunity to do so at a later date. In the mean time I beg leave to withdraw the Motion.