My Lords, I thank the noble Lord, Lord Forsyth, for introducing this debate on what will clearly be the dominant political issue in the period between now and the next election and well beyond it. I greatly enjoyed his withering analysis of how things have gone wrong, and I am only sorry that he did not then go on to explain how, were he a benevolent dictator in charge of our affairs, he would get us out of the mess that we now are in. I look forward to the speech of the noble Baroness, Lady Noakes, because I am sure that she will fill that gap.
A number of noble Lords have discussed who is to blame. I think that there is now near-consensus, with the exception of Downing Street, that, although there is a significant US component to the situation in which we find ourselves, most of the problems we now face are home-grown. It is obvious that we had a housing and credit bubble of our own making which was bound to burst at some point with disastrous consequences. The comments of the noble Lord, Lord Marlesford, were particularly interesting, because, as we have concentrated on banks and housing, we have not concentrated on credit card debt, which is another huge and immensely expensive bubble for those who have been caught up in it.
If we can agree that this is largely a home-grown problem, what are our prospects now and how can we attempt to make sure that they are as positive as they can be? The background that we have to assess is how bad things are and how quickly we can expect an upturn. I am relatively positive about the real economy and relatively negative about the state of the public finances. The speed of the upturn will be rather greater than most people believe for a number of factors, of which I shall mention two. The first is that we are not totally dependent on ourselves or on Europe and America for an upturn. The balance of the world economy has moved, and continues to move, towards China, India, Brazil and elsewhere. Those economies are not suffering to quite the extent that we are. Growth is continuing in many of them, and it is interesting that surveys coming out of them in recent days show more optimism. Although I do not believe that they will be the locomotive of growth, I think that they will play a much more significant part in pulling the world out of recession.
Secondly, the technology of decision-making speeds everything up. As people form a view that we are out of the bottom, it is so much easier now to take decisions quickly and internationally, and implement them using modern technologies, so that one can see the whole timetable of decision-making around new investments and opportunities being concertinaed. So, as sentiment changes, people can make decisions quickly and implement them more quickly than ever before, which will play a significant part in how quickly we move forward.
The two areas on which we have concentrated today are, first, what we are going to do about the plight of the financial services sector and, secondly, how bad are the public finances. As for the financial services sector, I share the concerns of the noble Lord, Lord Wakeham, that we are a very long way from being out of the wood. I gather that, as we have been holding our debate today, the Bank of England has announced, somewhat prematurely, that another £50 billion of quantitative easing will take place, which suggests that it does not believe that we are out of the wood. I share that view. What should we be doing about reform of the financial services sector? There are two things I think we should do and one thing I think we should not.
The first, to which a number of noble Lords have referred, including my noble friend Lord Oakeshott and the noble Lord, Lord Lawson, is splitting the banks between the utility function and the casino function. There is a widespread feeling in the country that that is what people want to see. I think it will be to the benefit of consumers and to the long-term benefit of the financial services sector and I hope that the Government will revisit it.
Secondly, there has clearly got to be a completely different view about modelling and risk within the banks. When you talk to senior bankers, they say, "Well, of course, all our models proved to be completely useless in the end, they were wrong and they have led us into this mess". They seem to be passive consumers of models, as if these were created by some deus ex machina, rather than having gone along with them because it fitted their own prejudices at the time. I strongly agree with both the noble Lord, Lord Smith of Clifton, and the noble Lord, Lord Plant, that we need to take account of political economy, of animal spirits, of some things that cannot be measured, in assessing risk. I hope very much that the banking sector tries to grapple with those intangibles rather than with equations which, not only they could not understand in most cases, but have led them to the pass in which they now find themselves.
The one thing that I hope the Government and the banking sector do not do is to return supervision of every aspect of the banks to the Bank of England. It seems to me that there is a considerable degree of nostalgia about the success of the Bank of England in managing the banks. If you go back to the great banking crisis of the 20th century— the accepting houses crisis of 1914, which Lloyd George sorted out very quickly, when the Governor of the Bank of England was asked how he knew which bonds were good and which were bad, the Governor of the Bank of England said, "I smell them". There is a lot of nostalgia, particularly on the Conservative Benches, for that sort of old-fashioned approach; that, somehow, if only you got back to the Bank of England, the smelling of the bond or the raising of the governor's eyebrow would deal with supervision of the banks. I do not believe it. I think that if you tried now to put back the clock, you would have a couple of years of complete inertia in terms of supervision, as the FSA and the Bank argued about who was doing what and which individuals were doing what. At this point, that would seem to be almost the worst thing you could possibly do.
Moving on to the public finances, which will clearly have a major part to play in how well the economy does, we have supported the principle of a fiscal stimulus at this point. We have not agreed with the detail of it, if the VAT reduction is a detail, because we think it has not been the most effective way of doing it, but we have supported it for two principal reasons. First, if businesses go bust at this point because of a lack of demand and a lack of lending, they cannot be recreated as quickly as they went bust. There is a long-term as well as a short-term cost in businesses—viable businesses in many cases—going bust. The same applies to individuals. We know that if individuals are unemployed for any significant period, their ability to hold down a job diminishes and they lose self-motivation which means that, even as the economy turns up, many of them never get a job again. That is a major cost and for the noble Lord, Lord Forsyth, to describe public borrowing at this stage as stealing from our children seems to me to be a very misleading way of looking at it. However, if you accept that we need to have had a fiscal stimulus at this point, it is clear that we cannot continue with the level of borrowing as the economy begins to grow.
As we think about how we measure and balance the various claims on government, we get back to the interesting interventions of the right reverend Prelate the Bishop of Bradford, whose maiden speech I greatly enjoyed—I once went to see Bradford City and spent most of my time looking at the hills beyond—the right reverend Prelate the Bishop of Portsmouth, and the noble Lord, Lord Judd. It is a major indictment, not just of this Government but of us as a society, that UNICEF rates this country as virtually the worst place in the civilised world to be a child. As we move forward in the new environment, those are the kind of issues that any Government have to grapple with and that they should be looking to as one of the key principles on which to base spending decisions. It is a challenge for David Cameron to articulate what kind of nation we want to be, not just what the level of the borrowing requirement will be. The speeches he has made up to now, such as the one at Davos, address these issues in ways I was sympathetic towards. My concern is that the rhetoric is not matched by the policy restrictions. We now need details of how he is going to implement some of the rhetoric; otherwise, his rhetoric will be severely undermined.
How are we going to bring down the debt? Clearly, it has to be a combination of various tax increases and expenditure reductions. To see a 50 per cent tax rate brings mixed emotions to Liberal Democrats, as this was our policy for quite a long time. However, we dropped it for the reasons that were so eloquently given in the House of Commons by Stephen Byers. Although I suspect the matter will be with us for some time, some of those arguments have force.
There needs to be fairness about the burden of tax and any tax increases going forward. One glaring problem is the level of capital gains tax, which is far too low and should be increased. On public expenditure, there are two components to dealing with the issue. First, there has to be better use of existing public finances. The work that Sir Michael Bichard is doing seems to me to offer help and guidance as to how that might be done, but there have to be real cuts in real programmes. Difficult decisions need to be made. We have set out some, including looking at our long-term defence commitments and public sector pensions. Further, I say to the noble Baroness, Lady Warwick, we have to look at how we fund universities and at how many young people will do full three-year degrees at university.
The current crisis forces us to question the assumptions on which we run our personal and national finances. The debate has concentrated on the difficulties we now face. Our challenge is how we can turn these into new opportunities, both for individuals and for the economy as a whole.