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AMENDMENT OF THE LAW

I welcome the opportunity to speak in the Budget debate. Given the economic instability and turbulence in the markets, I am delighted that the Chancellor referred to the targets on child poverty—a primary target of the 1997 Government—the initiatives on environmental taxation, the savings gateway and the measures for elderly citizens. He did so against a background of economic turbulence and the globalised world in which we live. Indeed, only yesterday the Federal Reserve put $235 billion into the market by providing Treasury securities to the bond market for it to accept as ordinary triple-A-rated mortgages for collateral. That was done to encourage banks to lend to one another. We are in the Northern Rock situation because of a failure of the private sector in the United Kingdom. We face the global crisis because of a failure of the private sector in the international system. The Treasury Committee has examined Northern Rock over the past six months, producing a report on ““The run on the Rock””. Just as importantly, it produced a report a few weeks ago on ““Financial Stability and Transparency””, pointing the way forward for the Government and the international community. We said that markets need a clear message about the risks that they are taking. We could see that in the Northern Rock fiasco, its board in particular did not appreciate the risks that it was taking. We are thus asking the Financial Services Authority and the Bank of England to ensure every year that their warnings are heeded, and that they come out with two or three main issues for boards to study. The boards should then report back to the FSA and the Bank of England that they have understood those messages. I can only describe what we have seen in the markets as a bout of collective madness. How much write-down is taking place at the moment? On the Committee’s visit to the United States in December, I was told that we could be talking about $600 billion, but a senior economist at the UBS bank is talking about $1 trillion, and others are coming out with figures of $2 trillion, $3 trillion or $4 trillion. We do not know where we stand at the moment, but there is no doubt that things will get worse. We must remember the globalised background against which events in the United Kingdom are taking place. The reason for that situation is that the low inflation and low interest rate environment of the past decade has encouraged a search for yield, which has resulted in complex and opaque products. The designers of those products often do not understand what they are producing. We had the chairman of an investment bank before the Treasury Committee, and when I asked him what a CDO-squared was, he said that he was not there to explain that. If the designers did not understand them, certainly investors did not.