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Banking Bill

I should have done that and I apologise. We can talk about what to do with both amendments at the end. I hope that I explained in Amendment 198A the error in the Bank of England’s remittal, or my version of it, of obliging the Bank to focus only on inflation. Amendment 198B deals with how that error was compounded by obliging the Bank to focus on only one kind of inflation—the wrong kind, as it happens. Whereas the Bank’s consumer price index keeps a close eye on inflation on the price of a packet of peas and a loaf of bread, it overlooks the very aspects of inflation that caused this crisis—all the debt, housing and mortgage ingredients of our present misfortune. For the past five years debt inflation was 9.5 per cent a year, which is four times the Bank of England’s CPI inflation target. Where is debt inflation in the CPI? It is not included. During the same period the inflation rate of one particular asset class—property—was 13 per cent per annum, which is five times the Bank of England’s CPI target. Where is that in the CPI? It is not included. What about the cost of acquiring and holding these property assets—mortgage interest? That is not included in the CPI. I understand the difficulty in suggesting a definitional change for inflation. The current CPI is bound by international standards and enforced by EC regulation. It was apparently intended to measure the changing price of consumer goods and services and not the change in the value of assets or debt servicing costs. That was a mistake on the part of those who devised the measure. Eurostat, which is the responsible body, has now conceded that it was an error and has apparently been considering for some time the inclusion in the CPI of service costs for acquiring new owner-occupied housing. Sadly, that investigation by Eurostat has not yet concluded an appropriate practice. It should get on with it. The Bank’s CPI measure of inflation is out of touch because the world has changed. The era of controlling inflation and inflation expectations with hand signals from Threadneedle Street to deter troublesome union wage demands is over. Millions of people had become investors in a new asset class. They were homeowners. We are used to lamenting the disappearance of private investors from the stock markets, but they did not stop investing; they just found something better to invest in—property. They adopted a simple model: I borrow money; I buy an asset; the price goes up; I exit the asset; I repay the loan; I keep the profit. That was the joy of debt, as taught by the masters of private equity. Why should private individuals not do the same? They did in their millions. By creating the false impression—that is my opinion, although it is denied by the Minister—that low inflation meant financial stability, and then measuring the wrong kind of inflation, the Act encouraged the view that it was safe to borrow and invest. British households took the message and took on twice as much debt as their EU counterparts. UK average household debt more than doubled from £23,231 in 1996 to £56,501 10 years later—that is staggering—yet the rate of inflation, so called, as monitored by the Bank of England, excluded debt inflation, asset class inflation and mortgage interest inflation, the very causes of the current crisis. Nor did Clause 11 in the original Act consider how a change in the inflation rate of a certain asset class could bring about a dramatic collapse in the economy, notwithstanding low inflation as defined by the Bank and the Act. As the current chairman of the Federal Reserve, Ben Bernanke, put it recently, there is no one correct method for valuing an asset class, and the Minister is extremely well aware of that. There are two methods. The first is the price a normal seller would receive from a normal buyer who considers the value of the asset at maturity. The second is the price a distressed seller would take now from a reluctant buyer. That change in valuation methodology, which is completely unforeseen in the Bank’s definition of inflation, created this crisis. By focusing on the wrong kind of inflation, as the Act directed it to do, the Bank of England was blindfolded to the disaster that could occur in a low-inflation environment. This amendment takes off the blindfold. I beg to move.