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The Economy

By common consent, we are facing the worst recession in a generation and, as each day passes, we hear more and more gloomy reports. I fear that matters will get very much worse before they get better, and that our constituents have cause to be anxious. For 10 years, the Prime Minister has posed as the man whose command of economic affairs was so all-embracing that he had abolished boom and bust, and thanks to whose stewardship and management of our economy, Britain led the world. There was no acknowledgement of the role played by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), or, indeed, of his predecessor, the noble Lord Lamont for his legacy of a successful economy, which was bequeathed to this Labour Government. That was, of course, all the work of the brilliant incoming Labour Chancellor, whose endless skills stopped short only of alchemy. Suddenly, however, as everything turned to worms, we learned that our problems were the fault of everyone else—of the global economy. I hope that everyone has noted how the word "global" has been used on every conceivable occasion. That was designed deliberately as a tactic—one that would have been worthy of the good German doctor—to impress upon our people that this was all someone else’s responsibility, and that responsibility did not lie here. Then the hapless Sir Fred Goodwin and his pension were invoked to distract the public’s attention from the architect of this disaster. As interest in him wanes, the laissez-faire market economy has been identified as a villain requiring a form of regulation, which I understand the Government described last night in chilling terms, saying that the banks""should be very frightened of the FSA"." They clearly have not been, up to now. The first issue that I want to address is the banks. I used to be an international banker, ending up with Standard Chartered bank. I believe that the banks must accept a large share of the responsibility, because they were responsible for making the decisions on to whom to lend money and on how to devise the various mechanisms to lubricate the economy. There is no doubt in my mind that the explosion in the number of complex products developed an inverted pyramid, and my right hon. Friend the Member for Wokingham (Mr. Redwood) was absolutely right to point out that capital ratios have simply soared. Securitisation and derivatives might not, in themselves, have created this crisis, but there is now a growing admission that those on the boards of the banks had little idea of where the real risk lay, and that the banks lacked the appropriate internal procedures and checks. A former chairman of RBS, Sir Tom McKillop, admitted as much yesterday. When asked whether he was sure that he could understand the full complexities of the sophisticated loans that his bankers had created, he replied:""You said ‘full complexities’. I would say no."" In other words, the man at the top of the bank did not understand what was being done in the name of the bank. What an indictment on those bankers, that they should have brought the profession to such a humiliating pass. There is also the matter of poor lending. It is entirely right that people have referred to what has happened in the United States. An interesting article appeared in The New York Times on 30 September 1999, in which it was pointed out:""Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people"." That is, people who were a notch below being creditworthy. There was political pressure to lend, and that was being mirrored at home by the Prime Minister, who wanted to increase social inclusion so that those who were a notch below creditworthiness could also be lent to. In that perceptive article, which I commend to my hon. Friends, it says:""In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn"." How perspicacious that was. The second issue I want to address is regulation. As my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) pointed out, the Bank of England had been responsible for banking supervision for centuries; it understood the system and the system understood it. The "Old Lady" understood. I recall when I was with Bank of America Ltd in the 1970s, my boss was called in; I asked "How did it go, Bob?" and he said, "Fine, no problems". We asked whether the Bank of England had anything to suggest, and he said, "Well, it thought our Polish book was a bit longer than we might like". That meant that, on the following day, our exposure to Poland was reduced—no diktat, no law: it was done because the Bank of England knew what it was on about and its advice was accepted. My right hon. and learned Friend the Member for Folkestone and Hythe also drew attention to the fact that we have warned consistently of the danger of transferring responsibility for banking supervision from the Bank of England to the Financial Services Authority. Interestingly, in the debate on the Financial Services and Markets Bill on 28 June 1999, the then Chief Secretary to the Treasury, the right hon. Member for Darlington (Mr. Milburn), claimed somewhat extravagantly:""The Bill gives the FSA the statutory basis and powers that it needs to be the world's leading regulator of financial services. In so doing, it establishes a modern regulatory framework that will stand the test of time and apply into the next century."—[Official Report, 28 June 1999; Vol. 334, c. 36.]" How are the mighty fallen. The regulatory regime established by the Prime Minister has been an abject failure, and he must accept responsibility for it. As anyone who has ever tried to open a bank account knows, the FSA concentrates on erecting hurdles to stop money laundering rather than on monitoring the quality of the lending by the main banks. The independent financial advisers gets the third degree and Goodwin gets the K. That is the way the FSA and its progenitor, the Prime Minister, worked. Now the Government are threatening to impose a draconian regulatory regime. What is wanted is not more regulation, but more effective regulation, which has been lacking. Thirdly, I want to raise the issue of the Prime Minister himself. I hope to make it clear to the House that I believe he is the architect and the man responsible. One of the most unattractive—indeed, offensive—sights has been how openly the Prime Minister appears to have been revelling in this crisis. He was down and out in October 2007; all of a sudden, a crisis came along and he blossomed. As I have explained, the banks have played their part, but the Prime Minister, the most overrated Chancellor in my lifetime, bears a heavy burden. He destroyed the pensions industry; he destroyed the tried and tested system of banking supervision; he failed to rein in irresponsible lending; he promoted imprudent lending by pressing banks and other financial institutions to lend to those he described as "the socially excluded"; he sold off 60 per cent. of the UK’s gold reserves at $275 an ounce—close to a 20-year low, and, I remind the House, a fraction of today’s price of $900. The Prime Minister imposed a growing tax burden on the people of Britain which, according to the OECD, has risen from 39.3 per cent. of GDP when he took office to 42.4 per cent. in 2006, and rising. He also permitted a 13 per cent. increase in public sector employment when private sector employment grew by only 5.7 per cent. All that has happened under the Prime Minister’s watch and he must be made to accept responsibility. The Chancellor said last year:""The Government do not want to run Britain’s banks—we want to rebuild them."—[Official Report, 13 October 2008; Vol. 480, c. 541.]" How can that be reconciled with the bullying of Barclay’s bank to join the scheme, presumably in exchange for its shares? I received an interesting note from a former colleague at Standard Chartered bank, who wrote to me today:""I am astounded how lazy the response has been to the extent of the RBS and Lloyds reliance on the Asset Protection Scheme. Over half their risk-weighted assets are covered. The cost to Lloyds shareholders has been enormous as by far the majority of the assets covered in the scheme are from HBOS, and the ‘price’ of insurance has increased the state holding to 70 per cent. Daniels and Bland should be given the Byng treatment and Government ‘congratulated’ for passing the cost of bailing out HBOS onto Lloyds shareholders—state sponsored grand larceny!"" I could not have put it better myself. The test for the Government will be how quickly they can restore the banks to private ownership. As the hon. Member for Twickenham (Dr. Cable) said, they will need direction on whether to increase lending or to reinforce their capital ratios first; they cannot have it both ways. Secondly, the Chancellor must demonstrate how he will reduce the taxpayer’s liability. This is not a failure of capitalism; nor is it an indictment of Thatcherism. She was all for sound money. The public have become completely bewildered by the turn of events and the amounts of money involved. At a time when finance is so tight that the Ministry of Defence has to scrape together every penny to fund the armed forces who have never let this country down, the banks have had literally billions of pounds thrown at them. Now the Government have even adopted Mr. Mugabe’s policy of printing money, a policy that has destroyed Zimbabwe and will come back to hit us. I believe that the message we must take away from all this disaster is that the country has become far too reliant on the financial services for wealth creation. We must create a much more broadly based economy, and we must reinvent engineering and manufacturing as well. I hope that the House will recognise that the one man who bears responsibility for this is the Prime Minister, and he should go.