The Economy

It is always a privilege to follow the right hon. Member for Bolton, West (Ruth Kelly) since she returned to the Back Benches. She has consistently given the House thoughtful and well-informed speeches on economic matters, even though in this case I profoundly disagree with her, on both her analysis and her prescription. Unless we establish the cause of the current economic crisis, we will not be able to find a cure or a way of preventing a repetition of the problem. Unfortunately, so far analysis has focused not on establishing the ultimate cause, but largely on allocating blame to greedy bankers, impotent regulators and incompetent Americans. Incidentally, following the point that the right hon. Lady made, the Prime Minister cannot say, as he does when he is trying to escape any share of the blame himself, that the problem arose solely in the US, and simultaneously blame the British bankers. Either the problem was caused exclusively in the US, in which case not only is the Prime Minister innocent, but so are the British banks, or the British banks contributed to their own downfall and aggravated our economic problems, in which case not only are they guilty—I believe they do share in the guilt—but given that he was responsible for regulating the banking system over the past 12 years, so was the Prime Minister, the former Chancellor, guilty of his share of aggravating our problems. I am sure that all the alleged guilty parties deserve some of the blame, but I will argue that their behaviour was essentially a symptom of a much more fundamental underlying cause of our woes. Take greedy bankers. I am sure that bankers were greedy, but bankers have always been greedy—I cannot remember a time when they were not accused of being so. It is a fundamental axiom of logic that we cannot explain a change by a constant. If bankers have constantly been greedy, why has that only now resulted in this change in our economic fortunes? The interesting thing is that, in the past bankers, were accused of being greedy because they would lend only to the rich, who had ample collateral, and to low-risk projects at high interest rates. This time they are accused of greed because they have lent to poor people at low interest rates with inadequate and inflated collateral and a risky repayment profile. Bankers' greed has been a constant feature; it is the form that it has taken that has changed and needs explaining. I shall come in a moment to a more fundamental explanation of that change. The second alleged culprits are impotent regulators. The common accusation is that deregulation stripped the regulators of the power that they needed to prevent the excesses of the past decade. In fact, under the regime that the Prime Minister introduced in one of his first acts as Chancellor, the regulators whose duty was to supervise the banking system in the UK had every bit as much power as they had ever had. The other day, my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) reminded the House—and, indeed, me—that I was the shadow Chancellor when the Bill that became the Bank of England Act 1998 was introduced. In the debate on that Bill, I warned the House:""With the removal of banking control to the Financial Services Authority...it is difficult to see how…the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse."" I went on to say:""The coverage of the FSA will be huge; its objectives will be many, and potentially in conflict with one another. The range of its activities will be so diverse that no one person in it will understand them all"—" and so it turned out. I added that I feared that""the Government may, almost casually, have bitten off more than they can chew. The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day."—[Official Report, 11 November 1997; Vol. 300, c. 731-32.]" I could foresee that then, because the problem was not deregulation but the regulatory confusion and proliferation introduced by the former Chancellor. The regulators have never had more power, employed more people or spent a bigger budget than now, but they have failed. The problem with the regulators worldwide was not lack of power, but lack of foresight and insight; until the 11th hour, they were as convinced as the bankers that everything was going swimmingly. In its global financial stability report in April 2006, a year before the crisis erupted, the International Monetary Fund no less, referring to securitisation and other complex derivatives, said:""There is growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped make the banking and overall financial system more resilient…The improved resilience may be seen in fewer bank failures and more consistent credit provision. Consequently the commercial banks…may be less vulnerable today to credit or economic shocks."" That is what the pinnacle of the regulatory system worldwide was saying a year before the crash. The truth is that the behaviour of bankers and regulators was not so much the fundamental cause of the crash as a symptom of a long period of easy money and irrational exuberance fuelled by excessive credit.