The Economy

Yes, although other things were going on, too. Monetary policy was too loose during that period, and the problems were pretty obvious from monetary statistics, without analysing the banks' balance sheets. Adair Turner has basically got his prescription right. I disagree with him about only one thing, which is the Glass-Steagall Act and the splitting of the casino from the utility—of the commercial banks from investment banking. That is worth considering, because the two are much more interrelated than they were, and in investment banking there is a risk of counterparty default. As we saw with Lehman Brothers, if one bank goes down it risks dragging a lot of other securities institutions with it. However, the problem in the current case was irresponsible lending by commercial banks. If we can isolate the deposit-takers and their business from the business that investment banks do with either their own capital or money borrowed on the bond market, we can be much tougher on investment bankers. We can say, "Right, you can write off your equity, and your lenders are not going to get their money back". However, we have a responsibility to protect commercial banks because there is a risk of system failure. I hope that the Government will insist on a tougher look at that. We have discussed the remuneration structure, which led to people behaving rationally as individuals but produced a totally irrational outcome—the upside for a banker of taking risks and making money, which was his bonus, vastly outweighed the downside. The worst that could happen to him was not getting a bonus, or perhaps in extremis losing his job. Regulation of that area will have to be considered in future, but there is a danger of over-regulation. The City of London has, on the whole, been doing quite well for Britain and making money for 500 or 600 years. There is a danger that we and the United States will over-regulate our banking systems and lose what is good about financial markets to other places. If we could just stop what is bad that would be fine, but if we risk losing what is good through over-regulation, we will create a new problem. The City is a very important part of the British economy, and hopefully it is not going to go away. All recessions are preceded by a monetary boom and lead to irrational lending, high asset prices and consumer price inflation or house price inflation. Recessions have monetary causes and monetary solutions. The Government and the Bank of England have put in place very low interest rates and a bank bail-out that is now worth £500 billion. Such amounts terrify me—a hundred billion here and a hundred billion there, and pretty soon we are talking about real money. A vast percentage of our GDP is at stake and we must keep very tight control over quantitative easing, which is a wonderful euphemism for what we would call printing money if it were being done in Latin America. I am not trying to second-guess the Government on that, but a huge amount of money is being pumped into the system. I hope that when the recovery starts, we will be ready to start getting that money back out again. Otherwise, we will end up with huge consumer price inflation in two, three or four years' time. The debate has been about fiscal policy, which I believe is wrong, because the remedies are in monetary policy. We are already running a huge fiscal stimulus, which will be 9 or 10 per cent. of GDP this year and next. The idea that we are somehow not running a fiscal stimulus is completely wrong. As I have said to the Chancellor, we should have been running a surplus in the good years, although there might be room to do a bit more now, as the Germans are finding. However, the United States and Britain are in the almost uniquely weak position of having serious financial and balance of payments deficits. I therefore believe that the US President and the British Prime Minister are wrong about this. They should let the stabilisers work, but we simply cannot afford to spend so much. The Treasury have run out of our, the taxpayers', money. No more of it can be used without seriously endangering the recovery when it comes. If we are saddled with huge quantities of debt that invade the corporate bond market, drive up yields, drive down the currency and leave the taxpayer with interest to pay for years to come, we will endanger the recovery. We have run a fiscal deficit of £200 billion over the past six years, and we look like running another £250 billion over the next two. Frankly, that is enough. We are getting into dangerous territory. The recovery will come from the private sector, and I want to make a couple of suggestions about what the Government might do to help that. First, the Government have been regulation junkies—frankly, they have been even worse than we were. A mass of regulation has been introduced and it has cost business a huge amount of money. That is a social luxury, which we can afford in good, but not in bad, times. Five EU directives on employment and four sets of UK regulations are in the pipeline, all of which will impose costs on business and deter job creation. The Government could score a lot of brownie points and do the economy much good through a moratorium on regulation that imposes costs on business or on the Government—regulation imposes costs on the Government, too—until the recession is over. Afterwards, we can debate whether it is a good or bad idea. The Government could help the private sector through tax policy. I do not simply mean tax cuts to put money in consumers' pockets. We need to encourage private sector investors to start taking risks again. They are currently risk-averse and are trying to find the safest possible way of conserving their cash. We need to try to alter that equation for them. We could do that if, for example, we provided that any business investment in the next 12 months was free of capital gains tax, or that capital allowances could be enhanced for the purchase of business investments. We could also allow offsets on capital losses made on investments in, for example, the next 12 months, against people's income tax. That would encourage people to invest in business—get investors investing again—by altering the ratio of risk to reward in the tax system. I do not believe it will cost much. Without the investment, there will be no gains on which to pay the tax, but the Government could genuinely help the private sector to contribute to the recovery. My final point is that the crisis is of the banking system, not of globalisation or free markets. We must not endanger free markets and free trade, which have given the world the most fantastic growth. They have taken more people in the third world out of poverty than any other system. We must not endanger that when addressing a crisis in the banking system.