Pre-Budget Report 2009

My Lords, last night at the delightful drinks party given by the Lord Speaker, I at last heard a forecast that I believe is credible and we can rely on. It came from the right reverend Prelate the Bishop of Manchester, who assured me that Christmas will fall on 25 December. I have had 54 years of City life, during which I have counted about eight financial crises or recessions. They have all had two things in common: first, they have all ended; secondly, they have mostly ended in tears. Even so, I am prepared to suppress my usual pessimism, which your Lordships might find surprising. During those 54 years, I have seen that we always come through, if not necessarily to sunny uplands then to some very nasty, boggy territory on the other side, which becomes the fertile ground in which the next recession down the line waits to take root. I have two pleas to make to your Lordships today, which I hope might have some beneficial effect on life when the present recession ends. First, will the Government next year, whoever they may be, give serious consideration to the creation of a new consumer credit Act? I regard the Consumer Credit Act 1974 as pretty well the seed plot from which most of our troubles have grown. I explain for those of your Lordships who were not around at the time—I unfortunately was—that the principal characteristic of that Act was that it decided with perfectly pure and understandable socialist principles that hire purchase was an extremely wicked thing, because it meant that a poor man could pay a quarter of the value of his car, fail to pay the next six instalments and have the car taken away. So the Act effectively banned secured credit and insisted instead that we should have credit control. The problem with that, which we have never really considered in this House, was that the credit loan arrangement that came in was very bad for the banks, because it reduced the security of all their lending. The banks did not like that; they went away, sulked for a while and immediately came up with the idea of the second mortgage to get them security. That was a bit of a cheat against the 1974 Act, but at least it got the banks where they wanted to be. Unfortunately for the banks, though, the second-mortgage business became so profitable for them that it began to challenge their mainstream business, so they hived off the second-mortgage business to create the secondary banking market, which duly became the crash of the early 1970s. We need to remember that the great crisis at that time was the prolonged insolvency of the National Westminster Bank, which rightly became known as the "National Wastemonster", and which was saved only by the brilliant intervention of the Bank of England and its lifeboat, as were all the other banks. When the secondary banking tide had gone back out and the wreckage had been cleared away, we thought that that was the end of that. We had not realised that this had not really gone away; it was just lurking around, waiting for its opportunity. That came with the big bang, which led to the "me too" banking creation, where everyone seemed to join in. There were a new set of creations that went on to become the Northern Rocks, the Bradford & Bingleys and all those other names that have haunted our nightmares for the past year. So there is one unbroken sequence of calamity going back to the Consumer Credit Act 1974. The sociological consequences of that Act are still with us to this day. It has secured this vast market of unsecured credit, including the explosion of credit cards. That is probably toothpaste out of the tube now, but credit cards still need curtailment. We have lost the connection between purchase being limited to what we can afford for what we need and the morality of lending between borrower and lender, which has been destroyed. Nothing would do more good for the stability of the post-recession era, when we get there, than the reintroduction of some form of restored morality between borrower and lender based on some form of required commitment to the loan for a particular purpose and limited to what you can afford for what you need. That is an important point. I hope that that will come about. I would like to see it come about in a straightforward way: no loan should ever be taken out again, in any domestic context, that is not universally acknowledged and signed for and accepted by both the husband and the wife or the partners in every household, so that they both buy into the concept of a manageable loan at that time. That would be a huge benefit. Beyond that, we should be looking at some form of central control of credit cards along the lines that my noble friend Lord Marlesford put forward in a presentation to this House some time ago. His words were extremely wise and should be borne in mind for the long term. My second plea is that we get better at forecasting the international consequences of things like sub-prime debt. I shall tell a brief story that illustrates the point. In 2008, when we got to the Summer Recess, I went to work in New York. Each day from my hotel I walked up 47th Street, where there is a one-legged Vietnam veteran who sits on the pavement and cleans shoes for $2 a time. He has been there for quite a long time and I got to know this friendly and talkative guy. I was getting my shoes cleaned by him one day and he said, "You’re in a nice suit but you’re going to burn in eternal hellfire". I said, "I’m sure I am but not too soon, I hope". He said, "No sir, you’re going to start burning in eternal hellfire nine weeks tomorrow". "Really?" I said, "I had hoped for a bit longer than that. Why then?". He said, "Because Lehman Brothers is going to file for bankruptcy that day. The great fiery jaws of hell are going to open up and suck all you suits down into it". I would like to know how a one-legged Vietnam vet sitting on 47th Street knows, nine weeks to the day before the event, that Lehman Brothers is going into insolvency when the rest of the financial world appears to live in total ignorance and does nothing about it. In the two weeks that followed on that trip, pretty well every maitre d’ and barman in New York wanted to tell you the same story, so it was an open secret. What was going on? Lehman was a leading member of a relatively small but hugely financially sensitive banking community. If there were nine weeks to find a solution, it should not have been beyond the capability of the geniuses who run those organisations to do so. Some form of mutualisation should have worked. The noble Lord, Lord Myners, will share with me vivid memories of what mutualisation means from our time together on the council of Lloyd’s. He will also remember that, when we got through the end of that crisis, we created a realistic risk scenario committee to devise what we thought would be the 10 most unthinkable calamities that would befall the world. We were given strict rules: we must not include any terrorism, because that was all known, and we had to think of 10 things that had never occurred and never could. These were to be fed into the Lloyd’s of London computer to see what the consequences would be. Where is the equivalent of that being done among the financial communities of the world today? Unfortunately, in the Lloyd’s of London situation, the first three worst scenarios that we could think of all happened in the next three years—that is if you allow for the fact that one of them effectively became 9/11, because although we could not call it terrorism we imagined the triple failure of the air traffic control at Kennedy, LaGuardia and Newark airports simultaneously and the mass collision of jumbo jets above Wall Street, which would come crashing down and destroy the entire infrastructure, with its entire economic memory and computer base, putting America out of all commercial trading. That is not dissimilar to what happened with 9/11 and, because Lloyd’s had been able to feed that into its computer, it knew what to do about it beforehand. Where was the pre-think where everybody should have been coming up with a different solution on how to cope with a Northern Rock, a Lehman Brothers or whatever? Why was there no central co-ordination between the great financial masters of this universe? I presume that the noble Lord, Lord Myners, would now be included in them. Why, then, are they not creating some form of realistic risk scenario process similar to that which served the Lloyd’s of London community so well, so that we have some perception and do not have to ask my poor old one-legged friend on the pavement of 47th Street in New York what will happen, because we have slightly better information coming through, where it matters, in the heartland of financial government? I can only wish all of your Lordships a very happy Christmas. By the way, of the 10 realistic risk scenarios, seven have now happened. I shall not spoil your Christmases by telling you what the three were that have not.