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In any plan it is necessary to know what to leave out. There are things which are for tomorrow, and there are things over which we have no realistic control. The first of those, pace the noble Lord, Lord Eatwell, is the Bretton Woods regime. There are three problems, the first of which is our record. We have always been against any sensible reform of the Bretton Woods institution, and we have sidelined the IMF for years. Secondly, this is for the next time—it does nothing for this crisis. Thirdly, the central issue, as has been said, is the trade imbalance between China and the United States of America, and we do not have any control over that.

We should leave out a simple, unstructured Keynesian “borrow and spend our way out” approach. There are three problems, the first of which is human nature. Many people will not even attempt to join in—they are savers, not spenders. Secondly, we are trustees, and there must be some limit. Thirdly, our economy is not well placed; the period of easy credit concealed underlying longer term issues, and we have a great propensity to import. That is why the IMF has given the judgment that it has, another thing about which we are in denial.

In outline, what do we need? First, and most importantly, there must be shared responsibility: no one saw this coming and we all contributed to it—and I mean “all”. Secondly, there must be an understanding that we do not have the room to manoeuvre to regain economic growth and stability on our own—we rely on others, principally the United States of America, and God bless Obama. Thirdly, there must be a willingness to accept that when an upturn comes, as it will, it will take years to rebalance our social and economic affairs. Meanwhile, we need to do all that we can for each other.

Such a plain man’s approach may seem to be nothing but a cliché, to be fleshed out with lots of detailed measures which, we hope, will meet its theme. I do not agree with that. We need a simple theme because we need to pull together in times which will affect different people very differently and when it will be all too easy for society to fall apart. Northern Rock was a warning of a falling apart, which we did not heed; Lindsey could be another. Let us not be caught twice.

11.58 am

Earl of Stair: My Lords, I rise to speak too long after taking my seat following the passing of my late noble friend, Lady Darcy de Knayth. It is a great

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honour to return to the House and I look forward to contributing more in the future.

The state of the national and global economy is reported on in our papers daily. Without a doubt, we are still in an extremely serious situation, with no immediate chance of recovery. However, we do not see much in the media about the Government’s plans for the support of small business, although I notice that the Real Help with Finance package is being managed by the Department for Business, Enterprise and Regulatory Reform.

The real long-term impact of this recession is extremely destructive to the small business sector—here I declare an interest, as I am involved in the sector. That is particularly true in rural and far-flung corners of the country and in areas of high unemployment, where even the loss of 20 jobs is significant. In Stranraer, in south-west Scotland, a town where unemployment seldom falls below 5 per cent even in good times, the demise of Baby Deer, a long-established clothing company, was directly as a result of problems experienced on the high street and particularly with Woolworths.

Some years back, when the foot and mouth disaster hit the United Kingdom, in the south of Scotland, the then Dumfries and Galloway Enterprise and the Dumfries and Galloway Council managed, with financial help from the Scottish Executive, to organise an excellent business support scheme which, without doubt, helped many small and tourism businesses to survive in what would otherwise have been a catastrophic time.

I am particularly interested to hear how the Government intend to manage the real help with finance programme. The website for the Department for Business, Enterprise and Regulatory Reform assures the reader that the Action for Business programme and Real Help with Finance programme are United Kingdom initiatives. Can the Minister explain how these will be implemented in the devolved areas and rural sectors?


Lord Peston: My Lords, I thank my noble friend Lord Eatwell for introducing this debate and making such an excellent speech. I suppose by “excellent” I mean that I agree with everything that he said. To begin, I would welcome a comment from the Minister on how interest-rate policy is working or, rather, not working. Certainly, the cuts have adversely affected lenders, whose income from past savings has fallen. Equally certainly, borrowers have not gained from lower interest rates since there appear to be no funds for them to borrow in the first place. It looks as though nobody has gained. Is my noble friend able to throw any light on this?

Next, since large parts of the banking system are, to all intents and purposes, in the public sector, what influence can the Government exert on how banks behave? For example, how many non-executive directors have been sacked? What view do we take of auditors who appear not to have noticed the existence of toxic assets? Above all, the bankers, despite being the cause of the catastrophe, still seem to regard self-preservation as their priority, rather than getting the economy moving forward again. I, for one, look on with amazement

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as the senior bankers, who are the villains of the piece, are invited to Downing Street for consultations. Equally, given that the Monetary Policy Committee of the Bank of England was almost the last to recognise the need for expansion in macroeconomic policy, on what rational grounds can it be thought right to place banking supervision—again—under the aegis of the Bank of England?

It has been said that we need a new Maynard Keynes. We do not. As my noble friend Lord Eatwell said, all we need to do is apply the principles of economics that Keynes laid down 70 years ago. We really need a new George Orwell; only a satirist of his quality could do justice to all of this.

This brings me to straightforward economics. What I find embarrassing is the large number of economists who have learned nothing from recent events. Indeed, many academic economists are still publishing articles that prove that what has happened in the past 18 years could not possibly have happened. It is apparent to almost everybody else, when the economy is subject to a major shock and moves significantly away from full employment equilibrium, that Keynes’s analysis was entirely right: the automatic path back to full employment is so slow as to be indiscernible to almost everybody. Indeed, it is so slow that it probably does not occur to them at all. That is why expansionary fiscal policy is needed and why Governments, with our own being the earliest to act, are right to adopt an expansionary fiscal approach.

Turning away from economics, I refer now to the social impact of what has been going on, by which I mean the need for fairness in our society and economy. What has been discredited, apart from some of the economics, is the trickle-down theory, which was put forward during what we are told were the good years. That is, if we support enterprise and let the rich get richer, everyone else will gain. In the US that has simply turned out to be completely untrue. The median worker in the US gained nothing over the 20 good years. Even in our economy, inequality has risen in broad terms. The time has come to call a halt and to ask how any policy intervention will affect the poorest in our society. It is as important that Ministers are obliged to make a declaration on how the poorest are affected by any policy as it is that they make a similar declaration on the human rights effects. Fairness to the poor is at least as important as human rights.

We should stop demonising single mothers. I do not doubt that children would be better off with two parents being there for them, but the children are not at fault when there is only one. Furthermore, if we are to encourage single parents to return to the labour market when the children are old enough, which is right—Orwell would really have appreciated that being a central plank of government policy when unemployment is rising at an unprecedented rate, and would have felt that it was taking satire too far—three conditions need to be met. One is that the jobs have to be there to go to; secondly, there should be incentives—namely, people should be better off by taking the job; and, thirdly, even when children are older, we need to make sure that proper arrangements exist for emergency childcare. More generally, we should compare the attitude of

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some people—I cannot exclude Ministers from this—to single parents who work the benefits system to their advantage with their attitude to the fat cats who use every possible means to avoid paying tax altogether. The distinction is dreadful.

On the latter, my right honourable friend the Prime Minister worked extremely hard when he was Chancellor to close tax avoidance loopholes, but he discovered that, whenever he closed one, two more sprang up. The best way to deal with this is to reverse the burden of proof when it comes to tax avoidance; namely, the avoidance scheme needs to be demonstrably legal. Until it is demonstrated as such, the full rate of tax should apply.

My main conclusion is that the Government are right to pursue an expansionary fiscal policy and deserve everybody’s support for it. Things will get worse before they get better, but that is not a reason for flinching. The Government must go on acting with determination and reinforcing the policies so that they will work.

12.08 pm

The Earl of Caithness: My Lords, the Banking Bill which we are currently discussing in the House is very complex and detailed, but it does nothing to resolve the current banking crisis, which lies at the heart of our economic problems. The noble Lord, Lord Peston, has just said that it is the fault of the bankers. I agree with him up to a point, but would go further and say that the fault that really needs correcting is our whole banking system. I am therefore grateful to the noble Lord, Lord Eatwell, for bringing forward this debate.

The Banking Bill fails to address the fault which has led to every major banking and currency crisis during the past 200 years, including this one. It merely, lazily and weakly, papers over the cracks. Like Lilliputians, we are trying to tie down Gulliver with ever more strands of rope. It did not work then; it has not worked since 1811; and it will not work now.

In March 1997, I warned in this House that our failure then to address the banking system would lead to greater hardship. I said:

“The cycle will continue, but the next time, as before, we will all start deeper in debt and with a burden harder to carry”.—[Official Report, 5/3/97; col. 1871.]

We did not act then in the good times. However, I am reminded of Milton Friedman’s observation that it takes a crisis for real change to occur. So what better time than now?

By January last year, I could see that the imprudence of bankers had exceeded even my worst fears and I introduced the Safety Deposit Current Accounts Bill to try to defuse the explosion that I could see coming.During the Second Reading debate in April, I asked under which Act of Parliament the current banking system had been established. I got no reply from the noble Lord, Lord Davies of Oldham, whom I am glad to see in his place. I asked again in November, in the debate on the Queen’s Speech. Again, there was no reply. I understand that no Act has been passed by Parliament. The current crisis, like previous ones, emanated from a base of judicial decisions. Prior to 1811, title to the money in depositors’ accounts belonged to the

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depositor. However, in that year, decisions in Carr v Carr and, in 1848, Foley v Hill gave legal status to the banking practice of removing depositors’ money from their accounts and lending it to others. Since then, title to depositors’ money has transferred from the depositor to the bank at the moment when the deposit is made.

Bankers have always seen it as their job to invest as much of their depositors’ money as they prudently can, in order to earn income for themselves while, at the same time, maintaining sufficient cash flow to be able to honour depositors’ cheques when presented and to meet withdrawals when demanded. If new deposits fail to materialise in sufficient strength or if borrowers fail to repay on time or at all, banks need to be rescued or they will fail. Historically, bank failures then led to a demand for central banks to act as lenders of last resort to save imprudent bankers who got caught short.

These judicial decisions meant that, from then until now, money deposited belonged to the bank and not the depositor, thereby allowing bankers to use customers’ deposits as they saw fit, always provided that they could manage cash flow so as to meet depositors’ requirements. In good times, that enabled them to take greater risks. Then, with the advent of central banks as lenders of last resort, the bankers soon learned they could take even greater risks with virtual impunity. When their lending became too aggressive and their reserves and deposit receipts were less than required to meet cash flow, they began to lend to each other. Banks with excess reserves would lend on the overnight market to those with a shortfall. With all these supposed safety mechanisms to protect them, bankers came to believe they could become even more aggressive in their lending, enabling them to make increased profits for themselves.

The provision of these safety mechanisms had, in some cases, merely encouraged them to take excessive risks. Further, these two judicial decisions overlooked or failed to consider the fact that when banks lend depositors’ funds, more than one receipt for the same deposit is issued. This was not done intentionally by individual banks or it would immediately have been seen as fraudulent. Rather, it was done by the system as a whole. This process continued to the present. It is as a result that our UK money supply has grown from £31 billion in 1971, when President Nixon closed the gold window, to in excess of £1,700 billion today. Let us consider the implications of those last two figures. They mean that every year since 1971 the banking system has created, on average, for its own use, in excess of £44 billion. That is more per year than the entire money supply which had, until 1971, sustained our economy since recorded history and through two world wars. Is it any wonder that we have suffered such serious inflation over that period? It is clear that the normal, everyday onward lending of depositors’ funds by retail banks has been the principal producer of inflation.

When paper money was backed by gold, this same production of new receipts by the banking system increased the number of claims for the gold held in reserve without in any way increasing the amount of gold available to meet them. Therefore, the amount of

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gold available for each receipt became smaller and the value of paper money decreased. The normal, everyday banking practice of onward lending of depositors’ funds led to such a continued increase in the number of claims for the gold available that it caused a series of revaluations of paper money with respect to the amount of gold each could claim. The rates of increase varied from country to country, creating complexity in foreign exchange markets and leading to a series of international agreements to try to determine the correct relationship between various national currencies and gold. The last of these was the Bretton Woods agreement in 1944. It was breached in 1971, when the huge increase in the number of dollars created since 1944 forced President Nixon to close the gold window.

The same banking mechanism, which destroyed the gold standard, is now destroying the central banking system. Central banks can no longer cope. The Treasury and the taxpayer have now to try to pick up the pieces. In fact, the failures are so serious and banks have been so imprudent that they are now unwilling to lend to each other and Governments had to ask to kick-start inter-banking lending. In Davos recently, the world looked at the imperilled state of the western monetary system with shock, and there is so little faith in paper money that cries are heard for a new Bretton Woods. All that has occurred because of the failure of Governments, economists, the press and the public to recognise the faults in the banking system that were given legitimacy by those early judicial decisions.

Even today, the Government are striving to save this discredited system with still more legislation that attempts to control the degree to which this fraudulent but legal mechanism can continue to operate. Why are we trying to save a system that, since 1811, has overcome every attempt to harness it? Now is an excellent time to revisit the question of the banking system. We should consider in detail a system to correct the faults that I have identified by creating accounts that do not transfer title to depositors’ money from depositors to the banks. Banks must not be allowed to continue to lend depositors’ money without the consent of the depositor. This will immediately stop the issuance of two receipts against the same money. Depositors would have to pay for the storage and distribution of their money in accounts and banks would have to compete and earn their income through storage and distribution charges.

For those who wish to earn an income with their money and who wish banks to invest their savings for them, savings accounts are available. With those actions we can completely remove the duplication of receipts from the banking system and stabilise the money supply. Banks will no longer be able to lend depositors’ funds. Depositors’ funds will then be safe. There will be no further need for lenders of last resort. Taxpayers will no longer be required to bail out future bank failures and inflation can be halted in its tracks. Can it happen? Yes. Will it happen? That depends on the Government’s response. My noble friend Lord Eatwell said, when he opened the debate, that we cannot return to the norm. We will, however, unless the Government grasp the nettle and cease throwing taxpayers’ money at a faulty system and stop trying to control the uncontrollable. There can be no better time to act than now.

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12.17 pm

Baroness Warwick of Undercliffe: My Lords, I am pleased to be able to contribute to the debate and I congratulate my noble friend Lord Eatwell on the way in which he introduced it. As he indicated, the situation that the country finds itself in is exceptional. The Government have announced a substantial package of measures to ensure that those facing redundancy and those seeking employment are helped back into work as quickly and successfully as possible. They have encouraged all sectors to play their part. I will focus my brief remarks on what the higher education sector can do and is doing to support the Government’s endeavours and emphasise the importance of a high-skill innovation strategy for economic recovery.

The higher education sector is playing an increasingly important role in helping British businesses to survive the economic downturn and build for the future. Universities and higher education colleges have an unparalleled record in fostering innovation, enterprise and skills and in helping to create wealth and job opportunities. Universities are by their nature long-term organisations. World-class research, the development of a highly skilled workforce, consultancy work and the creation of new ideas, products and industries are all examples of their long-term benefit. They will be crucial in delivering the highly skilled talent that my noble friend Lord Eatwell emphasised. However, this does not mean they have not tried to meet the needs of business and learners in the short term.

Indeed, Universities UK, in which I declare my interest as chief executive, along with GuildHE and the Higher Education Funding Council for England, produced a leaflet called Standing Together, which highlights the services that universities have to offer business. This includes the use of consultancies within business schools, access to relevant sources of knowledge, and reskilling and upskilling through postgraduate courses, to name just a few. The leaflet, which has been sent to a huge range of business organisations, provides a contact point within each university in the UK so that businesses can go straight to whom and what they need. It has also been sent to Members in both Houses as a signal of the contribution that higher education can make.

A number of initiatives have been supported by the Government. Knowledge transfer partnerships, supported by the Technology Strategy Board, enable companies to access knowledge and skills from higher education institutions to use in the strategic development of their businesses. I understand that the Technology Strategy Board has agreed to double the amount of KTPs between 2008 and 2011. That should enable a wider coverage of the scheme to include the service sector, which has been hit particularly badly by the downturn. As of March 2008, there were more than 900 live partnerships, with many more in the pipeline.

Universities already have a track record in supporting business, from developing science and research parks next to university campuses to promoting businesses at the start-up and early development stage in incubation centres. An area where increased government funding is having real effect on the ground is through the Higher Education Innovation Fund. HEIF is a £400 million

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scheme funded by the English funding council and supports universities and colleges in reaching out to businesses and providing the ideas and skills that are needed for innovation and improved productivity.

It is often forgotten that higher education institutions are also significant players in their own right within regional economies. Through both direct and knock-on effects, they generated more than £45 billion of output to the UK economy, which is more than the pharmaceutical or aerospace industries. After the NHS, universities are some of the largest employers in a particular town or region and, as such, they are major purchasers of products and services. The Government have said that their departments and agencies should aim to pay small firms within 10 days of the receipt of an invoice. That is something that a growing number of universities are trying to achieve.

Many universities are involved in building projects to update 1960s infrastructure, with their contractors often working with small firms as subcontractors. Universities are now looking to their contractors to achieve the same turnaround time for invoices and, by bringing forward capital funding planned for 2010-11, the higher education funding councils are helping universities to create or protect hundreds of jobs in construction. Higher education institutions are also responding to fears about a drop in graduate employment by developing a number of schemes, such as creating their own internships for recent graduates, which will provide talent pools for local business and industry. They have introduced graduate start-up schemes, where funding for training and business support is given to graduates to start up a business, and they have improved information, advice and guidance for new graduates entering the job market. That is a clear difference from the last recession; businesses have now learnt that cutting back on graduate recruitment during the downturn costs them a great deal more three years down the line.

As I mentioned, universities are large employers in their own right. UK higher education institutions employ more than 360,000 people, which equates to 1.2 per cent of total UK employment. That level of employment provides an important lifeline in many areas that have suffered during the economic downturn. However, to continue to maintain this important lifeline, it must also be remembered that public money is necessary to underpin higher education. As we enter a very tight spending review process, whether before or after a general election, I urge Ministers to continue to maintain the unit of funding for teaching and ensure that research excellence is funded wherever it is found. With these two key areas supported, it is then possible to build on the successes of schemes such as knowledge transfer partnerships and the Higher Education Innovation Fund, which have already proved their worth, so that higher education, business and government can work together to ensure that the UK pulls out of the downturn and is well prepared to maximise opportunities for the long-term growth and development of the country.

12.24 pm

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