Financial Services (Banking Reform) Bill

John McDonnell Excerpts

Monday 11th March 2013 Commons Chamber

[John McDonnell (Hayes and Harlington) (Lab)]

Thank you, Mr Deputy Speaker. Does that mean that I have an hour and a half?

[Mr Deputy Speaker (Mr Nigel Evans)]

You should be so lucky.

[John McDonnell]

I most probably will not even take 10 minutes.

I am very pleased that the plane of the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) did come in, because he always makes complex issues simple and entertaining. There is a consensus in the House around regulation as the approach to take towards resolving the banking crisis and ensuring that, if we do not prevent a future crisis, we at least stave it off for, as the hon. Gentleman suggested, possibly another 70 years. The degree of positioning is around Glass-Steagall-type full separation, a ring fence, and then, as he said, the novelty of an electrified ring fence. There must be different power levels of electricity on this ring fence, as well.

I stand outside that debate, because I do not think that regulation will work. I was the first Member to raise the issue of Northern Rock in this House. At that time, I completely underestimated what Northern Rock was up to. I thought that it was all about an offshore tax scam that was part of its link with the organisation that it called Granite; I had no idea of the scale of the problem that would be unravelled. I can remember the then Chief Secretary to the Treasury, I think, leaving the Chamber after I had talked about Northern Rock, to obtain a briefing about what I was talking about. I realised that what I was talking about was a crisis that was being created in the City by greed, primarily, and by speculation and casino banking. I remember being at the Labour party conference in the 1980s, around the time of big bang, and organising the launch of a book called “Big bang: the launch of a casino economy”, authored by the then Member for Hackney and my hon. Friend the Member for Bolsover (Mr Skinner), which predicted some of the outrageous potential that there was for speculation as a result of big bang.

When I raised Northern Rock, I completely underestimated the levels of casino banking and the corruption that was taking place. In the previous debate a few weeks ago, I described the City as a “cesspool of corruption”, which it was. However, what was also revealed was the absolute incompetence. It was like “The Wizard of Oz”—when the curtain was pulled back, there was not a wizard but someone scrambling with various levers. We discovered then that the hierarchy of British banking did not even understand the instruments with which they were working because they were so complex. Then it all started to unravel, and we discovered scales of greed, incompetence and corruption that none of us expected.

At that time, we were assured that the regulatory system was not at fault, but we soon discovered how inoperable it was. The result, as we all know, is that the then Government intervened to borrow and they used taxpayers’ money to bail out the system. At its peak, taxpayers’ exposure to the bank collapse was on the scale of £1.2 trillion. I understand that so far we have retrieved only £14 billion of that taxpayers’ money. The second wave was the austerity programme introduced to pay for the Government intervention to save the banking system. Mervyn King estimated the cost of that to be £1 trillion. Anthony Haldane, who is probably more accurate in his assessment, estimates that we have lost the equivalent of between one and five years’ GDP. Those absolutely staggering sums are the result of a crisis brought about by incompetence and greed. The majority of people are 7% poorer than in 2007, and their living standards have fallen, according to the latest estimate, by 13.2% since 2008. The median household income in 2015-16 will be the equivalent of that in 2002-03. These are the implications of what this wealth of greed brought about: mass unemployment, welfare benefit cuts, food banks, and parents missing meals so that children can eat. It is absolutely staggering.

I find it extremely difficult to come to terms with an issue that was raised by my right hon. Friend the Member for Holborn and St Pancras (Frank Dobson). Since the crisis occurred—since I first stood up in this House and mentioned Northern Rock—and we went on to the nationalisation of banks, and then to quantitative easing on a scale that we had never seen before or could even comprehend, the scandalous practices have not gone away: they have continued. As my right hon. Friend said, the bonuses have continued, fraud has continued, LIBOR interest rate fixing has been investigated, and we have seen tax evasion and money laundering. This is happening even when the bankers are in full public sight. At a time when the eyes of the country are on them, they are still manipulating the system.

I find it astounding—I have raised this in the House three times, and 10 days ago I received a letter from the Minister about it—that when quantitative easing was introduced, we discovered through press reports that bankers even then sought to profiteer from it. The letter from the Minister confirmed that at one point the Bank of England had to intervene and withdraw from the market because there were suspicions of price fixing and manipulation of the market during quantitative easing.

[Kelvin Hopkins]

I am very interested in and admire what my hon. Friend is saying. There is a suggestion that the recent surge in share prices is simply the effect of quantitative easing and that it bears no relation to what is happening in the real economy.

[John McDonnell]

Exactly. I accept that point, but the relatively simple point that I am trying to make is that a group of people who have, in effect, been caught with their hands in the till are trying to use the money that has been used to bail them out to profiteer at the taxpayers’ expense. That is staggering and it says to me that regulation will not work with these institutions. Even when they are absolutely shamed, subject to public opprobrium and under the acute gaze of the public eye, they still try to profiteer.

[Steve Baker]

This is the point that I have been trying to make. Every time the state sets up these dreadful institutions, people are able to profiteer. If we tell people that we are creating new money out of nothing and giving it to them in exchange for Government bonds, of course they will seek to make a profit. The thing to do is to make sure that they have institutions within which they can make a profit justly.

[John McDonnell]

There is another route and I will come on to it. The hon. Gentleman and I agree about the problem, but there is another solution. As he has said, regulation does not work with these institutions or the motivation to profiteer. I do not think that the new regulatory system—whether it be subject to a ring fence, an electrified ring fence or leverage ratios—will work. The reality is that as long as the banks are in private hands and have profit as their motive, they will aim to get around a regulatory system. The hon. Gentleman has mentioned how they will dig under and go around the fence. Like a chicken finding its way into the coop, they will always find a way. The regulatory regime proposed by the Bill is complex and, to be frank, virtually unenforceable. I think it will be almost impossible to execute the attempt to impose a firewall, as the Good Banking Forum concluded recently.

I agree with the hon. Member for Caithness, Sutherland and Easter Ross that we need to revisit the question of what role banks should play and what people want. I think that people and society want and need banks in which they can safely deposit their money and savings and which lend responsibly and provide credit to finance investment growth across the country. That is not what this Bill will secure and it is certainly not what is happening at the moment. The larger banks have an estimated £6 trillion at their disposal, but just £200 billion —3% of the overall total—is used to fund investment in this country’s industry. I do not think that a system of honest, responsible banking or long-term investment is deep in the culture. That may well have occurred at the earliest stages of capitalism but, many crises of capitalism later, we should have learned the lesson that this system is not working.

I believe that the only way to secure probity and to ensure that people’s funds are safe and secure and that we can invest in our economy in the long-term to create jobs is through a publicly owned and democratically controlled banking system. Of course, we own banks at the moment—we nationalised them. After Northern Rock, I remember standing up in the House to urge the then Chancellor of the Exchequer, my right hon. Friend the Member for Edinburgh South West (Mr Darling), to nationalise the banks. The next day he said that he had nationalised three of them. I told him that I had been right and he said, “Well, you were bound to be right at least once in 30 years.” We nationalised those banks, but we have no control over them. They are not democratically accountable to Government, workers, investors or the wider community. That is why they are not investing and why people cannot secure loans.

We should take full ownership of the larger banks. We already own Northern Rock, RBS and Bradford & Bingley and a large part of Lloyds. We should take public ownership and control of the UK-based operations of Santander, Barclays and HSBC, and we should create a unitary industry. That would enable us to control investment, secure savings, stop the paying out of large bonuses and ensure that any surpluses are returned to the public by investing in the public good. That is secure and safe banking, which is what I thought was the House’s objective.

What would full nationalisation cost? An excellent piece of work for the Fire Brigades Union by Michael Roberts and Mick Brooks, which was published and launched in this House only a week ago, estimates that it would cost £55 billion at current market rates. That is 3% of GDP. We could ensure that there would be no need for any cash exchanges and could simply swap shares for bonds, thereby saving the public purse a large amount of money. The Co-operative bank and mutuals would continue to operate as alternatives, as would credit unions, because we have confidence in them as safe and secure banks. We could also—we called on the previous Government to do this—remutualise those banks that transformed themselves from mutuals into limited companies.

In that way, we could achieve the stated objectives of the Bill not through regulation, but through public ownership and control. I do not believe that regulation will work. The system has gone too far and the profit motive has overridden any sense of value or judgment in the City. Unless we take action now, we will be back in a limited number of years to deal with another banking crisis. To be frank, we have not even talked tonight about the shadow banking process, the scale of the transactions that take place within it or how we should deal with it. That is beyond all our controls at the moment.

I will finish by saying who we are taking action for. We are doing it for my constituents, some of whom are threatened with evictions or job losses or are having their welfare benefits or their services cut, all because of an economic crisis that they had nothing to do with. They did not cause it and did not contribute to it. It was caused deep in the financial sector of this country and across the world. My constituents deserve not reform of the banking sector in this country, but an absolute transformation of it, based on public ownership and democratic control.