Financial Services Bill

Lord Peston Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Lord Blackwell]

My Lords, I apologise to the House that I was unable to contribute to the Second Reading debate. The fact that all these amendments recognise the interlinking of financial stability policy and the wider economic objectives is a major step forward. However, the amendment proposed by the noble Lord, Lord Eatwell, is mistaken in its wording. It is a fallacy to believe that monetary policy and financial policy can be conducted orthogonally, independently of general economic and fiscal policy. The two inevitably interact, and it is fallacious to believe that we can have a government Chancellor of the Exchequer in one corner deciding on a fiscal policy and an independent bank deciding on monetary policy in complete isolation—and, if necessary, disagreeing and conducting an alternative economic policy.

We are in this situation only because the previous Government separated monetary policy from the independence of the Bank of England in 1997. Until that point, the assumption was that the Chancellor of the Exchequer and the Government were accountable to Parliament and to the electorate for economic policy in the round. The Governor of the Bank of England certainly had a crucial role in advising the Prime Minister and the Chancellor of the Exchequer on monetary policy.

At the end of the day, however, a common policy was agreed that ensured that monetary policy and fiscal policy were aligned to the same objectives. They might be the right objectives, they might be the wrong objectives, but at the end of day the Government and the Chancellor of the Exchequer were accountable to Parliament and to the electorate for those decisions. The idea, as the noble Lord said, that at times you want a Bank of England or a financial policy committee to pursue a policy that is at odds with government policy is mistaken and misrepresents the way in which these functions ought to work together.

I therefore much prefer the wording of my noble friend’s amendment, Amendment 35A. Although I agree with much of what the noble Baroness, Lady Kramer, has said, my noble friend’s amendment has the great advantage of simplicity, and I support him in that.

[Lord Peston]

My Lords, I criticise both Amendments 35A and 35 on the grounds that they are both illogical and make no economic sense, to put it as bluntly as I can. I am amazed, however, at the intervention by the noble Lord, Lord Blackwell, just now, because he comes to the wrong conclusion. How can he support Amendment 35A on the basis of his analysis of interlinking?

Let me start with Amendment 35A. If you asked anyone why you would want to achieve what is in paragraph (a), the answer would be, “Because it makes the economy work better”. It is not wanted for its own sake, as far as I can see, because it involves a total confusion of means and ends. Therefore, sensible economics would delete the words—a favourite activity of my noble friend Lord Barnett and me—“subject to that”. All that is required is the word “and”—forget the “subject to that”.

The same applies to the amendment in the name of the noble Baroness, Lady Kramer, et al. What she wants to achieve is desirable; no-one would doubt that. However, if we ask, “Why do you want to have a stable and sustainable supply of finance to the economy?”, the answer is, “Because it makes the economy work better”. We cannot assume that the Government’s economic aim is to make the economy work worse; quite the contrary. My view is therefore that I would be reasonably happy with either of the amendments if “subject to that” was taken out, but in no other circumstances.

If I can, I will go back to the Monetary Policy Committee, which the noble Lord, Lord Barnett, and I have criticised for years now because of the “subject to that” clause. It gets around this dilemma by ignoring “subject to that”. I have said in this House before that in my judgment the MPC breaks the law under which it was set up, because there are now real inflationary dangers. You do not have to be a Friedmanite to say that expanding the quantity of money, which is what monetary easing is, is immensely dangerous when it comes to the future inflation rate of this economy.

Somehow or other, most members of the MPC—I am not certain that they all do—ignore that bit of the subject, go ahead with quantitative easing and forget their inflation objective, even though they are not achieving it. These two amendments might well be equally innocuous. Maybe in practice the whatever it is called—I am still having trouble with the acronyms but I think I am talking about the FPC—will become totally cynical and forget the subject of that bit at certain critical times. It would be better if the three little words “subject to that” were taken out; and then, to be perfectly honest, I do not care which amendment we agree to.

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[Lord Peston]

Before the noble Lord goes on with his agreement, which I am looking forward to, I still have not heard any argument from him about “subject to that”. What he has to say requires the word “and”, not “subject to that”. There is no way that “subject to that” makes any sense. To give him an example, could he imagine the head of the FPC being interviewed on the “Today” programme? The first question is, “What are you doing?”. “I’m contributing to the stability objective.” “Oh, and, incidentally, do you support the Government’s economic policies?” “Oh, no.” Can you imagine him saying, “Oh, no”? I cannot imagine any circumstances in which he would say, “Oh, no”. I cannot even imagine any circumstances—unless he wants to be regarded as insane—in which he would say, “I am unable to answer that question”. His only possible answer to the question “Do you support the Government’s economic policies?” is “Yes”, which is why the word “and” ought to be there and not “subject to that”.

That is why I regard the view that the Treasury took on the MPC as fudging the thing. I am afraid the ex-Treasury people have to recognise that that is what the MPC does. Could you imagine the Governor of the Bank of England saying, “I don’t support the Government’s economic policies”? We are not discussing the MPC. We are discussing the FPC—I always forget its name. Why does the Minister not use the simpler language, rather than “subject to that”, which is totally spurious?

[Lord Sassoon]

My Lords, as I was coming on to say, I agree with the noble Lord, Lord Eatwell, which is very much to the point of the noble Lord, Lord Peston. The FPC has to, and should, be able to lean against the wind—in appropriate circumstances—which is why the FPC’s primary objective is and should remain financial stability. It is right that it is “subject to that” primary objective that the FPC should seek to support the Government’s economic policy. The wording picks that up in the way that an “and” would not. We will have to disagree on that. I have given examples of where I believe that the FPC will interpret the language we have used appropriately.

Although I do not want to go too far into MPC territory, it is relevant to look at the MPC because there are examples one can draw out from its analysis to suggest that language is used in the MPC context in a very similar way to the way I would expect it to be used in the FPC context. I draw the attention of the noble Lord, Lord Peston, to what deputy governor Charlie Bean said in February 2012: that if the MPC,

“had chosen to run a substantially tighter monetary policy, then that would only have served to depress activity and raise unemployment even further … it would also make the task of fiscal consolidation and de-leveraging even more challenging. And by providing a gloomier climate for business, it would also inhibit investment and slow the necessary re-balancing of our economy towards manufacturing and internationally tradable services”.

Although this is not the time to go into it further, it is possible to argue—and the evidence is very much there—that the MPC is affected by the wording in the same way in which the suggested wording of the Government’s amendments will bite on the FPC. I am grateful to the noble Lord, Lord O’Donnell, for further illuminating some of these issues.

The three situations in which the noble Baroness, Lady Valentine, quite rightly postulated that the new secondary objective needs to work were good times, crisis and uncertainty. I can only say that I completely agree with her and that the wording that the Government propose strikes the right balance and will take account of all those scenarios. Of course, we are not relying solely on the secondary objective for growth, but I am sure that she understands that.

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I asked for three things in my maiden speech. I asked for the financial stability objective to have growth related to it, and I am glad that the Chancellor has responded to that. I suggested that we set up a Joint Committee of both Houses, chaired by the Treasure Select Committee, and I am glad that that now has a use. My third request, which I would like the Minister to respond to, is for more resources for the Treasury. Judging by the number of committees and inquiries it will have to deal with, that is more urgent than ever.

[Lord Peston]

My Lords, the background to my few remarks is the text:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

I am delighted that some of the better educated—no doubt those who were taught economics—are well aware of the provenance of this remark, which was by Adam Smith. He would not have been in the least surprised by what happened with LIBOR or by all the other conspiracies that, if we had enough time, I could tell you about, including the price fixing that still goes on in our economy.

Turning to my main remarks, I have a feeling that I will be in somewhat of a minority. I found what the noble Lord, Lord Sassoon, said yesterday, in announcing the Government’s proposal for what we will call the Tyrie inquiry to be totally unconvincing. The public require an objective inquiry which they can believe without a shadow of doubt is not a stitch-up. I do not believe for one moment that the remit given to the chairman of the Treasury Select Committee enables that inquiry to take place in any way whatever. I speak for myself in saying that, although I regard myself as totally objective and totally honest, if I were asked to be on that inquiry I would refuse because I do not believe that the public want people who are involved inside to be conducting it. We have very much to face up to that. I might ask the noble Lord, Lord Sassoon, why, if he is so anxious to keep politics out of things, does he make political remarks in almost every address he gives to this House—but that is simply me being my usual acerbic self.

Am I right, that the Prime Minister—given that this is a matter of absolute national importance—did not consult the Leader of the Opposition in deciding how we should go forward? The Government ought to backtrack and try to find a consensual way of going forward that would involve the Prime Minister talking to the Leader of the Opposition. I am not saying that we would definitely get a good outcome to that but I am absolutely convinced that that is the approach that ought to have been adopted.

I want to say a brief word about how speedily anything can happen. We are going to rise in three weeks’ time and, in the case of our House, not come back until October. As far as I can see, that means that any inquiry will certainly have to be short—whether it will be sweet, I do not know. This notion that it is all going to be done very quickly I just do not find believable, whoever does it. I have a holiday booked so I am not very keen on coming back earlier but we may have to. Again, perhaps the Minister can talk to us about the speed of the inquiry.

Perhaps I might ask another practical question: am I right that the corrupt practices on LIBOR have stopped? Do we know for a fact that they have definitely stopped? Perhaps the Minister could tell us. I hope that they have definitely stopped.

What is unavoidable is that we have to look at what the regulators have been doing. An inquiry that does not do a full examination of the regulators themselves would simply not be worthwhile. We are told that neither the FSA nor the Bank had the power to investigate the setting of LIBOR. I would have thought that the head of the FSA and, even more, the governor could have sent for some of the people involved with LIBOR for an informal chat—forgetting about what their powers might be—just to find out what they were doing, looking for some enlightenment. I find it astonishing that we are being told that neither the governor nor the main regulator knew about LIBOR, and did not think to apprise themselves of what went on, whatever they thought their formal powers were. I must say, if I had been one of them, I would have done that—perhaps that is why I have never been appointed to anything.

I have also been going through the nightmare of rereading your Lordships’ Second Reading debate, in which I was unable to take part. What is absolutely fascinating is that the one acronym that never appears in any noble Lord’s speech is LIBOR. There we are, all the great experts, and what we are really doing—as always happens—is fighting the battles of the past. Most of the speeches were looking at accounting for the financial crisis that started a few years ago and discussing a Bill to prevent that financial crisis ever happening again.

The great Chicago economist Frank Knight—who was very much on the right, I might add—wrote a classic work called Risk, Uncertainty and Profit. He said that risk was what you did not know was going to happen but that it was measurable, due to probability and that sort of thing. He argued that what really mattered was uncertainty, which you know about in an almost contradictory way: you know that what is really going to happen is something that is totally unexpected. The problem was how to prepare for it—how to expect the unexpected. He never found a satisfactory answer to that but he did say that the free market capitalist system was at least the best way of adapting to those unexpected shocks when they occurred.

This is where I disagree very strongly with the noble Lord, Lord Kerr, who said that what we have to do is make sure that LIBOR does not happen again. That is precisely to get it wrong: LIBOR is not going to happen again; something different is going to happen and we need a system that prepares us for dealing with something different. I do not think any of what the Government are proposing covers that.

En passant, the noble Viscount, Lord Trenchard, said that light-touch regulation was discredited. I have to tell him, I would be a light-touch regulator if I were one, because I do not believe that the role of the regulator is to run the businesses that it is regulating. That is my concept of light-touch. I believed it then and, if you accept my concept of light-touch, I believe it now. One place I would like us not to go to is the regulators essentially running the banking system, and I hope that the noble Viscount agrees with that.

Going back to the issue of the Joint Committee, it should not be ad hominem, as I think has been said; it is nothing to do with Andrew Tyrie. The real question is: should the Treasury Select Committee in the other place, which deservedly has a tremendously high reputation, be involved in this in any way? I do not want to go down the path of the Joint Committee; I would much rather go down the path suggested by my noble friend Lord Eatwell. I would be interested to know if other noble Lords know anything about this, but I think it would be a terrible mistake, in trying to maintain the very high reputation of the Treasury Select Committee, if it got involved in this inquiry. That would be a mistake beyond belief.

We end up with two possibilities. One is that we divide and test the opinion of the House on what my noble friend Lord Eatwell proposes; he will decide this. The other, which is what I would like to see happen—and I know I am being immensely naive here and there is probably nothing the Minister can do to help us—is that the government proposals are withdrawn and the Minister’s right honourable friend the Prime Minister and my right honourable friend the Leader of the Opposition do what I suggested earlier: get together and see if they cannot come to us with some proposals. This is a matter of national importance.

The noble Lord, Lord Carlile, will notice that I have not said a word about prosecuting the guilty because that is not my subject. As an atheist, I believe that if we do come back to this planet, I intend to come back as a Queen’s Counsel and certainly not as an economist. I really do believe that in the national interest the leaders of both main parties should get together and come back to us with some jointly agreed proposals.

[Lord Framlingham]

My Lords—