Banking Reform
Debate between Michael Meacher and John Redwood(13 years, 11 months ago)
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Mr Michael Meacher (Oldham West and Royton) (Lab)
I beg to move,
That this House, concerned that no action has so far been taken which would prevent a recurrence of the financial crash, calls upon the Government to establish a clearing house for approval of all financial derivatives and to set in place alternative mechanisms to remove the implicit taxpayer guarantee, other than to purely deposit-taking banks, in the event of any future banking collapse.
The motion is on the Order Paper through the good offices of the Backbench Business Committee, and I take this opportunity to congratulate the Committee and its Chair on the way in which, in my view, they have already opened up Parliament to valuable new procedures and paved the way for important debates that might otherwise not have happened. I hope and believe that this might be one of them.
I begin with the words of the managing director of the International Monetary Fund, Dominic Strauss-Kahn, who a few weeks ago told Stern magazine that he thinks a second financial crisis is almost inevitable given the paucity of reform and the vulnerability of the financial system, and that next time round it may well be impossible to persuade taxpayers to fund bail-outs. I do not believe that is an exaggeration, and the latest travails of the eurozone serve only to underline those fears.
It is worth noting that we in the UK have more bank lending as a proportion of our gross domestic product than even the Irish—some £7 trillion, which is five times our GDP. If we are to prevent a repetition of the financial crash, it is clear that its causes must be identified and dealt with by appropriate means. I argue that those causes, in the main, include: an over-lax monetary policy that encouraged an excessive leveraging culture; extreme light-touch regulation that left too much to the markets; the development of a vast global market in credit derivatives, which were not well understood, and which Warren Buffet, the world’s second richest man, notably described as
“financial weapons of mass destruction”;
the role of enormous bonuses, which drove recklessness; a banking structure so over-concentrated in the lead banks that when disaster struck, they were judged to be too big to fail, with catastrophic consequences, as all hon. Members well know, for national debt and the budget deficit; and a banking model that linked speculative investment with retail deposit taking, both of which were protected by an implicit taxpayer guarantee. I hope that that description is accepted on both sides of the House.
All those causes need to be dealt with, and yet none has been. Given the limited time, of which I am very conscious, I want to concentrate on the most important. First, financial derivatives are a perennial candidate for causing the next crisis, because they add opacity and leveraging to the financial system. Credit default swaps, a £65 trillion market, and collateralised debt obligations, which are one of the most common derivatives, urgently need regulation.
Mr Meacher
I will give way to the right hon. Gentleman, but having heard what Mr Speaker said, I am reluctant to take more interventions, precisely because this is a very short debate—only three hours—and many wish to speak. We already have a six-minute limit, and I have too often been at the back of the queue, unsuccessfully waiting to be called at the end.
Mr Redwood
I am grateful to the right hon. Gentleman, and I shall refrain from intervening at great length for the very reason he gave. Will he explain to the House why over the past decade the UK banking regulator allowed the huge expansion of balance-sheet risks of all kinds, and why it did not demand more cash and capital?
Mr Meacher
I mentioned light-touch regulation in the City of London, which we have had since the Thatcher era and through the Blair era. I believe that that needs to end. We want not excessive but adequate and proper regulation, and for the past three decades, in the so-called neo-liberal era, we have not had it.
Derivatives should be approved by the regulatory authority before they can be issued. At that stage, they can be either prohibited or accepted, perhaps with certain conditions attached. The key point is that transparency is essential. It is worth noting that the recent Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to achieve that by requiring that all derivatives are traded on public exchanges.
Linked to that is the role—or perhaps the scandal—of the credit rating agencies in allocating a spurious status to some highly dubious securities. Light-touch regulation in this country has evaporated into virtual deregulation. Credit rating agencies were paid by the very institutions whose credit worthiness they were supposed to be assessing. By granting the highest rating, as they so often did, they made it easier for the banks that were securitising and further repackaging debt to create the greatest possible number of securities with the lowest possible regulatory cost. That practice should never have happened, and I believe that it should always be prohibited where there is a serious conflict of interest, as there was in that case.
Finance Bill
Debate between Michael Meacher and John Redwood(14 years, 4 months ago)
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Mr Redwood
Once again, the hon. Gentleman is not listening. I was explaining that the coalition Government have made no change to the capital expenditure line that they inherited from the outgoing Government. What they will do is get more bang for the buck—to get more spending on construction, relative to the total investment line in the Budget. On the radio this morning, I was able to satisfy the other people in the discussion; the independent forecaster’s overall forecasts for the economy say that investment is going to rise. There will be an overall increase in investment because more homes will be built over the next five years than the pathetically low figure that was reached under Labour. There will be more investment in housing improvement, and more investment by the private sector. That more than offsets the decline in the investment programme in the public sector inherited from Labour.
Mr Meacher
The right hon. Gentleman’s fantasy that there will be a continuation of or an increase in capital investment is completely belied by the OBR forecast on page 90 of the Treasury Red Book, which shows that net investment will fall from £49 billion in the current year to £21 billion in 2014-15. That is a colossal drop.
Mr Redwood
Those are Labour’s figures for the public sector. I have just told the House that I am talking about total investment across the economy. Overall, the right hon. Gentleman will find in the Red Book that it is anticipated that the rises in investment elsewhere will more than offset Labour’s cuts in the capital programme, which we have decided to live with. I should also tell him that he is quoting the net line when he should be quoting the gross line. In other words, he is knocking off the depreciation, whereas we are interested in the total spend—the gross line, which is much higher than the figures that he has inadvertently, I think, given the House in error.
Mr Meacher
How can the right hon. Gentleman believe that private investment will remotely compensate for this enormous fall in public sector net investment, given that household consumption is falling, particularly with the increase in VAT, the banks are not lending, and export markets are fading because of the situation in the eurozone? Why should the private sector invest in those circumstances?
Mr Redwood
That is what I have been explaining to the right hon. Gentleman. We are in this position because everything has been so awful. The private sector has just been through a couple of years when it has invested practically nothing because companies could not get any money and were not making much profit. Now, profit margins are growing, there is a bit more money around and they are getting more confident for the future.
It would be much better if Labour Members got behind their voters and constituents, who want the jobs that we wish to see created, got behind the recovery that everybody else is forecasting, and started to live in the real world. They presided over the collapse. Throughout their years in office, manufacturing fell, whereas in the Tory years before that, manufacturing rose. We want to get manufacturing rising again. From that point of view, the one good thing that they did was to preside over a collapse in the value of the pound. They probably allowed it to collapse a bit too much, and it is beginning to rise again under the new Government. That gives those in manufacturing a huge opportunity to make better profit margins, to invest more money, and to produce more. That is exactly what they are beginning to do, and there will be a beneficial effect.
Mr Redwood
A shift in the relative position predicted by someone else does not necessarily mean that manufacturing is going to decline. The figures in the official forecast, and I think in most sensible forecasts outside, show that manufacturing will recover from the very low base that it reached in 2009-10. That is what is needed, and we need to have policies that do just that.