Money Creation and Society

Debate between Steve Baker and Michael Meacher

Thursday 20th November 2014 Commons Chamber

[Mr Meacher]

I very much agree with that argument. Again, I assure the hon. Gentleman that I will return to that matter later in my speech. He is absolutely right that the reason is the greater returns that the banks can get from the housing and rental sector. Our rental sector, which is different from that in Germany and other countries, is the cause of that.

It is only this last 16%—the 8% lent to businesses and the 8% to consumer credit—that has a real impact on GDP and economic growth. The conclusion is unavoidable: we cannot continue with a system in which so little of the money created by banks is used for the purposes of economic growth and value creation and in which, instead, to pick up on the point made by the hon. Member for Na h-Eileanan an Iar (Mr MacNeil), the overwhelming majority of the money created inflates property prices, pushing up the cost of living.

In a nutshell, the banks have too much power and they have greatly abused it. First, they have been granted enormous privileges since they can create wealth simply by writing an accounting entry on a register. They decide who uses that wealth and for what purpose and they have used their power of credit creation hugely to favour property and consumption lending over business investment because the returns are higher and more secure. Thus the banks maximise their own interests but not the national interest.

Secondly, if they fail to meet their liabilities, the banks are not penalised. Someone else pays up for them. The first £85,000 of deposits are covered by a guarantee underwritten by the state and in the event of a major financial crash they are bailed out by the implicit taxpayer guarantee—

[Steve Baker]

rose—

[Mr Meacher]

Let me finish, and I will of course give way.

The banks have been encouraged by that provision into much more risky, even reckless, investment, especially in the case of exotic financial derivatives—

[Mr Meacher]

Members are beginning to queue up to intervene, but let me finish my point first.

The banks have been encouraged even to the point at which after the financial crash of 2008-09 the state was obliged to undertake the direct bail-out costs of nearly £70 billion as well as to provide a mere £1 trillion in support of loan guarantees, liquidity schemes and asset protection arrangements.

[Steve Baker]

I wholly agree with the right hon. Gentleman. The moral hazard problem is absolutely enormous and one of the most fundamental problems. However, the British Bankers Association picked me up when I said it was a state-funded deposit insurance scheme and told me it was industry-funded. I think the issue now is that nobody really believes for a moment that the scheme will not be back-stopped by the taxpayer.

[Mr Meacher]

As always, I am grateful for the intervention from the hon. Gentleman—let me call him my hon. Friend, as I think that on this issue he probably is.

Financial Services (Banking Reform) Bill

Debate between Steve Baker and Michael Meacher

Monday 11th March 2013 Commons Chamber

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

We have had an interesting and thoughtful debate, which has concentrated on detail, but I think it is worth putting it into context. Despite the banks triggering, as we all know, the biggest economic crisis since the 1930s, with the Government having to provide nearly £1 trillion in loans, guarantees and asset protection schemes to ailing banks, it has taken five years to reach this point of proposing reform—and even then, by any standards, this Bill is woefully short of what is urgently needed to prevent a recurrence of financial collapse and to produce a safe and desirable finance sector. I have a lot of sympathy with my hon. Friend the Member for Bassetlaw (John Mann) when he said, “Is this it?”

First, the Bill’s central mechanism—ring-fencing between the investment and retail arms of the banks—is all too likely to be subverted by the Machiavellian skills of the City in regulatory arbitrage. The Minister mentioned that, but rather slithered over it, I thought, by saying that he had confidence that it would work. The only evidence he quoted in favour of that was the opinion of Sir John Vickers. Since it was his proposal, it is not surprising that he believes it will work. Historically, however, all the evidence is that Chinese walls will be circumvented.

Let me deal with the Parliamentary Commission on Banking Standards. One has to ask, as has been asked a number of times already in this debate, why after five years of delay this Bill is being rushed through just a few months before the Government’s own appointed commission actually reports? The Tyrie banking commission has made it very clear that it strongly advocates electrification of the ring fence. The Chancellor initially rejected that until the commission’s chair, the highly respected hon. Member for Chichester (Mr Tyrie), and Lord Lawson threatened to table amendments to force the Chancellor’s hand to ensure that the full sanction of separation remained in the Bill. Finding his hand forced, the Chancellor then made the absolute minimum concession he could get away with, namely giving regulators the power to dismantle an individual bank that tried to undermine the ring fence, but not a more general power to apply full separation across the industry. Even after that, dubiety remains because the Bill does not say what precisely is to be ring-fenced. Savings, for example, can certainly be placed in a variety of exotic securities.

The Government have also succumbed to the banking lobby in permitting banks to locate simple derivative products within their retail operations. As my hon. Friend the Member for Nottingham East (Chris Leslie) pointed out, that can be, and indeed already has been, uncomfortably extended. The Government’s retreat can only have the effect of opening the door to other forms of speculative activity to nest inside retail banking.

There are other uncertainties. Let me give just one example. Let us suppose that funds are transferred from a ring-fenced to a non-ring-fenced entity via a foreign subsidiary or affiliate in a place where there is no such separation. Is that a breach of the ring fence? How does anyone actually know? I presume that we will not rely on the good intentions of bankers.

The real problem with the Bill, however, is that it does not deal with the fundamental causes underlying the reckless and destructive banking that has done so much damage. It is preoccupied with investment banking, and it offers no relief from those suffering from the abuses in retail banking. As many people have mentioned, payment protection insurance, money-laundering, the fixing of endowment mortgages and interest rates, and pension mis-selling are just some of the rackets that have been run by retail banking. Nothing in the Bill offers any reform.

Many of those abuses, on not only the investment but the retail side, are fuelled by the incessant stock market demands for higher short-term returns, as well as the profit-related pay of executives and traders. Even when the European Union tried to limit the latter by means of bonus caps, the Chancellor went out of his way to stop it without managing to secure a single ally in any of the other 26 member states. I can only say that the banks certainly do not provide half the annual donations to the Tory party without expecting a very big return.

However, even more important than the ring fence and the ambiguities relating to the status of so-called simple derivatives, which are anything but simple—for example, there is the obvious question of whether currency hedges can be sold to small businesses from within the ring-fenced operations—is the leverage ratio. As has been mentioned, the Vickers recommendation was for capital of 4% with a lending ratio of 25:1. The Chancellor, in yet another very big concession to the banks, dropped that to 3%, opening up a 33:1 ratio. In its interim report published today, the Tyrie commission—rightly, in my view—rejected that as being wrong-headed and unnecessarily risky, precisely because of the excessive size of the finance sector in our economy, relative to the size of those in other economies and, indeed, absolutely. I think that that unwise concession ought to be overturned in both Houses.

This is not, I think, a great Clark-Javid Bill. It is a mini-Bill which, unforgivably in my view, entirely ignores the wider banking framework. The big four—and this, surely, is the background to the Bill—have let Britain down badly. We need to transform the whole banking culture, and end its present obsession with property, overseas speculation, offshoring and tax avoidance. By being too big to fail, the big four exacerbate moral hazard; because of their size and weight they choke competition and new entrants to the market; and they have manifestly failed to keep adequate funding flowing to business. They should be broken up, initially by a clean break between the investment and retail sides—on the basis of all the historical evidence, I think that a ring fence is highly unlikely to work—and beyond that by a wider restructuring.

What the country really needs is a national investment bank supported by a range of smaller specialist banks, focusing on infrastructure development, science and technology, small and medium-sized enterprises and a low-carbon economy—to mention only some—together with a regional spread of banks along the lines of the German Mittelstand. The other essential requirement is the regaining of public supervision of the money supply. As the Minister mentioned in his opening speech, the total gross lending of the banking sector has been about £7 trillion a year, five times as much as GDP. What the Minister did not say, however, is that only about 8% of that has gone towards productive investment. The banks have used their virtual monopoly over domestic credit creation—amounting to some 97%—largely to fuel successive property booms and speculative foreign ventures. That is a basic reason for the fact that the country now has a fast-rising and unsustainable deficit in traded goods, which last year amounted to more than £100 billion —7% of GDP.

[Steve Baker]

The right hon. Gentleman has raised a point that many people fail to appreciate: the banks lend money into existence and into housing, partly because they are encouraged to do so by the risk weightings in Basel. Does he agree that, at least in that respect, the money supply tripled because regulators encouraged banks to do it?

[Mr Meacher]

I do agree, and I know that the hon. Gentleman believes that banks have far too much power to create money out of nothing. He and I may not agree on exactly how that can be dealt with, but it certainly needs to be dealt with.

Tax Avoidance and Evasion

Debate between Steve Baker and Michael Meacher

Thursday 13th September 2012 Commons Chamber

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

I beg to move,

That this House has considered the matter of tax avoidance and tax evasion.

I would first like to thank very sincerely the Backbench Business Committee for giving me the opportunity to raise this issue for debate. Tax avoidance and evasion is a cancer in Britain’s society today. The Prime Minister was right to condemn it as morally wrong and the Chancellor was right to condemn it as morally repugnant. The problem is that the Government’s actions to deal with it have been feeble and do not match those words, if indeed they are not downright evasive, as I shall show.

The extent of tax avoidance and evasion is much disputed, but even the Government admit that, along with uncollected taxes, it reached £42 billion a year in 2009, which is equal to one third of the entire UK budget deficit. Spread over the past six years, it amounted to £228 billion. The Tax Justice Network believes that the true figure might be up to three times higher. For the purposes of this debate and this argument, let us accept the Government’s figure at the moment—it is certainly big enough.

[Steve Baker (Wycombe) (Con)]

Will the right hon. Gentleman give way?

[Mr Meacher]

I am always ready to give way to the hon. Gentleman on these issues.

[Steve Baker]

I congratulate the right hon. Gentleman on securing the debate; it was an honour to join him in bidding for it.

I wanted to check where the right hon. Gentleman was getting his figures from. I am looking at the 2011 tax gap document from Her Majesty’s Revenue and Customs. It gives a figure of £35 billion for 2009-10. Where did he get the figure of £42 billion from?

[Mr Meacher]

I got it from the same source. I thought that the figure for 2008-09 was £42 billion. I shall write to the hon. Gentleman later. The average over the period is, I think, £38 billion and I am sure that the level reached £42 billion.