Finance Bill

Yes, my Lords, and certainly every GP—maybe even some Members of your Lordships’ House. I shall move on to a slightly more macro aspect. Alan Greenspan, the former chairman of the Fed, has much to answer for. He encouraged the creation of the credit bubble in America and even consciously filled it with toxic credit. He admitted as much in his autobiography, published last year, a few weeks before the crisis burst. He said: "““I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk … But I believed then, as now, that the benefits of broadened home ownership are worth the risk””." It is not just that Mr Greenspan’s reputation must be declining by the month; more seriously, it means that confidence in the judgment of central bankers has taken a blow. The reassurance of politicians and, sadly, central bankers will not in itself stimulate economic activity. The credibility of politicians in these circumstances, in so far as it ever existed, probably evaporated in the 1930s. To make the same mistakes today merely gives a contrary message to what is intended. I have watched with fascination the reaction of Wall Street to the various attempts made at reassurance, whether by the Treasury Secretary, the chairman of the Fed or the White House. In virtually every case, markets moved in the opposite direction to that intended. It is clear that Fed chairman Ben Bernanke has been under huge pressure to avoid a recession, at least until after the presidential election in November. In my view, he cut interest rates far too fast and too much. The 2 per cent Fed rate is a negative rate of interest. We have seen in Japan the economic stagnation that resulted from such unwise interest rate policies. After some 17 years of adjustment to the bursting of Japan’s bubble, the Nikkei index is today 67 per cent below its all-time high in December 1989. Low interest rates fail to stimulate industrial investment—noble Lords will remember Keynes’s famous analogy when he described interest rate cuts to stimulate business in a time of depression as, "““pushing on a piece of string””" —because businessmen will invest only if they have confidence in the demand for the product of that investment. The disadvantage of low interest rates is that they can tempt consumers into incurring further debt—we should recognise that debt is a four-letter word. This is precisely what is not needed in a recession that has been caused by the bursting of a bubble filled with toxic credit. The Bank of England’s judgment has been much sounder. I can see no reason to reduce in coming months the current 5 per cent rate. If inflation continues to increase, it may be necessary to raise the rate. Equally, the ECB has been right to raise rates to 4 per cent. Again, they may have to go higher. One of the problems that both Governments and central bankers always underestimate is the lag between macroeconomic disasters and the time that the consumer stops shopping. Let us remember also that the richer a country, the bigger the proportion of expenditure that is discretionary and thus the greater the potential fall in demand. It should have been obvious that economic events such as a credit crunch and an explosion in commodity prices have an esoteric content, with consequences that are not at once apparent to the punter in the street. This lag effect is one of the most important factors in economic history. Let us remember that, following the September 1929 Wall Street crash, the Dow did not hit bottom until July 1932, by when it had lost 89 per cent of its value. Today, the economic outlook is alarming. There still seems to be reluctance in the Government to face up to this. This week, Sir Robert Wilson, until recently the boss of RTZ and one of Britain’s most distinguished industrialists, told the AGM of the Economist Group: "““We are on the threshold of a particularly nasty recession””." So what can we do about it in Britain? First, of course, we have to maintain the independence of the Bank of England. Secondly, there must be cuts in discretionary expenditure by the Government, particularly in housing. It is the job of a Government to see that citizens are decently housed; it is not their job to expand home ownership. We already have 70 per cent home ownership and it is arguable that that is enough. It will be necessary to increase government borrowing—I can see no way around that—probably by as much as 5 per cent of GDP. That means that we must not go on borrowing off balance sheet, which is as dangerous in the public sector as it is in the private sector. Taxes should not be increased overall, but nor should they be cut. The 2 per cent postponement of the rise in fuel tax is absurd, because 2p on a gallon is within the variation between one pump and another. Fiddling around with that is tokenism. In addition, we must have the courage to take more strategic decisions on infrastructure, particularly the building of a new generation of nuclear power stations. If the Government had not spent 10 years making up their mind, we could be about to see the commissioning of a dozen new nuclear power stations in this country. We must try to attract and welcome investment into the UK from the massive sovereign funds that have built up in the oil-producing countries. There will be protectionism to discourage that in both the United States and in some countries in Europe, particularly France, but we should not play that game. Finally, we should do all that we can to get the Doha trade round into force. It will be hard, but it is far more important and much more certain in its results than that other priority about which the Government bang on: negotiations on global warming.