John Redwood’s speech during the Opposition day debate on the economy

Mr. John Redwood (Wokingham) (Con): Let us first of all get rid of some of the nonsensical soundbites that the Government offer in substitute for serious analysis and debate. I am glad that the Government no longer talk of “no more boom and bust”. Even they see how absurd that is, but it is disappointing that they still tell us that they made the Bank of England independent. As my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) explained, the Government did grave damage to the Bank of England, which we highlighted at the time and continue to highlight.

In the report by the group I chaired, which the Govt often misquote, we made a big thing about how the Bank of England was gravely damaged in 1997, which made it very likely that when a crisis struck the Bank would be unable to handle it properly. It was damaged not only by the removal of responsibility for financial regulation of the clearing banks—something that a central bank needs to do so that it knows the day-to-day positions and the true financial state of those banks—but by the removal of the responsibility to manage public debt. Anyone who understands money markets knows that public debt is the life and substance of the money market. The Bank of England was blind and deaf in its own money markets, because it was no longer in daily contact with clearing banks—one side of the equation—and nor was it handling minute by minute the Government debt requirements. No wonder it made an awful mess of the money markets in 2007 and 2008. No wonder it was not sighted in the massive credit explosion that the regulators allowed the banks to perpetrate, and that created this immediate crisis.

We now have two more soundbites substituting for serious policy and analysis. One is that this is a global crisis, as if in some way that excuses the Government of all responsibility. Their refusal to understand that we have a worse version of the crisis than others is extremely depressing. Their refusal to admit that the global recession is happening for different reasons in different places means that they will find it very difficult to tackle the problem here in Britain. They do not seem to understand that the crisis is very different in Japan, Germany and China—the successful saving and exporting countries—from the crisis in Britain, the US, Ireland and Spain, the over-borrowed, over-extended credit countries.

The exporting countries merely face the very serious problem that their export markets are temporarily very badly damaged, but they have strong fiscal positions and strong savings, while the heavily borrowed countries have a double crisis. We have the downturn in activity, like the successful exporting countries, but we also have extreme credit crunch problems, meaning that we do not have the financial flexibility to pump up our economies and return to previous levels of activity. The levels of activity reached in 2006 and 2007 were unrealistic, and were sustained on a sea of debt and those funny instruments that were allowed by the Government’s regulation.

The Government now say that the problem was created by deregulators, as if a deregulatory Government had been in charge in Britain for the past 11 years. However, never has more regulation been put on the statute book than in the past 11 years. Every feature of the financial regulatory system that they inherited was taken apart and recreated with far more cost, far more expense, many more regulators and far more complexity. Anything that has gone wrong on their regulatory watch is the result of their style and choice of regulation, and it certainly was not deregulatory.

What we said in our economic review, which Labour Members love to misquote, was that we needed stronger and tougher regulation of banking cash and capital, and that that had to be done by a reunited Bank of England, which saw all the business and the money markets and understood them. We said that we did not need the new regulation of mortgage process that the Government had introduced. If we needed proof of that, we need only consider that we have had more mortgage process regulation than this country has ever known at the same time as we have had more dodgy mortgages than this country has ever known.
Mortgage process regulation does not stop credit over-expansion. It does not tackle a credit crunch. I find it very odd that intelligent Ministers cannot understand that point; perhaps they deliberately misconstrue it. It seems so obvious to me that they were regulating the wrong things in the wrong way and that they were not doing what a regulator should do. When businesses can extend credit and lend lots of money to people and companies, we should control their cash and capital to ensure that they are prudent.
The massive expansion in bank balance sheets should have been ringing alarm bells by 2004-05 in the Treasury and with the Chancellor, let alone in the Financial Services Authority and the Bank of England. It was ringing alarm bells on the Opposition Benches, as we have learned today. I shall not treat the House to loads more quotes or say that we saw all this coming, as that does not matter. What does matter is that the Government did not see it coming. They were not listening, they were not watching and they were not carrying out their prudential activities sensibly and well.

What should the Government do now? They are making a worse crisis now than the one that they are talking about. We know about the over-expansion of credit, and they do not talk about how they brought that to a grinding halt in a very damaging way—that was the second part of the crisis. We might go into a third crisis if they do not control the public accounts and the public obligations sensibly.
There are huge disputes about what should be factual matters. It seems very clear to me that this country is massively indebted in the public sector, and that that debt has expanded many times in the past two years as a result of the policies that the Government have been pursuing, both through their running of large deficits and, more importantly, through their very expensive policies of support, subsidy and guarantee to the banking sector.

Let us look at the figures. The Government admit—I think—that there is public borrowing of about £700 billion. If we add in private finance initiatives, public-private partnerships, Network Rail and some other off balance sheet liabilities, that figure is about £1 trillion. I hope that they would accept that figure.
There are, too, about £1 trillion-worth of unfunded pension liabilities. The Government can say that it is not convention to put them on the balance sheet in state accounts, but it is convention to put them on the balance sheet in the corporate sector. Indeed, it is a legal requirement to do so—imposed by this Government and strictly enforced. The hon. Member for Twickenham (Dr. Cable) might think that I have made a mistake and I am misrepresenting those figures, but I assure him that pension liabilities are liabilities of the state. They represent money that we do not have and that we have to pay out.

On that basis, the figure is £2 trillion, but to get the Government’s true financial position we then have to add something for the banks. If we took on the Government’s private sector accounting rules, we would have to put on the balance sheet the gross liabilities of the banks that we have bought, in the proportions of the shareholdings that we have acquired. That would add another £2.5 trillion—for the banks, the liability is £3 trillion, and we own most of that. That adds up to £4.5 trillion.

Of course, those banks have some assets. I am pleased to say that we will not lose £2.5 trillion, but I fear that we will lose quite a lot of money on these banks. We have, after all, already lost £24 billion in about six weeks on the RBS shares that we bought, based on the losses that RBS has had to report after the shares were purchased. We have lost £10 billion on the HBOS shares that we have bought so far, based on the losses that HBOS has had to report through its profit and loss account. The losses on the shares, based on the current share prices, are similarly very large figures. We can lose a lot of money on this.
If Government Members still do not like the idea of putting those gross amounts on the balance sheet in the way that a company would, why not put on the specific guarantees, subsidies and injections, which would amount to about £1 trillion?

Mr. Brooks Newmark (Braintree) (Con): The Chancellor has asked the banks to be transparent in their accounting only this past week. Is this not a case of “Don’t do as I ask; just do as I do”? The Government should at least be making what is going on off balance sheet as well as on balance sheet far more transparent.

Mr. Redwood: Of course they should. The Government should not think that everybody outside in the real world is a fool. The outside markets and commentators are already adjusting for all these figures anyway, so why do the Government not get real and accept that they have to introduce them?
Mr. Bone: Is it not a fact that international accounting standards require them to do so? There are no ifs and buts—the Government have to consolidate.

Mr. Redwood: The Office for National Statistics is going to demand quite a big recognition of these banking risks. That recognition may not be for the full amount that I have suggested, but it will take our total indebtedness as a country, as defined by the ONS, to well over 150 per cent. of national income. That is well above many comparable countries around the world that have not blundered into so much bank ownership as this country has through the actions of the Government.

What should the Government do to start to cut the risk? First of all, they must recognise that the risk is colossal and that, if they get it wrong, taxpayers could be left hopelessly stranded and have to pay enormous losses. They must recognise that house prices are still falling, that the mortgage experience is deteriorating and that there could be more bad loans than we know about. They must recognise that the corporate sector is in deep trouble—I fear that there could be many more bankruptcies in the months to come—and that corporate loan books are still deteriorating at a terrifying rate.

For some unknown reason, the Government have made the taxpayer stand behind all those problems. Although a central bank must make sure that a main bank does not go under, it should do so through short-term lending. It should act as an intelligent bank manager and tell the bank involved to cut its costs and risks and to close down its casino banks. It must tell that bank to stop paying people £200,000, £300,000 or even £400,000 a year when they are making colossal losses that the taxpayer has to stand behind. It is grotesque that we, the taxpayers, are now expected to stand behind people who want to earn £200,000, £300,000, £400,000 or £500,000 a year, with pensions to match, even though their banks are loss making and need state capital and subsidy to survive.

I am a well known exponent of free enterprise capitalism. I am all in favour of people in the private sector getting great bonuses and lots of money if that is what they deserve and if they do it in the normal way, but I also think that they have to live with the downside. High rollers who get it wrong should get no benefit from doing so, and it is deeply offensive to many people in this country—and I am sure, in their honest moments, to many Labour MPs as well—that this Government are far too generous with the subsidy and capital that they give to the broken banks. The result of the Government’s actions is only that there is a delay in adjusting those banks and getting them sorted out so that they are in a position to behave normally again.

The banks involved cannot be subsidised into lending more: they have to be sorted out to lend more, and that means getting rid of the rubbish. They must sell some of their foreign banks and some of the assets that are good so that they can get cash to do something with. There has to be a patient and difficult case-by-case analysis of every loan on their books, and there also has to be some intelligent banking to see how many people can be got through the crisis and how many unfortunately cannot. For the latter category, it may be better to close the loan down quickly before there are more broken dreams and more lost money.
The Government will find out—as I think that they are beginning to do—that owning something means being responsible for it. By all means let us have intelligent and able people who are not politicians or civil servants running the banks that the Government own on behalf of the taxpayer, but they have to do so according to a sensible and understandable remit from the Government. They are not being given that remit, even though it should be very simple: cut the risk and the losses, get us out of dangerous things like investment banking activities, sell some of the good overseas banks because we need the money and should not be standing behind them.

The Government have placed the country at grave financial risk, financially. They were warned, but they ignored the warnings. They blundered because they regulated, and over-regulated, but they did not regulate the thing that matters. Will they now please concentrate on the thing that matters? That is that we now have, on the taxpayer’s account, two broken banks that are bigger than the national income. Do the Government understand how risky that is? Will they issue immediate instructions to cut the risk? Will they understand that the British people will not put up with, or be grateful for, paying enormous salaries to people for doing the wrong things in broken banks that then lose us a packet?