Cable, Kramer and Browne on the current economic crisis

4.54.00pm GMT Thu 13th Nov 2008

• [Nov 10]: Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): I BEG to move, That this House is concerned at the increasing difficulties caused by the current economic crisis to many British citizens in maintaining their homes, paying their bills and providing for themselves and their families; . .

. . believes that these problems originated not just in the global financial system but in unsustainable levels of personal borrowing and house prices which were overlooked by Government policy; is alarmed at the steep rise in mortgage arrears and repossession orders; regrets that, despite receiving £500 billion of taxpayers' money, the banking industry has failed to respond adequately to the needs of its customers or modify sufficiently its behaviour in respect of mortgage interest rates, new lending to struggling small businesses and its bonus culture; notes that the Bank of England has implemented the 2 per cent. cut in interest rates which the Liberal Democrats called for and urges it to make further cuts if the economy deteriorates further; and calls on the Government to introduce an immediate substantial cut in income tax to benefit low income and standard rate taxpayers, paid for by wealthy individuals who profited disproportionately from the economic boom and who do not pay their fair share of tax.

Having checked that I have switched off my mobile phone, it is a pleasure to introduce an Opposition day motion that stands in my name and in those of my colleagues. Our purpose in bringing it to the House is to give Members an opportunity to review the rapidly deteriorating economic situation and to air some ideas and options about how it might be dealt with in the run-up to the pre-Budget report.

We have noticed a pattern developing in the past few weeks whereby we come up with ideas and, whether they are on housing repossessions, interest rates or tax cuts, within a few days or even weeks, they are rapidly followed by the Conservatives, the Government, or both. We might almost say that the road to Damascus is becoming severely congested as they queue up to adopt our policies in different respects. Unfortunately, some Government Front Benchers do not convert quickly enough, and as a result, they leave themselves feeling somewhat embarrassed.

I am glad that the Exchequer Secretary has been brave enough to come back to the House after the previous such Opposition day debate, because she may already realise that her comments on that occasion have become the stuff of radio and television comedy shows. I shall quote one of her more memorable observations during that debate:

"The Liberal Democrat motion has been much commented on, possibly because it reads like the storyboard for "Apocalypse Now", or perhaps even "Bleak House". According to the motion, we are facing...the 'risk of recession'...Fortunately for all of us, however, that colourful and lurid fiction has no real bearing on the macro-economic reality."-[ Hansard, 2 April 2008; Vol. 474, c. 824-5.]

It is only fair that we do not isolate the Exchequer Secretary too much, however, because Labour Back Benchers faithfully echoed everything that she said. I do not want to criticise a gentleman in his absence, but I am sure that he will not mind my quoting what he said. He is one of the more distinguished- [ Interruption. ] Indeed, he is here now. Mr. Mudie, who is a very distinguished and respected member of the Select Committee on the Treasury, said on that occasion:

"I do not see how anyone can table a motion that suggests that we are nearing a recession".-[ Hansard, 2 April 2008; Vol. 474, c. 810.]

Well, things do change in a six-month period.

It is not just Government Members, however; the habit has spread. The Conservative shadow Chancellor is not present, but I remember that when I last spoke about economic matters, he intervened to rebuke me for irresponsible behaviour in respect of interest rates. On 14 October, he said:

"By the way, I do not think that it is particularly sensible either for politicians speaking from the Front Bench to call on the Bank to cut or increase interest rates. Indeed, I make it a practice not to comment on them."-[ Hansard, 14 October 2008; Vol. 480, c. 708.]

Well, I followed the hon. Gentleman last week around the television studios, where he claimed credit for having anticipated the cut in interest rates. Indeed, there was some mysterious process of intellectual osmosis by which the idea had communicated itself to the Monetary Policy Committee of the Bank of England, and for which he wanted to claim full credit.

Without indulging too much in anecdote, however, I think that it would be useful to record some of the facts of the current economic situation. Those of us who talk to local business groups know that the position is really dire and will feed through to statistics in the coming months, but let us stick initially to the facts. The Government's own figures recorded a decline in output in the third quarter, and that represents a fall over the year. The International Monetary Fund predicts a stagnation of growth this year and a decline of 1.3 per cent. next year, which it believes is the deepest cut in any major western country.

We talked at length about the housing market in our last Opposition day debate. The main market indicator suggests that there has been a 15 per cent. fall from the peak at the end of October last year and that house prices at auctions have now fallen by 30 per cent. since last year. It is worth contrasting that with what the former Financial Secretary to the Treasury told us when we debated this subject a few months ago:

"House price inflation is declining, but it is doing so relatively gradually, and house prices remain higher than they were a year ago."-[ Hansard, 2 April 2008; Vol. 474, c. 803.]

The Government told us that repossessions were not a problem, but they have doubled since the first quarter of 2007; at the end of October this year, they were 71 per cent. up on the year before. The latest figures suggest that there were more than 4,000 insolvencies in the third quarter of 2008-a 26 per cent. increase on the corresponding quarter the previous year. The unemployment rate is, mercifully, much lower than during the last recession, but at 5.7 per cent. on the international measure it is up worryingly, although we hope that it will not reach those alarming levels of the early 1990s.

Those are the facts, although we will no doubt argue endlessly about the causes. A reasonably fair-minded view is that the problems and the depth of the recession that we now face are partly due to domestic policy failures and partly due to international factors beyond our control. As far as domestic policy failures are concerned, it is reasonable to point out the growing consensus that there was an excessive build-up of personal household credit linked to the boom in the housing market. We warned about that for the first time back in October 2003. Others, including the IMF and the Governor of the Bank of England, also issued warnings; even Conservative Front Benchers eventually spotted that there was a problem-the shadow Chancellor referred to it for the first time in January 2007. Clearly, there is now an acceptance that that major UK problem was domestically generated.

There has also been an international banking crisis, for which obviously the Government are not responsible, at least directly. We should not be too complacent about that, however, because much of the shadow banking industry that originally grew up on the back of sub-prime lending activity originated or developed in the City. Until very recently, there was extraordinary hubris and complacency about the workings of financial markets in the City. A few months ago, the Minister's predecessors were talking to us in loving terms about how the City operated, a bit like little boys who had just discovered an unexploded bomb and thought that it was a shiny new toy. The Minister's predecessors now realise that many of the activities that were taking place were dangerous.

Andrew Pelling (Croydon Central, Independent): It is a great pleasure to intervene on a Member who will single-handedly save so many seats for the Liberal Democrats. Is not the issue about seeing the solutions rather than trying to place blame for what happened in the past? The hon. Gentleman has detailed the damage done to the banks. Does he agree that, following the rescue of the banks, one of the solutions is to repair them, take the bad debts off their balance sheets and create a bad bank solution, as has been done successfully in Sweden, and is now also being attempted in Switzerland?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): That is a helpful prompt; I was about to move on to the positive suggestions, and the hon. Gentleman is right to say that we should spend our time and energy on them. He has anticipated one of the points that I was going to make: the British bank rescue plan-the recapitalisation-was right, necessary and appropriate, but it is only one half of the solution, and there is the other half to deal with.

In talking about where we move from here, we should start with the bank rescue proposal, as the hon. Gentleman suggested. We supported that; it was right and timely. However, we now know a little more about what is going on and can ask more critical questions about how the process is developing.

One of the key questions concerns the nature of the commitments that were entered into between the Treasury and the banks when the recapitalisation programme and insurance of inter-bank lending were entered into. On one of the key commitments, we have debated several times the precise meaning of the statement that

"the Government has agreed with the banks"

on

"maintaining...the availability and active market of competitively priced lending to homeowners and small business at 2007 levels".

It becomes more important that we establish exactly what that commitment meant and what was understood about what would happen.

Let me put a series of specific questions to the Government. Are they or anybody else actually monitoring the amount of business lending, in particular, that is taking place? Are they monitoring on a weekly or monthly basis how much credit is going from each individual bank into the business sector? I hear anecdotes-I cannot prove this-that several of the banks have instructed their managers to cut credit and are incentivising them to do so. One way of proving or disproving that point would be to have evidence, and I hope that the Government are monitoring it very carefully. Do they have any mechanism for telling us what is happening as regards the flow of funds?

What instructions have been given to the Government directors? Do we know who they are? What were their letters of appointment? What have they been told to do? They appear to have a very simple mandate, which is not to interfere, but that is clearly creating a problem in itself.

John Redwood (Wokingham, Conservative): Does the hon. Gentleman accept that the Government are saying two contradictory things to the banks? Through their regulator they are saying that the banks have to improve their ratios, which means cutting their loans as well as increasing their capital, and through their guidance they are saying that the banks need to increase their loans, which would worsen their ratios?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): The instructions are indeed contradictory, and we need more clarity. In fact, they are not the only instructions that the banks are being given. As of the other day, we understand that the Government have now told the banks to pass on interest rate cuts-a third objective. Again, we need to understand the implications. The banks tell us that they are making a loss by doing that; I do not know whether that is true, but we need to understand precisely what the banks are being instructed to do and in what circumstances.

Susan Kramer: I have checked on the internet with several banks today, and rate cuts are certainly being passed on to savers. For example, a product that was available with 6.9 per cent. interest two weeks ago is now down to 5.7 per cent., which seems to be the best deal available. Does he agree that that does not seem to be matched by the offers being made to mortgage holders?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): Indeed. The banks are simply widening their spread. That is their objective, as Mr. Redwood suggested. The Government appear not to have thought through the implications of the agreement that they reached.

What precisely was the understanding on bonus arrangements, which have been criticised in all parts of the House? Quite lavish bonus arrangements have been proposed by Lloyds TSB, which is one of the beneficiaries of the process. Mr. Hornby, who on any conceivable measure could be described as a business failure, is now being very lavishly rewarded by his new employer, Lloyds TSB. How is it possible that the Government reached a very specific agreement with the banks on bonuses only to have them completely disregard it?

Let me make various suggestions on the banking programme before we move on. First, it is clear, as we have heard in the previous two interventions, that merely telling the banks that the Government are going to operate on an arm's length basis is causing confusion. The rational response of the banks is to build up their reserves to get the Government off their backs as quickly as possible so that they can pay dividends and bonuses. The Government's ambition appears largely to be limited to getting the taxpayers' money back as quickly as possible. While those objectives seem rational in themselves, pursued in isolation they potentially have devastatingly negative consequences. If the economy goes into a downward spiral and business credit is cut off, that further increases bad loans, which increase the amount of the recapitalisation that will have to take place. Can the Government be absolutely clear about whether they are going to intervene to give the banks more specific instructions?

Secondly, can the Government tell us why they are now proceeding, in terms of their approvals, with the Lloyds TSB-HBOS merger? There may well be good commercial and public policy reasons for that, but I think that they are assuming that because it made sense six weeks ago in order to rescue HBOS from collapse, it still makes sense today. There are growing numbers of authoritative people in the banking system who say that it does not make sense. They want to have the options re-examined and they want alternative bids to be looked at properly. Along with Tavish Scott MSP, I have written seeking an appointment with Mr. Hornby and Lord Stevenson to explain why they are not willing to reopen matters on the part of HBOS. There is also a question for the Government, however. Will Ministers explain why they are allowing matters to proceed? The deal may well be beneficial to Lloyds TSB, but why is it in the national interest?

Finally on the banking system, what the Government did in broad terms made sense in the context in which they introduced it, but a whole set of other problems are now coming over the horizon that have not yet been discussed. When will the Government discuss them? One of them was raised from the Back Benches a few moments ago: we have had half the policy. The Swedish model had a combination of elements, one of which was recapitalisation, and another concerned the "bad bank"-the Paulson-type plan, and the Americans have had the other half of the programme, but are the Government going to bring both halves together, and how will they do so? Are they thinking ahead to how the new banking system will operate?

We are discussing at the moment a Banking Bill that is valid in many respects, but is limited in what it covers. It does not explain how the banking system, once it has emerged from its massive heart attack, will lead a different kind of lifestyle. One thing that cannot continue is the ambiguous relationship in which banks have what Cruickshank called eight years ago "regulatory privileges"-they depend on being bailed out, in other words-while they continue to operate on the maximisation of shareholder value. That contradiction cannot continue, and the Government need at an early stage to give ideas as to how they will deal with that problem.

My second point about forward-looking policy concerns housing, which is the sector that has been most damaged. We encouraged the Government to pursue an idea that they had some months ago of buying up empty property and land, which is now available at heavily discounted prices, so that registered social landlords can increase the availability of social housing, thereby providing an injection into the building industry. Although the Government are talking the right language, the feedback that I have received suggests that absolutely nothing is happening. It appears that approval was given for £8 billion of investment in social housing, but that the money is not reaching the social landlords. There are problems with the Treasury funding arrangements and the rental arrangements that operate under Treasury rules, which are preventing progress from being made with the programme. Will the Government tell us how much of the social housing package has reached the social landlords, and how many houses they propose to proceed with in the context of the emergency to which we are told that they are reacting?

On repossessions, 10 days ago, at Prime Minister's questions, the Prime Minister told us that the Government have proceeded with fresh instructions to the courts on how to handle repossession cases. We had been urging that, and we welcomed it at the time. The feedback I have received suggests that no instructions have yet been given, or if they have been, they are very discreet. No one is aware of any change in practice being communicated to the courts that process such matters. Moreover, there is an extremely alarming story in the Financial Times today, which says that banks and building societies whose clients are in arrears for a few weeks can proceed to repossession without going to the courts; they simply issue an instruction to the bailiffs to repossess after a few months' arrears. The Government need to tell us how, through legislative or other action, they will prevent a cascade of repossessions proceeding through the winter, as growing numbers of people find that they are on short-time working hours, losing overtime or losing their jobs, and simply cannot afford their payments.

Thirdly, we had a debate on small business a week or so ago, which my hon. Friend John Thurso introduced. I do not want to go into further detail on the measures involved, but how will the Government develop the helpful ideas they have already set out for accelerating payments to small businesses that are involved in Government contracts? Will that extend to the vast numbers of quangos that operate under Government scrutiny? Will it be used for companies that are subject to Government procurement? The 10-day payment-the accelerated payment-is a good principle, but how far will the Government spread it? How far has the programme already gone?

Bob Spink (Castle Point, UKIP): Will the hon. Gentleman extend his advice to the Government by asking them to ask Her Majesty's Revenue and Customs to take a more sympathetic and reasonable attitude to those who owe the Government money in back taxes, and to agree more achievable repayment systems and schemes?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): Indeed, the Government could take a variety of steps, and the hon. Gentleman suggests one. The small Government loan guarantee scheme has not been updated to take account of current realities. Given the strength of the Government's balance sheet relative to the private sector, the Government could do a variety of things to help. They have made several helpful gestures, but they could go much further.

Let me consider the issue of the day-tax cuts. I approach the matter with caution, given that the Conservatives and the Government seem desperately anxious to run on to the ground that we staked out. Our approach was that there should be tax cuts for people on middle and low incomes, for which people who are relatively wealthy would pay. We argued that primarily on the ground of fairness. At the time, there was no major economic crisis, but the proposal now happens to be appropriate to the context in which we operate.

Clearly, people on low incomes have a higher propensity to spend than those on high incomes, who are very wealthy. Our proposal, which the new President elect of the United States echoed at least generally, seems highly relevant. We have advocated a programme whereby income tax should be cut for people on low incomes, either by raising thresholds or cutting the basic rate by the equivalent of 4p in the pound. We are therefore considering an amount of approximately £1,000 for a £30,000 income tax payer. The proposal would be funded in a variety of ways, which we have set out, one of which involves tackling potential tax avoidance and the existing concessionary rates that people pay on capital gains tax. We were impressed with the sensible way in which Lady Thatcher and Lord Lawson devised the capital gains tax rules, and we would like to revert to that, with potentially major Revenue implications.

We believe that people who contribute to large pension pots should be incentivised, but that larger incentives should not be given to people who make small savings-we believe in closing that loophole. We also believe in a much tougher approach to tax havens. Again, the President elect of the United States wanted to go down that road. Specific measures, such as dealing with leading corporations' evasion of stamp duty, which the Government should have tackled long ago, are blatantly obvious. A series of measures could, if implemented, enable us to make a substantial cut in income tax for people on low and middle incomes.

Kenneth Clarke (Rushcliffe, Conservative): Does the hon. Gentleman agree that, when the proposal was made, it was not intended to be a fiscal stimulus? Indeed, it would not be a fiscal stimulus, because he is describing how revenue would be raised to pay for it. Given that there may be a case for some temporary fiscal stimulus in the not-too-distant future, does not it make more sense to consider a temporary reduction in value added tax, which would relate directly to consumer demand? It seems likely that we will need to stimulate consumer demand in the new year.

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): The measures that I have described would be stimulating for the reasons that I gave: people on low incomes are more likely to spend. The right hon. and learned Gentleman's proposal could have the same effect, but it depends on how it is funded. That gets to the heart of what I am sure that Conservative Members will tell us in the next day or so. As I understand it, the Conservative party proposes funding the VAT cut through parallel cuts in Government spending. Although there may be a case for cutting Government spending generally, in the context that we are considering, the proposal would simply offset a stimulus with a reduction in spending. The right hon. and learned Gentleman must deal with the same problem that the Government have and that we have tried to tackle.

If there is to be a tax cut, it should operate under three simple principles. First, it must be substantial; a nominal cut has no effect in such circumstances. The package that I have described would cost something in the order of £16 billion. That is a large sum, but as a share of GDP it is not enormous and is certainly affordable within the parameters that I have described. The second principle is that a cut should be fair and equitable, which was where we started from. The third principle is that a cut should be funded. There are dangers in doing what I believe the Government propose, which is to have an unfunded tax cut, which I understand would be financed by Government borrowing. However, Government borrowing ultimately has to be paid for-it is deferred taxation or inflation, and that is not a satisfactory way forward either.

We need a stimulus that will be funded and is seen to be fair, but which also makes sense in the context of the need to inject demand from people on low incomes, whose income standards are being squeezed. With that, Mr. Speaker, I thank you for the opportunity to introduce the motion and look forward to hearing the reactions to it.

. . Matthew Taylor (Truro & St Austell, Liberal Democrat): Will the Minister confirm that the inter-bank lending guarantee has failed to deliver the intended solution-to bring down LIBOR to the rate that existed before the banking crisis?

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): As of the weekend, the important three-month LIBOR rate had come down from a peak of 6.4 per cent. to 4.4 per cent., which represents good progress. We will continue to monitor those numbers, but that has been a cause of significant relief throughout the financial system.

. . Susan Kramer: Quite a number of statements have suggested that this economic crisis was a thunderbolt out of the blue. The Minister will remember, however, as a member of the Treasury Select Committee I visited the United States in January 2006. I cannot remember whether she was on that trip, but others from her party certainly were. Investment bankers made it clear to us that, while all was well that day, there would be a major crisis in the sub-prime housing market 18 months down the road, and that there were black clouds on the horizon. We attempted to pass those messages on to the Treasury, formally and informally-so there were warning signs.

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): It was not my pleasure to be on that trip. I made rather a bad habit of missing the foreign trips taken by the Treasury Committee when I was a member of it, owing to other work pressures. However, I think that one of the lessons to be drawn from the circumstances of an interconnected and globalised world is that the weakest link in the regulatory chain can affect all economies, as the circumstances of the credit crunch have demonstrated in quite a sobering way. That new reality will have to be taken into account as we rebuild and reform international structures.

Before taking a series of interventions, I was saying that the credit crunch presented us with a once-in-a-generation economic challenge, to which we are rising by stabilising the global banking system. However, we must also re-engineer the global economic system to cope with 21st-century realities, and the reality that Susan Kramer spotted in the sub-prime mortgage market during her trip to America is clearly one of the new realities with which we must deal.

. . Christopher Huhne (Shadow Secretary of State for Home Affairs, Home Affairs; Eastleigh, Liberal Democrat): Will the Minister give way?

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): I have given way to the hon. Gentleman once already, but I shall do so again.

Christopher Huhne (Shadow Secretary of State for Home Affairs, Home Affairs; Eastleigh, Liberal Democrat): I am very grateful to the Minister for giving way again. As she knows, the level of repossessions took some time to build up in the crisis of the early 1990s. Is she saying that there will be no further increase in the level of repossessions? Given what happened when we debated this matter in April-my hon. Friend Dr. Cable has quoted her as saying that there was no possibility of a recession, and that there was scaremongering on the Liberal Democrat Benches-why should we take her at all seriously now, when she was so comprehensively wrong then?

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): I noticed the quote from the hon. Gentleman in April when talking about Dr. Cable-that he was one of those gloomy economists who always think that a glass is half empty, rather than half full. I am not going to be gloomy about the UK economy; rather, I will repeat what I was saying when Chris Huhne intervened. We are not complacent. We recognise that each and every repossession is a tragedy for the people involved. I am certainly not going to predict-the Government do not predict-the number of repossessions; the Council of Mortgage Lenders publishes its figures. However, we are determined to do what we can to ensure that we can mitigate the problems that lead people to fall into arrears and face repossession. I will deal in a minute with some of the announcements that we have made to that effect.

. . Matthew Taylor (Truro & St Austell, Liberal Democrat): There are serious shortages of affordable housing, and fewer houses are being built at the moment. Government policy instructs local councils to reduce the leasing of private properties in order to house people in housing need, on the basis that that is a temporary solution. Right now, a temporary solution of that sort would help to meet not only the housing needs of a large number of people, but the need to cover mortgage costs of those who have these properties and would like to let them out. There might be a solution that meets the needs of two groups: those facing the loss of their property, and the many who are in housing need.

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): We will be looking to build further on our announcements of help to home owners as the situation progresses, and we will bear the hon. Gentleman's suggestions in mind.

Although the world economic climate is uniquely challenging, pessimism about our prospects is neither sensible nor reasonable. We need to be not only realistic about the difficulties we face, but confident that we can get through them. The UK is better placed to weather the global economic storm than it was in the 1970s, 1980s or the 1990s. Following last week's Bank of England actions, the UK has its lowest interest rates since 1954, and we also have low inflation. Both interest rates and inflation are well below the double-digit levels that were a feature of previous recessions.

Jo Swinson (Shadow Minister, Foreign & Commonwealth Affairs; East Dunbartonshire, Liberal Democrat): The Minister says that we are well placed to weather the economic storm, but the huge level of over-indebtedness that many families face means that they are not well placed to do so-as the individual insolvency figures for Scotland, which were released on Friday, showed when they rose by 26 per cent. between quarter two and quarter three. Families and individuals across Scotland-and, indeed, the rest of the UK-are struggling. How are those people, who face such high levels of debt because of irresponsible lending, well placed to weather this storm?

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): I was talking not about individuals but about the economy as a whole when I made my points about interest rates and so on. We have to deal with individual problems as they come to our attention. Clearly, some people are struggling with their debts, which is why we made our announcements to support them. The hon. Lady must not think that I was applying what I said about interest rates and inflation levels to a particular individual in trouble in Scotland-I was not. We recognise that individuals are facing difficulties, and this Government are determined to be alongside them, helping them to cope during this downturn.

. . Christopher Huhne (Shadow Secretary of State for Home Affairs, Home Affairs; Eastleigh, Liberal Democrat): Will the Minister give way?

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): No, I have given way to the hon. Gentleman lots of times.

Christopher Huhne (Shadow Secretary of State for Home Affairs, Home Affairs; Eastleigh, Liberal Democrat): Frit.

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): It is churlish of the hon. Gentleman to say that I am frit when I have given way to him so often. Perhaps I am getting a bit fed up of giving way to him and this time I am not going to do so. Our labour market has 3 million more jobs than it did-

Christopher Huhne (Shadow Secretary of State for Home Affairs, Home Affairs; Eastleigh, Liberal Democrat): Will the Minister give way on that point?

Michael Lord (Deputy Speaker): Order. I think that the Minister has made it perfectly plain that she is not going to give way.

. . Susan Kramer: But does the hon. Gentleman remember that my hon. Friend Dr. Cable said that it is in the Government's gift to set the inflation target and that looking at the current reality of the economy it was entirely appropriate to change, suspend or defer that target so that the Bank could concentrate on rescuing the economy? May I also remind the hon. Gentleman that although the shadow Chancellor, in response to an intervention from me, said that he did not comment on interest rates-I cannot read a quote during an intervention, but the hon. Gentleman will be able to find the exact words in Hansard-within two weeks, he was writing in T he Daily Telegraph that there was plenty of scope to stimulate demand with lower interest rates? That contradicts exactly what the hon. Gentleman has just said.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative): The hon. Lady needs to think about that. It is one thing to observe that there is a considerable gap between the level of UK and US interest rates, which was precisely the point that my hon. Friend the shadow Chancellor was making, but quite another thing to call for a reduction after having just told one's party conference that the Government must not compromise the independence of the Bank of England by telling it to slash interest rates.

. . Lynne Featherstone (Youth and Equality Spokesperson, Cross-Portfolio and Non-Portfolio Responsibilities; Hornsey & Wood Green, Liberal Democrat): Does the hon. Gentleman agree with me about bonuses? I opened an account at Barclays a few weeks ago. On the news that it was seeking funding to avoid Government intervention, possibly involving not paying bonuses, I contacted the bank to say that I did not want to go ahead with my account, and it was very worried by that, having asked me the reason why. I wonder whether there is anything in people power-perhaps by having to print directors salaries and bonuses on bank statements. Does he think that that might give the public some sense of where they want to keep their money?

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative): If the hon. Lady wishes to exercise her people power, I point out that it is a statutory requirement for directors' salaries and bonuses to be published in banks' annual report and accounts.

. . Susan Kramer: The right hon. Gentleman is talking about an incredibly important matter, which, as he says, has been neglected. Does he realise that in the United States, several states-for example, California-are initiating major efforts to try to identify whether fraud lies at the bottom of many of the problem loans on banks' books? There is concern that fraud and extreme mis-selling, which has not been unravelled in the UK and other markets, is holding up reinvigoration.

John Reid (Airdrie & Shotts, Labour): I do not intend to deal with fraud today-the issue of confidence is difficult enough to tackle.

. . John Hemming (Birmingham, Yardley, Liberal Democrat): I share the hon. Gentleman's concerns in respect of the regulation of the financial services institutions-I declare my interest as a shareholder in some of them-but why does he think that the utilities are key in the financial crisis?

Kelvin Hopkins (Luton North, Labour): I have always felt that a significant state sector, as we had until some 30 years ago, was useful not just because it provided the public with a good deal, but because it was a component of economic management and brought a considerable amount of income into the Treasury. The mixed economy that we used to have worked very well. The instabilities have taken place since we started to dismantle that and to put everything into the private sector and the market, and I think that we will see a reversal of that. In fact, if I had said in the debate on Europe, when the now leader of the Liberal Democrats was so kind to me, that I believed that the Government should take a substantial stake in the banking sector and start to arm-twist the Bank of England to reduce interest rates, and that a Chancellor would tell the banks and building societies to reduce their lending rates and pray in aid the name of J. M. Keynes, he would have thought that I had gone mad. However, that is precisely what has been happening in the past few weeks, and I am very pleased that it has been.

. . Redistribution and intervening actually help to keep economies buoyant, maintain employment, ensure a decent life for working people and bring about a high level of social justice, which is what most Labour Members have spent their lives fighting for. Obviously, I will vote with the Government tonight against the Liberal Democrats, but I hope that, in their new-found enthusiasm for social democracy, the Liberal Democrats continue to move further to the left, and eventually become socialists.

Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): In view of the hon. Gentleman's speech, surely he should vote with us, because our motion calls for a reduction in taxes for people on low and middle incomes, and refers to plugging the tax loopholes used by the rich. Surely that is redistributive, so I am disappointed that the hon. Gentleman is not voting with us.

Kelvin Hopkins (Luton North, Labour): I did say at the beginning of my speech that I was not convinced by the Liberal Democrats' recent conversion to a little bit of social democracy. My tax changes would go a lot further than those suggested by the Liberal Democrats. I suspect that the motion is a little bit about courting the electorate before the next election, and is not to be taken too seriously.

Susan Kramer (Cabinet Office; Richmond Park, Liberal Democrat): It is always an honour to follow Kelvin Hopkins. We are getting a blend of the 18th and 21st centuries in speeches tonight, and that is always a pleasure. I want to pick up some of the issues that have been raised and perhaps to take them a little further. I was very interested in the speech made by John Reid about the inter-bank market. He proposed that the central banks create an exchange that takes account of party risk for banks on either side of the inter-bank market. I just want to point out possible fundamental flaws in that approach. That is not to say that we should not explore it; however, it might not be the palliative that it appears to be at first glance.

As hon. Members will know, there are already exchanges within financial markets-an example is the futures market-that take different kinds of counterparty risk. However, they do it by having margin pools. In other words, they require parties to pay ahead of their due dates, if that is the easiest way to describe it, in order to limit their exposure to the counterparties on either side. If an exchange takes the full credit risk of the counterparty for the banks on both sides of a transaction, the encouragement given to banks to make an irresponsible decision is quite extraordinary, because the transaction is protected by the exchange that stands in the middle. That is almost like saying that the package put together by the British and other Governments to come to the rescue of banks should not only be placed on a permanent footing but should be of a size and proportion that would, in effect, cover the whole banking market. That is a degree of exposure that we cannot possibly underwrite and undertake.

For all of us, there is a sense of great failure in the fact that banking institutions have failed to assess the risk of the transactions with which they have been involved. Rather than relieve them of responsibility of ever having to assess that risk, we ought to require them to assess it. That is the direction in which we have to go; we should not basically say that central banks, and essentially Governments, will stand in the middle and take that counterparty risk.

John Hemming (Birmingham, Yardley, Liberal Democrat): I share my hon. Friend's concern about the proposals made by John Reid. Does she agree that if we tried to establish a central body to take on the counterparty risk, the danger is that it would take on the counterparty risk for entities regulated in other European economic area countries? As a consequence, we would be taking on risks for places far beyond the UK-for Iceland, Estonia and so on.

Susan Kramer: My hon. Friend is right, and it strikes me as impossible for an international body to have sufficient grip on and be sufficiently responsive to the sort of transactions and changes made by individual banks all over the globe. Such an arrangement would also remove responsibility from banks-a responsibility that no Government or central bank should take.

Mr. Redwood talked about the imbalance in the UK economy. That has been a concern of mine for a long time. There was a general feeling that it was following the direction of the future, and not taking a risk, to allow developments in financial services and the various spin-off industries and businesses to become overwhelmingly dominant within the UK economy. However, there has always been a risk involved. For example, nobody in this Chamber, when considering their pension, would put all their eggs in one basket or all their money in one sector of the economy. However, we in this country have largely allowed ourselves to invest heavily in one sector of the economy, largely on the assumption that it would be immune from the cyclical patterns that we know exist in manufacturing and what we might consider to be the more traditional industries. We have discovered that financial services are no more immune than other sectors to inevitable cycles; they follow the patterns that have developed in other industries and sectors. We have put ourselves into the terribly difficult position of having only one major arrow to our quiver. We must avoid going in that direction in future.

This seems an ideal opportunity for the Government to focus on developing the green industries that we need if we are to tackle climate change. Often, when I hear people talk about the economic recession-we are at the beginning of it-I find that they tend to feel we should abandon environmental targets and our work to tackle climate change because we have to give priority to getting the economy back into shape. They have always seen the two as being in conflict with each other. I have never believed that they are in conflict. This is surely an opportunity for the Government to use every mechanism possible to encourage those industries, for example by encouraging the development of new technologies that will reduce our use of carbon and new forms of energy. Work needs to be done on infrastructure, too. There is a whole range of activities that the Government could begin to develop and underpin. We have before us a great opportunity to channel investment into the future; we know that that is required if our children are to have a reasonable environment in which to live. I want to encourage the Government and to hear whether they intend to take advantage of those issues.

We are all concerned about how the regulators behaved throughout the period leading up to our financial crisis. The notion that regulators behaved perfectly and the crisis developed despite them strikes me as extraordinary and naive, and work must be done to create a much more rigorous regulatory system.

John Pugh (Shadow Minister, Treasury; Southport, Liberal Democrat): Does my hon. Friend recognise that after previous bank crises, there was a demand for a modest amount of new regulation, but that there was no wholesale demand throughout the City or the political parties for better regulation until now?

Susan Kramer: I very much agree. There is suddenly demand for a lot of new regulation, but wise regulation might be better than simply stacking up layers of additional regulation. We must work out what needs to be regulated and how it would be most effectively done, so may I suggest one step in that direction? Members will be aware that the Financial Ombudsman Service recently reached a verdict of maladministration against three of our most significant regulators in the case of Equitable Life, but the Government have not acted on that verdict. What better lesson could the markets, more broadly, and the regulators in particular, be taught than to live up to the terms that the ombudsman laid down, with an apology from every regulator to all those who lost out by taking pensions through Equitable Life, and the payment to them of the full compensation that the regulator called for?

Robert Smith (Shadow Deputy Leader of the House of Commons; Aberdeenshire West & Kincardine, Liberal Democrat): My hon. Friend makes a very good point about the ombudsman's report on Equitable Life. It is disappointing that the Government have still not reached the point of saying sorry. Even then, they could develop the details for implementing the practical recompense. The Government have often prayed in aid the fact that it was a big report, but they had draft copies and knew where it was going. It should not have taken them so long to recognise that they needed to say sorry to the people who invested in Equitable Life.

Susan Kramer: I very much agree. The ombudsman was very clear and, so that it was not too complex and difficult for the Government to grasp, made only two recommendations: one was the apology, and the other was a swift process for implementing compensation in full. When it comes to compensation for those who invested in Equitable Life, what once might have seemed like an extraordinarily large amount is lost to the right of a decimal point in the commitment of funds to resolve the broader banking crisis.

Small businesses are very important in my constituency, and Member after Member has talked about the problems that small businesses in their constituencies have had obtaining credit, despite the Government's belief that they have from the various participants in their banking recovery plan the commitment to keep lending to small businesses at 2007 levels. One particular group in my constituency has been suffering, and its situation indicates the depth of the problem. This group, traditionally, has not needed credit lines and therefore has no credit history. Today, however, the companies need credit because their customer base is starting to pay late, but because they have no credit history, the banks are closed to them. Tied to that is the issue of suppliers. I know that the Government have said that they will try to pay people in 10 days, but my hon. Friend Dr. Cable asked for much more detail about exactly what that means, how it will play out, and whether it will apply to quangos and related Government institutions, because the private sector is doing almost the opposite.

Lorely Burt (Shadow Minister, Department for Business, Enterprise and Regulatory Reform; Solihull, Liberal Democrat): We all commend the Government's approach, and the 10-day period should be passed on. Indeed, in my constituency we are trying to persuade the local authority to adopt the same approach, but does my hon. Friend agree that when the Government pay within 10 days, it is very often to larger suppliers that are not necessarily in the same financial difficulty as small suppliers at the bottom of the supply chain? Does she agree also that the Government should make their 10-day payment conditional on the same payment going down the supply chain-the same conditions, right the way through-to small suppliers, too?

Susan Kramer: I very much agree. There is a fundamental flaw in many Government contracts, because they are designed so that only the large entity can bid on them; they are not examined to try to find ways they might be bid on by relatively small businesses to stimulate new enterprise. In that context, several private companies-Tesco is the name that comes to mind-are going not from 30 days to 10 days but in the other direction, and, I understand, adding another 30 days to the payment period. Very powerful entities, such as the major supermarkets, need to feel some heat from the Government to join them in their approach.

Lorely Burt (Shadow Minister, Department for Business, Enterprise and Regulatory Reform; Solihull, Liberal Democrat): Suppliers to another company, Boots plc, can actually wait more than 100 days before it is required by its own changed rules to pay up. My hon. Friend talked about regulators. Does she agree that we should ask the Government to task regulators to ensure that such big plcs fulfil their reporting requirements, because they are required to name in their annual accounts their terms of conditions? It is time, I believe-

Alan Haselhurst (Deputy Speaker): Order. I know that these are exchanges between colleagues, but I ought to say to the hon. Lady that they are very long interventions that are eating into her colleague's limited time.

Susan Kramer: Thank you very much, Mr. Deputy Speaker. I shall quickly draw my comments to a close. I want to make only a few more points.

John Hemming (Birmingham, Yardley, Liberal Democrat): Will my hon. Friend give way?

Susan Kramer: Of course.

John Hemming (Birmingham, Yardley, Liberal Democrat): I thank my hon. Friend for giving way as we move towards 6.30pm. Does she think that the Government should review the insolvency laws and examine the chapter 11 experience in America because of the difficulty that companies could face in a tight credit situation, whereby, owing to payment delays, they face legal action to be wound up? Perhaps chapter 11 is something that we in the UK might consider.

Susan Kramer: My hon. Friend makes a pertinent comment and an important recommendation. Having worked in the United States for 18 years, I am conscious that chapter 11 often allows companies to continue and to be restored to health. We have not followed that mechanism in the UK, and I find that surprising, so the situation under discussion is, as my hon. Friend says, a good opportunity to make that change.

Finally, I am particularly disturbed by the banks' dismissal of the Government's recommendations on the current bonus culture and of the public's outrage at its continuation. Members often feel that the reason why there is a problem with the bonus culture is that the sums of money are so utterly outrageous. At a time when the Government are coming to the rescue, the numbers seem almost immoral, but there is a deeper problem with the bonus culture in our institutions.

The Government know that many bankers at a variety of grades are paid exactly the same salary and that most of their income is from bonuses, which have always been tied to short-term performance. The problem is that when somebody makes a sensible decision, recognises risk and refuses to take it, they lose out on bonuses and rewards, whereas the person at the desk next to them who takes that extraordinary risk gets the great bonus. When that persists year on year, we end up with a culture in which not only do we reward risk-taking but we penalise people who make the appropriate decision and identify and begin to recognise both risk and systemic risk. We must turn the whole picture upside down if we are to have a healthy banking economy.

Jeremy Browne: Thank you, Mr. Deputy Speaker, for calling me to conclude the debate. My hon. Friend Dr. Cable kicked off the debate in a typically thoughtful and insightful way, and no doubt his speech was of interest to all who heard it. My hon. Friend Susan Kramer later made a similarly insightful and interesting contribution.

As my hon. Friends have dwelt in such depth and detail on a lot of the salient points at issue, I will concentrate slightly more on the political response to what in recent months has indeed been an unfolding economic crisis, as the title of the debate suggests. This debate is extremely timely because the economy is shrinking, unemployment is rising and tax revenue is falling. The backdrop to the debate is the issue of how that happened. Two arguments have been advanced by the two main parties. The Prime Minister's essential take on the current situation is that it is all the fault of sub-prime mortgages in America which have contaminated our domestic economy-an economy that in other circumstances would have been just fine. As has been reiterated by John Howell and others in this debate, the Conservatives' take is different: they say that the problems are the Prime Minister's fault as he grew a bubble of personal and public debt in Britain.

In a spirit of generosity, let me say that both sides are half right; they have identified the twin causes of a grave situation. As my hon. Friend the Member for Twickenham said, there have been international factors beyond our immediate control, but in many ways they have been made worse by how the Government have prepared the country for this situation.

John Redwood (Wokingham, Conservative): Will the hon. Gentleman tell us how much more tax somebody on £50,000 a year should be paying, according to Liberal Democrat theories?

Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat): The right hon. Gentleman can be assured that they would pay less. Let me get to the party political dimension, because I know how much he enjoys that aspect of things.

The Labour Government have not prepared us well for the current situation. As the right hon. Gentleman said earlier, the Government allowed private debt and house prices to soar to unsustainable levels, failed to make prudent assumptions when setting budgets for the public finances and were painfully slow to respond to rapidly changing economic circumstances earlier this year. As the Minister said, it is easy to make such observations in hindsight; it is much harder to make them in advance. That is why my hon. Friend the Member for Twickenham deserves such credit and admiration, because he did precisely that. The Minister spoke for half an hour, but at no point did she address the salient point made about her response in the House to the economic crisis earlier this year. She was completely dismissive and high-handed about the warnings that my party was offering, free of charge, to the Government. If they had listened at that point, they might have been better equipped to deal with the current situation than they have been so far.

I am afraid that the Conservative party has gone through a terribly difficult period; the past few months have been a painful humiliation and a case study in hubris for what was once a great party. It is hard not to wince when recalling the cluelessness, opportunism and inconsistency that has come from the Conservative Front Bench. Earlier, the shadow Chief Secretary to the Treasury, who is no longer in his place, made a partisan speech, but he was the one who got his party's uncertain start under way when he made his now infamous observations on borrowing. In one interview, the hon. Gentleman said both this:

"Increasing borrowing is not a strategy for dealing with the recession",

and this:

"To increase borrowing to deal with an economic downturn-that's a perfectly sensible thing to do."

That was not an auspicious start, but to be fair the hon. Gentleman is only doing the bidding of his political master, Mr. Osborne.

Unlike many of his own Back Benchers, I do not wish the shadow Chancellor any misfortune. I have followed the career of the Conservative child prodigy with a benevolent interest, and it gives me great sadness to say that at every single juncture of this economic crisis he has been found wanting. Let me illustrate the point. My hon. Friend the Member for Twickenham has led the debate on interest rate policy. We have already heard what the shadow Chancellor said in the House about interest rates in response to my hon. Friend the Member for Richmond Park less than a month ago:

"I do not think that it is particularly sensible...for politicians speaking from the Front Bench to call on the Bank to cut or increase interest rates. Indeed, I make it a practice not to comment on them."-[ Hansard, 14 October 2008; Vol. 480, c. 708.]

I am going to chronicle the terrible unravelling of the shadow Chancellor's credibility on the issue by referring throughout to that reliable journal, The Daily Telegraph. Initially, there was a false start, because just two weeks after the shadow Chancellor made his comment in the House, the headline that confronted me as I opened the newspaper was "Osborne admits his mistake". I thought that progress had been made, but soon found out that the headline referred to a completely separate catastrophic error of judgement by the hon. Gentleman. However, I had to wait only a further 24 hours for the Telegraph headline: "George Osborne: Slash interest rates to drag Britain out of economic nosedive". [Interruption.] Mr. Gauke says that the shadow Chancellor did not say that. However, I took the trouble of reading the article, which contained quotations attributed to the shadow Chancellor-they may have been written by him or by one of the teenagers in his office. One of the quotations stated that

"there is plenty of scope to stimulate demand with lower rates".

That is what the shadow Chancellor said, having told the House that it was his practice not to comment on interest rate policy. He is struggling to keep up; he is a follower, not a leader.

Hon. Members do not need to take my word for that, as it is the judgment of the shadow Chancellor's own admirers. Only a week after the article that I mentioned appeared, on 7 November, there was a Daily Telegraph headline that will cause sadness on both sides of the House. It read, "Support for George Osborne collapses". I did not say that, and neither did Labour party Members-Conservative party supporters did. Anybody who thinks that last week's cut in interest rates was a dramatic percentage fall needs to see the shadow Chancellor's credibility rating. In one month, his approval rating has fallen from 70 per cent. to 2 per cent., which is a mark of how well the Conservative party has responded to the economic crisis. The article went on to describe the sheer horror of the hon. Gentleman's position. It said, "Only Caroline Spelman"-an extremely inauspicious start to any paragraph about a politician in trouble-

Alan Haselhurst (Deputy Speaker): Order. The hon. Gentleman is in danger of breaching the custom of the House to refer to right hon. and hon. Members not by name but by constituency, or so to paraphrase remarks so that actual names are not used.

Jeremy Browne: I am grateful, Mr. Deputy Speaker, although I should say that I was quoting directly from The Daily Telegraph. I return to the quote: only Mrs. Spelman,

"the Conservative Party chairman who has been sidelined over allegations she paid for her children's nanny from parliamentary funds, has a worse rating than Mr Osborne"-

the hon. Member for Tatton, I should say. The clincher came when the article went on to say that

"the Shadow Scottish Secretary who is barely known outside Westminster, is higher than Mr Osborne."

That confirms the wisdom of the immortal Mark Twain quotation:

"It is better to stay silent and look a fool, rather than speak and remove all doubt."

It has been a sad period for the Conservative party, which has rarely looked more foolish.

We have to remember that the Conservatives' flagship economic policy, which enabled them to look both ways and tell completely different audiences that they were on their side, was to share the proceeds of growth. It was launched against a backdrop of sunlit trees by a leader who told us, from the beneficial standpoint of lifelong security in terms of his own finances, that GWB-general well-being-was more important than GDP. How much the rhetoric of Conservative Front Benchers has changed since then.

David Taylor (North West Leicestershire, Labour): I counsel caution when speaking in this Chamber. I once said that economics could not have been on the curriculum of the minor public school that the shadow Chancellor attended, and within minutes I had received a flurry of abusive e-mails. Will the hon. Gentleman have time to reach the worst quote of all from the shadow Chancellor-that the function of financial markets is for people to make loads of money out of the misery of others?

Jeremy Browne: The hon. Gentleman sets me a very difficult challenge, which is to chronicle in 15 minutes absolutely every inappropriate remark made by the hon. Member for Tatton. I am concentrating on some of the particular lowlights. It is a depressing experience for all of us who want to see a young man do well in politics. He is very enthusiastic, and his reputation was extremely good, but we are now witnessing a very difficult period for him. However, that is how the Conservatives have positioned themselves. They wanted to share the proceeds of growth, seeming never to have considered that there may not be any growth to share the proceeds of. One can only infer that the logical conclusion is that they now want to cut spending and increase taxes, which would be the flipside of that-in other words, sharing the pain of negative growth.

The other policy that the Conservatives have been giving us a cast-iron promise to put in place is to match Labour's tax and spending commitments. We are now in an unhappy position whereby Labour's tax and spending commitments are not quite as impressive as the heir to Blair-the leader of the Conservative party-clearly originally thought that they were. Only yesterday, there was an unseemly clamour in the Sunday newspapers for Labour and the Conservatives to position themselves much closer to the commitments made by my hon. Friend the Member for Twickenham and the Liberal Democrats.

Steve Webb (Shadow Secretary of State for Energy and Climate Change, Energy and Climate Change; Northavon, Liberal Democrat): The suspense is too great for me to wait to see whether my hon. Friend is going to come to another example: when fuel prices were rocketing, the shadow Chancellor promised to cut fuel duty to keep things fair. Does he agree that the logic of the Tory position is that we should now be jacking up fuel duty to keep things fair?

Jeremy Browne: That is another extremely well-informed intervention. What the Conservatives did-I suppose that it is only fair given the lack of experience on their Front Bench-was rush into panic mode when they thought that there would be an opportunity for a quick hit when prices for unleaded petrol were going up to 110p or 112p a litre. My party had a reasonably detailed conversation about the Conservative proposal, concluded that it was completely potty, and therefore decided not to support it. We were well advised in that, because now the Conservatives, keen to tell everybody their policies, will be putting out leaflets, inappropriately called "In Touch", in every constituency saying, "Vote Conservative-we'll put your petrol up by 5p a litre." [ Interruption . ] It is 5p this week, and it could get a lot worse. The Conservative proposition is, "Vote for the same taxes as under Labour apart from more on petrol." That is not a particularly impressive piece of positioning.

My message to Conservative Members who long instead for decisive and coherent leadership is this: "You do not have remain trapped in the high-tax, wasteful spending box into which your shadow Chancellor has locked you. You can support this Liberal Democrat motion and show your constituents that you too believe in the values put forward by my party-effective public spending that offers real value for money, low interest rates to help struggling families and small businesses, and real tax cuts now for low and middle-income households, who need our help." Those are the right policies for Britain; they are Liberal Democrat policies, and they need to happen now.

. . Question put, That the original words stand part of the Question: - The House proceeded to a Division. The House having divided: Ayes 58, Noes 303.