Banking reforms and the NHS – Politics Show interview transcript

Jon Sopel: First of all your reaction to these proposals from what we know of them?

Ed Balls: Well we don’t really know any of the details yet, we’ll get that tomorrow morning and it is a very thorough and a very respected commission and there was an attempt by the government a few months ago to try and do a deal with the banks. And the commission, the commission was having none of it they will be very independent. I think we need to see the details but it is very important that they don’t duck the challenge. I’m sure they won’t, it is very important that George Osborne implements this fully. We need a tough solution which can ensure this can never, ever happen again. So many families and businesses have suffered, we need accountability, we need transparency, some tough firewalls to protect the tax payer from those risky activities the banks do, some more competition. And I’ve set three tests today: can we ensure when the report is published and implemented that it can never happen again, can George Osborne get the international agreement we need to make sure this isn’t only happening in Britain, around the world, and thirdly will it support the long-term investment and business needs of our economy? Those are the three tests, they need to be passed and most important of all we must make sure this can never happen again.

JS: And this commission is effectively sorting out the mess, clearing up the mess that Labour left behind?

EB: Well look that is what the Conservatives would like you to believe, but it was a global mess, in every part of the world we had these banks failures and in Britain we didn’t regulate this in a tough enough way, there is no doubt about that. You referred to that a moment ago, George Osborne kept saying to me when I was a finance minister that we were being too tough, that we were actually being too heavy in our regulation whereas in fact we weren’t tough enough and that was the problem and we need to make sure that we can ensure for the future in Britain and around the world, the taxpayer doesn’t have to step in and bail out banks in this same way again.

JS: Yeah, I’ve got this lovely quote from you: ‘When the City and the Tories called for lighter regulation, we should have ignored them and been tougher still.’ It gives the impression that you were kind of hanging on the words of IDS and William Hague and George Osborne and cowering when they sort of criticised you?

EB: Well the interesting thing was we brought in statutory regulation after 1997 and the Conservative voted against that legislation to toughen things up. George Osborne and his colleagues kept saying in 2005, 2006, 2007, they kept saying too much regulation, you’ll drive the jobs abroad we need to be softer, less European intervention. They were wrong and I am saying very clearly we weren’t tough enough in the way we regulated the banks. Governments failed around the world, but also we stepped in and stopped a depression, we stopped the financial meltdown many people feared and the next stage, which is what the commission is all about, is to make sure that for the future we can stop this happening again. So, look, sometimes politicians, governments, regulators don’t get things right, we all got this one wrong, and the important thing is to make sure we don’t repeat these mistakes again.

JS: OK, let us move on to the health service, I don’t know whether you heard the interview we just did with Norman Lamb, Nick Clegg’s chief political adviser, chief parliamentary adviser, I wonder what you thought of the significance of it?

EB: I thought it was very significant indeed. I was watching, clearly Norman is very close to Nick Clegg, his closest political and parliamentary adviser, he has very great concerns. He made a very important point which is that you shouldn’t say reforms are always good, there’s good reforms and there are bad reforms and these are bad reforms. They are not popular, they won’t work, they will be destabilising financially and also in terms of treatment. And what do we actually see already in the NHS? We’ve got waiting times going up, we’ve got frontline staff being laid off, it’s no wonder the Royal College of Nursing is saying morale is plummeting in the NHS. What we don’t want is a pause, or a PR initiative, what we want is for the government to say we’ve got this wrong and, as Norman Lamb was saying, have a change of direction. And I think many people watching this programme will think well if they can do that in the NHS why don’t they do that on tuition fees and on spending cuts which are too deep and too fast and pushing up unemployment? The fact is Nick Clegg seems to be willing to go along with just about anything to stay in the government. It is good to see Norman Lamb is taking a stand, as other Liberal Democrats are. We’ll support them in that. These reforms are not working, they are very reckless and I think Norman Lamb is right the government needs to change course on substance not just a bit of spin.

Catherine MacLeod: Hello Ed. Going back to the banks will you be at all concerned of asking the commission or George Osborne indeed to ensure that the government of the banks themselves is better, because although there may have been governments at fault and regulatory authorities at fault the banks seem themselves seem to not be very clever, that the one hand didn’t know what the left hand was doing, is that important?

EB: It is and that is one of my points about the international agenda. George Osborne was trying to do a deal behind the scenes a few weeks ago in the UK. But on the international stage, transparency, proper corporate governance change, these things are being discussed internationally, people say to me the UK isn’t even really at the table at least the UK Treasury is not really driving that agenda and if we only have reforms in the UK the danger is we lose jobs to abroad. So it is really important we get this right. It is about corporate governance and accountability.

Tim Montgomerie: Mr Balls, don’t you think this is an opportunity for you though to apologise, you were there with Gordon Brown throughout those years, you set up an entirely new regulatory system, that completely failed, failed to get on top of the banks and failed to deal with the crisis moment, do you think you have some real humility and should really be apologising to the country?

EB: Well if you were listening to Jon Sopel a moment ago you would have heard him say that a couple of weeks ago on a national broadcast I said, for the mistake we made in bank regulation, me and the Labour government, I am sorry for that. And we, to be honest, listened maybe too much to those people in the City and in the Conservative Party urging us to be softer on the banks. What I am not going to do is apologise for the extra spending in the NHS, in our police, in our schools. That made a huge difference and in that case you know it was actually our investments that have secured a better future for our country but on the banks we got that wrong, definitely.

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Posted April 10th, 2011 by Ed's team

One Response to “Banking reforms and the NHS – Politics Show interview transcript”

  1. Sweetness_and_light says:

    The seeds of a crisis.

    Ninety seven per cent of the money supply (broad money) is created by private banking. Over the last 10 years UK banks created over £1.5 trillion of credit (e.g. M4 has grown to £2.6 Trillion in 2011).

    Whilst money is created in this way we are destined to see a litany of failing economic symptoms – Households will remain in permanent debt; the Government will never be able to smoothly fund necessary infrastructure or growth enhancing projects; the UK will suffer continual boom and bust of recessions and ever increasing grinding inequality.

    The credit created by banks when they expand the money supply, as an accounting relationship, equates to growth in household debt (£2.6 trillion of it in the UK). In return for this debt UK households have gained part ownership of some assets (houses mostly).

    Unfortunately, these assets are not at this time growing in value. This is the underlying truth of all recessions and demonstrates the problems our current system of monetary creation causes for both households and the banks.

    The business cycle, under our current system for money creation, is inevitable. The banks create more and more credit which has to correspond to household debt. The debt builds up until either inequality or inflation cause a lack of confidence which results in the real value of assets bought with the credit faltering. At this point there is a either a clamp down on inflation or a financial liquidity crisis with investors fleeing asset markets. The pattern has been growing in magnitude over the decades.

    The responsibility for this growth in debt cannot entirely by laid at Labours feet. George Osborne and the Conservatives were pushing for lighter regulation. The Governments of other G7 countries were similarly blindsided by the growing problems.

    In short, the limits on the growth in the money supply had been relinquished to the Basel Committee in Switzerland who set a woefully inadequate contingent capital ratio for international banks. Similarly, the independence of the Bank Of England in setting policy interest rates was also responsible for stoking up demand in the banks to create new unparalleled levels of leverage and debt.

    The 2008-9 recession.

    In 2008 the Labour Government was forced, along with many other Governments throughout the World, to respond to the liquidity crisis and bail out the UK financial sector.

    Despite the current Governments misrepresentation of the facts, prior to 2008 the Labour Governments fiscal position was fine (a structural deficit at 2.3%, debt interest costing only 2.3% of GDP, total debt of 35% of GDP). George Osborne was promising as late as 2008 to match Labour spending pound for pound. The Liberal Democrats, under Nick Clegg, were promising increased public sector spending.

    However, the bank bailout and recession of 2008-9 changed everything. On top of the stunning direct costs of the bailout (£120 Billion), guarantees and asset purchases from banks worth many more hundreds of billions, and with household debt at unprecedented levels, the recession caused a huge increase in unemployment, business failure, drop in Government tax receipts and a huge drop in UK output.

    Osborne’s Austerity measures.

    Osborne’s austerity measures *aim* to (but will not succeed) reduce Government debt. This again, is an accountancy equivalence and as the OBR forecasts show, is at the expense of an unsustainable rise in household debt (from 159% of household income to 173% in 2015).

    Apart from the unfairness of the cuts there is a huge likelihood, as we saw in the Great Depression, in Japan in the late 1990s and as we are seeing now in Ireland, Greece, Portugal and Spain, that austerity will cause economic growth to falter, unemployment to rise, tax receipts to fall and
    Government debt to increase.

    The concept of financing future Government spending needs through interest bearing bonds is at best wasteful and at worst corrupt. The people who gain from the bond issuance process are the banks and institutional funds who cause the recessions that make them necessary in the first place.

    Governments are not like households or normal businesses – they are able to directly create money as we saw with the Quantitative Easing programs. The issue with Quantitative Easing was that the money created was aimed at the wrong targets – banks and high end conglomerates – and has merely stoked commodity and oil inflation or precipitated Sovereign debt crisis in the Euro countries because it is money given to investment

    An unacceptable future- the democratic shortfall.

    We are at a cross roads. We can limp through the current continued crisis – slowly nullify the public sector debt built up from the banking crisis through austerity and debt issuance through interest bearing bonds.

    The result of this will be the cycle perpetuating itself. Households will emerge into the upswing of the economic cycle with huge levels of debt. The current unsustainable levels of debt will be exacerbated as the only way to create money within our current system is through the banks issuing more debt to households.

    The Government will build up structural debt with the inevitable return of the next recession at the end of the next business cycle.
    With the obvious moral hazards of the 2008 bail outs unresolved, the likelihood of another liquidity recession and huge bail out for the banks looks like a significant risk.

    The only stakeholders who will remain immune to hardship are the banks and investment funds. Come rain or shone – bonuses will flow. In hard times funding will come from Government, through interest on bonds, Quantitative Easing and direct bailouts. In good times, from the creation of debt in private households.

    This is not an acceptable way to treat the citizens of the country whose understanding of the underlying economics of money creation and financial sophistry is growing.

    An integrated solution.

    Fortunately, there is an alternative economic approach to the creation of money, the funding of future Government spending needs and the regulation of banks.

    The problems faced by the Country are many fold. However, let’s start with the stimulus badly needed by the economy to return labour and private industry to full capacity following the bankruptcies and unemployment caused by the recent recession.

    The UK Government is able and should play a greater role in the creation of the money needed to stimulate demand in the private sector directly rather than allowing this to be the province of private banks – banks use the money creation process to increase household debt which is unsustainable.

    Government spending needs should not be met by issuing interest bearing bonds and gilts. This process is wasteful and sows the seeds of future recessions.

    Instead of issuing interest bearing bonds the Government should, when the economy is below full capacity, create some of the money supply directly and transfer it to the citizens of the country in order to reduce household and government debt and stimulate the economy.

    This could be done in many ways – through reduction of taxation; capital funding directly for industry, public sector infra structure programs or public sector employment. These are the exact opposites of austerity.

    An elegant approach would be the creation of a Citizens Allowance which would replace the plethora of existing working and unemployment benefits and state pensions.

    The idea would be to give all working and non working voting citizens of the UK a regular allowance that provides the social security to meet their needs in times of hardship. The allowance would not be targeted or means tested.

    Any income earned by citizens on top of the Citizens Allowance should be retained by them with no effect on the Allowance. This would removes the need to pay many, many other benefits such as working tax credits, child benefits, unemployment benefits and so forth. The Citizens Allowance would also remove the myriad disincentives that the current tax and benefit system provides to avoid work. Importantly the Allowance would be progressive and also mitigate household debts and stimulate economic growth to allow economic recovery.

    This policy wouldn’t be inflationary as the money used to pay the Allowance would in many cases be used to pay down household debt and to reduce unemployment. There is little room to create wage pressure at the moment with the economy on its knees. A parallel progressive reform of the tax system would also be parsimonious. The efficiency created form a single integrated tax/benefit system would allow huge reductions in adminsitration costs at HMRC and DWP.

    To further ensure the process of public sector stimulation is not inflationary and to prevent future financial crisis the contingent capital requirements for banks should be increased in parallel. In effect money created by the Government would replace that created, as debt, by the banks.

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