Browne, Cable and Öpik on recession and repossession

6.50.57pm BST (GMT +0100) Thu 3rd Apr 2008

' . . this House notes with concern the risk of recession in the United Kingdom economy . . '

[Mar 27] Vincent Cable (Twickenham, Liberal Democrat): I beg to move, 'That this House notes with concern the risk of recession in the United Kingdom economy; recognises that although the collapse of the United States mortgage market and the global 'credit crunch' are a catalyst to the current downturn in the United Kingdom economy, record levels of personal debt and the extreme bubble in the housing market were already major destabilising factors; further notes that because of inflation and weak public finances there is little scope for stimulating demand; applauds the efforts of central banks to reintroduce stability into the world money markets, but warns against the use of taxpayers' money in bailouts which cause serious concerns about moral hazard;

further notes with dismay rising levels of personal debt, exacerbated by high mortgage interest rates; further notes the rising evidence of a major slowdown in the United Kingdom housing market; registers with concern the increasing number of people requesting help regarding mortgage payments; further notes with concern that repossession orders are now at the same level as in 1990; regrets the Government's failure both to admit the current problems in the housing market and to act to prevent mass home repossessions; calls upon the Government to consider options being used in the United States, particularly to encourage banks to explore options other than repossession; and further calls upon the Bank of England to include house prices in the measure of inflation.'

I am grateful for the opportunity to introduce this debate on a motion in my name and those of my colleagues. Perhaps I will be able to pursue answers to questions that I was not able to ask earlier in our proceedings. The Government's reputation rests very heavily on their economic credibility and performance, and they have won two elections on that basis. Two propositions are at the heart of their credibility: the first is that they have enjoyed the longest period of economic growth since records began in 1701-I think that that is how the case is put-and the second is the mantra that there is now an end to boom and bust. The first of those two propositions is still true, but looking rather precarious, and the second is beginning to look rather ridiculous.

This is an Opposition day debate, and I know that the convention is to deal with such matters in a rather Punch and Judy way, but I shall try to avoid doing so for several reasons. First, we are at the beginning rather than the end of a difficult period for the economy, and it may be that with good policies and good luck, we shall avoid the worst, such as something similar to what happened under the Tories 15 years ago. Secondly, some of the problems are home-grown and result from failures of Government policy, but some are imported-particularly the credit crunch-and the Government are not responsible for those. We need to acknowledge that there is a mixture of the two.

The other point, which is technical but rather important, is that some of the problems we are now confronting are difficult and perhaps unprecedented. How does one deal with a big debt deflation problem, as it is called? How do we deal with the collapse of a bubble in an asset market such as housing? How do we deal with a drying up of credit in the banking system? Those are relatively new problems to which there are no obvious easy answers. I want to set some ideas for discussion as to how we might approach those questions.

However, I do not want to be too generous. There are clearly criticisms that one can make of Government performance, and the central one is complacency. Many of the problems that we face were anticipated in the past. I recall raising the issue of the housing market and debt with the current Prime Minister in 2003. At that time, I put this to him:

"On the housing market, is not the brutal truth that...the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level?"-[ Official Report, 13 November 2003; Vol. 413, c. 398.]

The then Chancellor's reply was that I was scaremongering, but the scariest thing about my scaremongering is that my predictions turned out to be largely correct. There are major concerns in that area.

Let me just review the problems. First, we have an acknowledged slowdown in the economy. We are not in a recession, but the slowdown is acknowledged. The Government's forecasts are significantly more optimistic than the consensus among independent forecasters, who, a few weeks ago, were predicting 1.7 per cent. growth for the next year. Those estimates have been marked down week by week. We have other estimates from companies such as JP Morgan, the bank advised by former Prime Minister Tony Blair, that there is a one third risk of recession. Lehman Brothers have now joined it in making such an assessment.

In addition, we have severe, outstanding problems, many of which relate to problems of personal debt in a range of households-not all of them, but a substantial number. The total amount of personal debt in relation to people's income is now roughly of the order of 160 per cent.-twice what it was when the Government came to office. It is the highest figure in our recorded history, and the highest in the developed world. Now, that is just a figure, and it does not necessarily relate to people's everyday lives. What does relate to their lives, however, is the amount of income that they have to spend in service of debt. That now stands at about 20 per cent. and comprises mortgage payments, interests on mortgages, unsecured loans and credit card payments. We are now at roughly the level of debt service required as during the great Tory recession of the early 1990s.

Philip Davies (Shipley, Conservative): I am sure that most people will share the hon. Gentleman's analysis of the problems. However, the Liberal Democrats are usually very good at telling everybody what the problems are, but very weak on the solutions. Does he agree that at a time when people are struggling to pay their mortgages, energy bills and petrol prices, and when their pay is going up slowly, if at all, one of the best things that the Government could do is reduce the burden of taxation on those hard-working families? It is quite the wrong time for the Government to scrap the 10p basic rate of tax.

Vincent Cable (Twickenham, Liberal Democrat): We do agree with that, and we argued that case at the time. The hon. Gentleman was probably rehearsing his intervention while I was speaking, because I did say that half of what I wanted to say concerned constructive solutions. However, I agree with his specific point, which we have made many times.

In addition to the problems of debt and the problems of debt service, there is a problem at the heart of the economic difficulties, which is inflation in the housing market, its consequences and the turnaround that may come from it. Since this Government came to office, the relationship between price and earnings has roughly doubled for housing. That has meant that a lot of people are a great deal wealthier and they have been happy to spend that wealth, which raises the question of what happens as the market goes into reverse.

At the core of the Government's case, which is summarised in their amendment, is a statement made by the Chancellor a few weeks ago:

"Housing market conditions today are very different to those we saw in the early 1990s. Interest rates remain at comparatively low levels-as do mortgage rates. And unemployment is currently at 30-year lows."

That is true, as far as it goes, but it is deeply misleading and extremely complacent, for several reasons. First, if we look back at what I call the great Tory recession-[Hon. Members: "Which one?"] There were several, but I am talking about the last one, at the beginning of the 1990s-

Philip Davies (Shipley, Conservative): Was that the one when we were in the ERM?

Vincent Cable (Twickenham, Liberal Democrat): We were dealing with extreme conditions at the end of the Lawson boom- [ Interruption. ]

Alan Haselhurst (Saffron Walden, Deputy-Speaker): Order. I do not like to interrupt the hon. Gentleman-I am sure that he is capable of taking care of himself-but we really do not want sedentary exchanges across the Chamber. They spoil the debate.

Vincent Cable (Twickenham, Liberal Democrat): Thank you, Mr. Deputy Speaker.

At the end of the Lawson boom, interest rates stood at 15 per cent. and inflation at 10 per cent. Those are extreme figures, but the practical reality was that the cost of borrowing was 15 minus 10-the real cost of borrowing was 5 per cent. real interest. Of course, we have different conditions today, as the Chancellor said. Someone borrowing at current rates will probably be paying 7.5 per cent. interest, but official inflation is about 2.5 per cent. The cost of borrowing in real terms is the same.

There is another problem that is a simple point of arithmetic and logic, but I sense that the Chancellor and some of his Ministers do not fully appreciate it. Since the last experience, prices and mortgages have increased enormously in absolute terms. The absolute value of a mortgage has grown from £40,000 in 1999 to about £160,000. In relation to earnings, the level has doubled. In practical terms, that means that somebody trying to buy a house has to pay roughly twice the amount in mortgage servicing as they would have done in 1990. Interest rates may have halved, but the total mortgage outlays are the same because the mortgage is so much bigger. That accounts for the fact that so many households are under enormous stress.

The Chancellor would argue-he is right up to a point-that these days we have a sensible way of managing interest rates with the Bank of England, and the Bank of England can cut interest rates. The context is rather different, however. The interest rates set by the Bank of England rose from 5.5 per cent. in March 2003 to 7.5 per cent. in July 2007-an increase of 2 per cent. Since then, it has been trying to cut rates, but the experience of households is not that of rate reductions. The alarming fact is that many households face increased interest rates because the banks are not passing on the cuts. They are not doing that because there is a credit crunch and credit has become unaffordable. Even those who have to refinance mortgages and can get them, which is unusual, pay increased rather than reduced rates.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat): Does my hon. Friend share my concern that 60,000 families now take home less than £1,000 a month and spend 75 per cent. of that take-home pay on mortgage repayments? Those people will feel the pressure, and nothing is being done to tackle the problem. The figure for those affected is more than double the total number of repossessions last year.

Vincent Cable (Twickenham, Liberal Democrat): My hon. Friend is right. She describes an extreme situation, but many others approach that position. If interest rates remain high because of the crisis in the banking system, many people will find current circumstances unsustainable.

The key point in the Chancellor's comment that I cited, about which he was right, is that unemployment is much lower. That specific problem does not therefore exist. However, I noted from the Red Book a table that describes the assumptions that the National Audit Office audited. The Government are assuming-I do not know whether the Financial Secretary is aware of it-an increase in unemployment this year of approximately a couple of hundred thousand to a million. That may be a small change, but the Government acknowledge in their forecast that unemployment will increase, albeit at a low level. People find their mortgages unaffordable for many other reasons, such as short-time working and lack of bonuses.

The new dimension, which changes the picture, is the fall in the price of homes that is beginning to occur. The obvious reaction is to believe that that is a good thing. If homes are unaffordable, it is surely desirable that their prices decrease to a more sensible level. That is correct, up to a point, but it depends on the extent to which and the speed at which it happens.

According to the Nationwide's estimate, we have had five months of continually falling average prices. We have a forward market for property, which suggests that prices will fall by 10 per cent. this year and that, in five years, they will not increase at all-in other words, they will fall substantially in real terms. Some forecasters are talking about falls of 25 to 30 per cent. in a couple of years. Although the Government sensibly do not venture into forecasting houses prices, they assume that the market is heading for genuine difficulties. We know that because of the Red Book's pessimistic forecasts for stamp duty receipts, which are due to fall by £800 million. They therefore assume a big fall in transactions.

The Council of Mortgage Lenders confirms that 3 million families currently have properties with a loan-to-value ratio of more than 90 per cent. If the numbers that I have cited, such as the 10 per cent. fall in a year, materialised, all those families would be in negative equity in a year. That is happening to many people now.

Greg Knight (East Yorkshire, Conservative): Is there not another new dimension that needs to be taken into account? Does not the hon. Gentleman accept that, back in the Lawson years, most borrowers would lend only up to two and a half times a family's annual income, whereas nowadays, some borrowers lend up to five times the annual income?

Vincent Cable (Twickenham, Liberal Democrat): The right hon. Gentleman is a right. A great deal of reckless lending is involved. The Financial Services Authority-the regulator-made that specific point a few weeks ago, when it estimated that 1 million families are at serious risk because of income multiples of around 3.5, as well as high loan-to-value ratios. There is a specific category of 1.4 million families who have taken the two-year, fixed-rate mortgages-teaser mortgages, as they are called-and now have to renegotiate them. Many find that they cannot raise the capital, that high deposits are being demanded of them or that even if they can raise the money, their interest rates are increasing from 4 per cent. to 7.5 per cent. That is only on the mortgage. Many were given unsecured loans, which are increasing to 15 per cent., as a part of the package. The position is therefore unsustainable for many of those 1.4 million families.

We are beginning to see evidence of that in the repossession process. The Government amendment correctly points out that repossessions are much fewer than in the previous major financial crisis that we experienced. There were five years in the early 1990s when 300,000 people lost their homes, and the rate last year was about 27,000. The prediction of the Council of Mortgage Lenders for this year is 45,000. That is somewhat reassuring, but I do not know whether Ministers have spotted that the first stage of the repossession process-the so-called orders, which go to court-now operates at a comparable level to that of the last slump. There are various reasons for that. Banks are no longer friendly, local high street banks. The securitisation of much mortgage debt means that many repossession orders are triggered by computer and no personal relationship is involved. As soon as somebody gets into difficulties, the order goes to court and that person is in the first stage of the repossession process. The problems may well be a great deal worse than in the last housing slump because of such changes.

Philip Davies (Shipley, Conservative): The biggest employer in my constituency is probably the Bradford and Bingley bank. My experience shows that it does all it can to help people stay in their homes and that repossessing people's property is a last resort. I hope that the hon. Gentleman will not try to go for an easy hit by attacking banks when many do an awful lot to try to help people stay in their homes.

Vincent Cable (Twickenham, Liberal Democrat): The hon. Gentleman has a romantic view of contemporary banking, which is not reflected in the reality that most people experience. Perhaps he should have been here late on Monday when we discussed Northern Rock, which is one of the most aggressive banks.

Robert Smith (Aberdeenshire West & Kincardine, Liberal Democrat): Is not there a growing concern that it is not necessarily the mortgage but the credit card and other debts, about which there is even less tradition of concern for the individual, that trigger repossessions?

Vincent Cable (Twickenham, Liberal Democrat): My hon. Friend is right. An especially nasty trick is being played at the moment whereby many banks offer "Together mortgages" that are 125 per cent. of the value of the house. The extra is used to buy cars and go on foreign holidays. Anyone who defaults on the extra bit, above the mortgage, can be taken straight to repossession. That is happening.

The current crisis could be much more difficult than the previous one because there are no safety nets. The right hon. Member for Hitchin and Harpenden (Mr. Lilley) made an important policy decision when he was in government. I am not making a personal comment, but referring to his ministerial record. He abolished the system whereby people could go to social security for help with mortgage payments. It now takes nine months before that position is reached. In reaching that decision, the right hon. Gentleman made the calculation, which was probably realistic at the time, that half of all borrowers would take out insurance in future. In practice, that has not happened. Only one fifth of households have taken out insurance. We are now in a different environment from the early 1990s, and there is no safety net. There is no social security assistance and there is no insurance. A comparable degree of pressure on payments therefore results in a much greater likelihood of people being taken to court and losing their homes.

Alistair Burt (North East Bedfordshire, Conservative): As a former Minister in the same Department as my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), let me tell the hon. Gentleman that the calculation was also made that, in the first instance, building societies would renegotiate and spread their payments for six months, thus relieving a pressure on the taxpayer, but not putting individual householders in a more difficult position, and that was indeed what happened.

Vincent Cable (Twickenham, Liberal Democrat): That might have happened at the time, but it is not happening now, and I will come to how we might address that failing.

Andrew Stunell (Hazel Grove, Liberal Democrat): Does my hon. Friend agree that his figure of one fifth for insured households might be too optimistic or an overestimate of the cover available? Many of my constituents have found that those insurance policies do not work at the exact moment they need them to work.

Vincent Cable (Twickenham, Liberal Democrat): That figure probably is an overestimate, which also reflects the fact that many policies are extraordinarily expensive. Those who now recommend insurance as a way of dealing with the problem fail to take into account the large cost associated with payments protection insurance, so my hon. Friend is right.

The concluding part of my remarks is about what can be done. Again, I want to be constructive and raise questions about ways forward, rather than just criticise how things are being managed now. First, what can be done within the conventional policy framework? Normally when there is an impending recession, the standard answer, which we learnt or taught from economics textbooks, is to cut interest rates and run a budget deficit-they are the standard apparatus of macro-economic policy-and that is indeed happening aggressively in the United States, but not here. We know that that is happening in the United States, because the chairman of the Federal Reserve, Mr. Bernanke, did his PhD thesis on the great depression from 1929 onwards. He is terrified, and says so publicly, that we are in danger of repeating that experience. He is desperate to head it off and is doing whatever he can.

Our problem is that the Government are enormously constrained in what they can do that is similar. They made a good decision 10 years ago to make the Bank of England independent. The Bank now sets interest rates, which are not politically driven, and is making it absolutely clear that its first responsibility is to follow its mandate, which takes account of inflation, which is currently above the level that it should be pursuing. Therefore, the Bank's scope for cutting interest rates aggressively is limited. In addition, the Government claim that they have stayed within their rules for fiscal policy, but we do not know that, because there is no independent monitoring. In fact, the Government are up against the very limit of their fiscal rules and have absolutely no scope for the kind of expansionary policy that one would hope for in a period of recession.

Even if it were possible to do things those things-to cut interest rates aggressively and run a fiscal deficit-there is little evidence to suggest that they would solve the problems that we now face, because interest rate cuts are not being passed on by the banking system, for the reasons that I have described. The conventional policy framework is therefore not adequate. The question is whether we could reform it.

My colleagues and I have argued for several years that the Bank of England should have within its mandate a responsibility to take account of the housing market, not just conventional inflation. If the Bank had done that, it would have raised interest rates sooner, in the boom, and would be able to cut them more aggressively in a slump, now. That is one concrete suggestion that should be considered.

The second policy question is whether the Government should simply be watching the drama of repossession unfold or whether they should intervene to do something about it. The Government's position is currently entirely passive. They take the view that there is no great problem, and that in any event it is nothing to do with them. However, we should perhaps at least consider what the options are.

The first option, which the Council of Mortgage Lenders and several non-governmental organisations, such as Shelter and the citizens advice bureaux, are pursuing, is for the Government to revive the pre-1994 idea of giving greater social security help to people in mortgage difficulties. It has been suggested that it would help, for example, if the Department for Work and Pensions could secure a second charge on a home as a way of giving extra help. That is not the best way forward, because we would effectively be transferring all the risk from the mortgage lenders who made loans in the first place to the taxpayer. However, if the crisis develops momentum, that kind of idea might have to be considered.

What else could be done? One possibility, which we are keen to promote, is for the lenders to have a much greater responsibility, so that if a default is triggered, there should be a process whereby the debtors have access to independent financial advice and the banks are required to offer a range of payment alternatives, which might include shared ownership, for example. The banks will say, "Well, that's all in our code of conduct," and indeed it is, but there are plenty of rogue lenders who are not bound by that code and others who do not observe its spirit. My question for the Government is whether they are considering the arguments for and against making the code of conduct binding on the mortgage lenders, requiring them to do what is currently regarded as good practice.

Jim Cousins (Newcastle upon Tyne Central, Labour): The hon. Gentleman has spent the past year denouncing the lending practices of banks in the most dramatic terms, using such expressions as "close to a scam", "irresponsible lending", "rubbish mortgages" and "poor assets"-that was his phrase on Monday night. Now that he is staring the consequences of his own policies in the face and does not like them, his solution is to compel the banks to carry the problem, in the middle of a liquidity crisis, on their balance sheets.

Vincent Cable (Twickenham, Liberal Democrat): I would have thought that the simple logic is that if lenders have behaved irresponsibly, there is an obligation on them to behave more responsibly in future. I will come to the question of how that affects liquidity and the balance sheet-quite rightly, because that is part of the argument-but there certainly should be an obligation on banks that have lent irresponsibly to the people who have borrowed and are now in considerable difficulties.

Simon Hughes (North Southwark & Bermondsey, Liberal Democrat): In looking for solutions, may I say that many families-probably more in the past year than at any time over the past 25 years in which I have been here-are coming to me with multiple debts and pressures in respect not just of their homes, but of credit cards and the like, which my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) mentioned, so could not the Government add one other thing to the list? Could they spend a bit of the money that they spend on publicity on helping people to go to the one-stop-shop advice centres that exist, which can consider their position in the round and give them advice that enables them to manage their way out of the problem, rather than just rely on the banks or one agency to help in their sector, while those people are struggling with the rest of their debts?

Vincent Cable (Twickenham, Liberal Democrat): That is a constructive suggestion, which builds on a policy that we have been arguing for. An excellent report was published for the Government a few weeks ago by Mr. Thoresen that developed that point. Unfortunately, like so many other good reports prepared for the Government, it is in danger of sinking without trace, because it requires somebody to take responsibility for rolling out a network of advice, which, as my hon. Friend correctly says, is so necessary.

The final option that we need to consider is whether, in current circumstances, the Government, or social landlords on behalf of the Government, should act as a buyer of last resort in housing markets that are falling rapidly. In cities such as Leeds and Manchester, there are large amounts of empty buy-to-let accommodation that cannot find a user, quite apart from the properties that have been auctioned off as a result of repossessions. Social housing has been sold off over the past 10 to 15 years, as a result of the right-to-buy policy, but we now need to ask whether that policy should, in some degree, go into reverse, partly as a way of sustaining the market and partly as a way of providing more social housing where it is badly needed. That would clearly require an investigation of the borrowing powers of social landlords. I wonder whether the Minister could give an indication of whether the Government are thinking about that.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat): It might help my hon. Friend if I set that point in context: 1 million fewer homes are now available for social rent than at the time of the last housing market fall. In the last 10 years, we have seen social housing waiting lists rise by 60 per cent., so we are already in a position of high demand, which could get a lot worse.

Vincent Cable (Twickenham, Liberal Democrat): My hon. Friend is absolutely right. That is another reason why the repossession crisis is so severe. It is not just a matter of people not having safety nets; the problem is that there is nowhere for them to go if they are repossessed. They are put into a desperate situation with virtually no social housing. There is an opportunity for the Government to reverse the negative net sale of public housing, which has been so damaging in the past.

Let me move on to a third area where the Government should be thinking of reform and change. I want to respond directly to the intervention of the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), who correctly said that this problem is linked to the wider issue of the crisis within the banking system. I shall not digress widely into why the banks face a credit crunch, but we all know the essence of the problem: through very complicated financial instruments, debts, including bad debts from the sub-prime market, were bundled up and sold on in such a way that those bad debts can no longer be traced, as a result of which trust within the banking system has collapsed so that banks will no longer lend to each other, except at extreme rates, and the normal function of banking has broken down.

The question then is what the British Government can do about it. This is partly an international problem, but it is also a very specifically British problem, because the City of London is probably the largest financial centre in the world and we are all affected by how its finances develop. What is happening-it has happened over the last few weeks-is that the banks are launching a major campaign to get the Bank of England to provide them with cash with minimum strings. What they would like is for the Government simply to advance cash in return for their mortgages, particularly their poor-quality mortgages. That is happening on a very large scale in the United States, where the state is effectively nationalising the losses and risks of the banking system. The banks would dearly love our Government and our authorities to do the same here.

The Governor of the Bank of England has been taking quite a hard line on that, rather differently from his opposite numbers in the US, and I have a good deal of sympathy with him. However, he and the rest of us are confronted with a practical problem-if the banks are to continue to function and the financial system is not to seize up, there needs to be liquidity. The question then becomes under what conditions it should be provided.

We may well be getting an answer to that question, but I would like to suggest an approach that I believe the Government should support in working with the Governor. By all means let more liquidity be provided in the banking system, which has to function as a lender to businesses and households, but there should be a condition. The condition is that the banks' shareholders should accept the losses that come with bad debt. They will have to do that by accepting what are called write-downs. They will have to do that by cutting their dividend payments, by rights issues, by sales, by forgoing acquisitions-all the sort of things that banks like doing. The are going to have to go through a period of austerity in order to get their own accounts in order. That would be the condition for the advance of liquidity. The banks will hate it; they will run campaigns in the financial newspapers, saying how terrible the Governor of the Bank of England is for being so stingy and not giving them what they want, but in those circumstances it is the job of the Government to provide political support for the Bank of England. The basic point is that our banks are too big to fail, but equally, they are too big for the Government to bail out all their losses and bad debts. They will have to carry this themselves and they will have to be helped to do it.

My final point is about the future of regulation. As a result of this crisis, many of the assumptions that underlay the regulation of the financial system in Britain are having to be re-examined. We had a system of so-called light-touch regulation, which has in practice led to major financial institutions in the City behaving irresponsibly-behaving like casinos rather than lenders in many cases-and that has to be stopped. In the emergency circumstances of the present, we cannot rewrite all the rules, but in order to prevent this from happening in future, there will have to be a complete rethink of the way in which our financial institutions are regulated.

The central change that needs to be made is to recognise that markets operate in cycles. This is not some unhappy circumstance; capitalist economies always operate cyclically. They may be more efficient and may function better at certain times, but they are very cyclical, so the authorities need to ensure that the reserves that banks hold reflect the cycle; in a boom period, they should be required to hold more, and they should be required to hold less in a downturn. The whole process by which financial institutions are managed needs to be much more proactive and much more aware of the cyclical nature of the industry.

I put forward those ideas in a constructive spirit. I think that if the Government were to address them and come up with positive solutions rather than just waiting for events to happen, they might well avoid the damage that would result if they were simply to relive the experience of the great Tory recession.

. . Lembit Öpik (Montgomeryshire, Liberal Democrat): I was very interested in the earlier contribution from the Minister. I like her; she did a good job in Northern Ireland as I guided her towards securing peace there. That is no more of a claim to power than what has been foisted on us from both sides of the House this afternoon, but all the negativity that the right hon. Lady showed makes it clear that she seems to have a real downer for the Liberal Democrats.

The Minister has nothing to fear from the contributions made by me and others this afternoon, as we are trying to offer insights and, I hope, some sage counsel. Any self-respecting Government should take such offerings seriously, regardless of their source. Getting help and support from us is nothing to be embarrassed about, and it should not be shunned. Indeed, the Minister should be proud that we are offering the advice for nothing. If she were to meet Liberal Democrats socially, I am confident that she would quite like us. The crucial point is that the observations made by my hon. Friend the Member for Twickenham (Dr. Cable) are right, regardless of party position, because they are based on the facts of the current economic situation.

The hon. Member for Newcastle upon Tyne, Central (Jim Cousins), who had to go to another event, to some extent underlined the power that we Liberal Democrats have by suggesting that my hon. Friend the Member for Twickenham was single-handedly responsible for the collapse and withdrawal of the Together mortgage scheme. That is power indeed. Perhaps most interesting of all was the way in which the Minister, who sadly is not in the Chamber at the moment, likened my hon. Friend the Member for Twickenham to Private Frazer in "Dad's Army". She suggested that he was effectively saying, "We're all doomed". To take up that analogy, she surely takes on the role of Corporal Jones by suggesting that we should not panic.

I cannot resist suggesting that the hon. Member for Fareham (Mr. Hoban) has taken on a Vicky Pollard role, as his party's position this afternoon is "Yeah, but no, but yeah"; I still have not got a clue whether the Conservatives will vote with the Liberal Democrats or support the Labour party. That is a bit of intrigue and excitement to look forward to. On the subject of the Conservative position, I must correct something that he said about my choice of leadership candidate. He is right that I had a bit of a bad run of supporting unsuccessful leadership candidates, but my right hon. Friend the Member for Sheffield, Hallam (Mr. Clegg) is so good that I backed him and he still won. [Interruption.] I am willing to give way the hon. Member for West Chelmsford (Mr. Burns); I did not hear what he said from a sedentary position, but I am sure that it was very entertaining. Perhaps he should quit while he is ahead on that one.

The hon. Member for Fareham went on to claim that my words are so powerful that the very utterance of the phrase "brink of repossession catastrophe" will cause such a catastrophe to happen. If that is the case, I must be more cautious about my predictions that we will be hit by an asteroid. In practice, the prediction is not the same as the event. The purpose of the Liberal Democrats calling for today's debate was to try to avert a repossession catastrophe by trying to get the Government to take a cross-party attitude, rather than a partisan bunker mentality, towards a problem that is obviously coming our way. Perhaps that was optimistic of us, in light of some of the comments made today.

I was interested in hearing what the Conservative position was, but-I do not mean this in a rude way; it is just an observation-it seems that the Conservatives have a series of bits-and-pieces ideas, but no clear philosophical narrative to their housing and economic policies. That is the case in other policy areas, too. They can tell us what they do not like, but I have no idea what economic policy on repossessions in the housing market would be if the Conservatives were in charge. Perhaps we will hear that narrative in the summating speech of the hon. Member for Fareham, which will immediately follow mine, but I fear that we have not heard that narrative because there is not one. I shall reserve judgment until we hear what the hon. Gentleman says in about 10 minutes' time.

The hon. Member for Leeds, East (Mr. Mudie) spoke in an erudite, insightful way, as ever. He berated us for talking about the risk of recession, but what kind of debate will this be if we are censored, and prevented from discussing the real and present danger of a recession in this country? I have some disturbing statistics from my constituency. Between 2006 and 2007, average wages in my constituency went down, for the first time in years, by 4 per cent. That is not even a real-terms decrease; it is an absolute decline. The constituency of Montgomeryshire is therefore already displaying signs of recession. We ignore such statistics at our peril. If we take the mature attitude that my hon. Friend the Member for Twickenham has consistently taken in debates on the economy, we will collectively consider the issues and move forward.

Repossessions are rife and are on the up. They, among other leading indicators that we discussed, are harbingers of the doom that we were accused of spreading. Each of us has specific examples from our constituencies, where repossessions and problems with finding housing are arising all the time.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat): I have two examples from my constituency that may inform my hon. Friend's further comments. First, the local Citizens Advice branch informs me that it is concerned about the number of people who turn up in court for repossession hearings having not sought any advice at all. Does that not underline how important it is that advice is made available when people first experience difficulties? Secondly, it is not just mortgage lenders who are serving repossession notices. Some councils are now serving repossession orders for arrears of council tax. That is of great concern. There are pressures from all sides putting people's homes under threat.

Lembit Öpik (Montgomeryshire, Liberal Democrat): My hon. Friend illustrates the precise problem. This is not a theoretical debate about what might happen, but a practical debate about what is happening. When councils act in the way that she describes, and when individuals face the desolation of homelessness, we have to take ideas seriously. I ask the Exchequer Secretary to the Treasury to offer us a crumb of hope when she sums up, by saying that the Government will consider the points made by my hon. Friends the Members for Twickenham and for Falmouth and Camborne (Julia Goldsworthy), and by me. I hope that the Government will be willing to work on those ideas on a cross-party basis.

It is implicitly accepted-I shall now say it explicitly-that the problem is not necessarily that loans were given in an inappropriate way in the past. The debt crisis arose because loans were given at a time when the economic circumstances were more stable and promising. Now that we find ourselves in a more precarious position, some loans that previously looked reliable look rather less reliable. The Government cannot be blamed for all the changes in economic circumstances, but they are responsible for responding now, at an early stage, when we can still prevent repossessions-the number of which is relatively small, given the total number of householders-from becoming a big macro-economic problem due to the decelerator effect that a change in fortunes often heralds.

About £7.5 trillion-worth of real estate is in the British public's possession, but the fact that debt is coming up to £1.4 trillion is a concern, due to the sheer size of the debt and the difficulty in managing it. The British people now pay £1 million of debt interest every nine minutes. That is one reason why interest rates are so important, and have such a powerful effect on the general fortunes of our country. So what can we do about it? Well, my hon. Friend the Member for Twickenham-or, as I like to call him, the next Chancellor of the Exchequer-has put forward a cohesive strategic package that we look forward to implementing, but the country cannot afford to wait two years for that. The Minister is perfectly welcome to plagiarise our ideas; what we are talking about is a strategic narrative, to use that word again, that brings us out of the danger of massive numbers of repossessions being made, with the knock-on effect that that would have on recession.

The right hon. Member for North-West Hampshire (Sir George Young) made a very good point about house building and changing circumstances. We can consider other tools in addition to house building, such as shared ownership schemes, modular construction-that can bring down the cost of high-quality housing-restoration and the release of about 1 million homes that are lying vacant for various reasons that include financial or planning restrictions. That would immediately increase supply and deal with fixed demand, which is hard to alter.

So we have a basket of opportunities before us, which we can implement; not all of them cost a great deal of money, and some require only creativity, but it is important that we do that now, because we will not alter the demand for housing. We can alter the supply and therefore take some heat and pressure out of the system, reducing the risk of a crash as the market readjusts.

I would say in parenthesis-this is not directly related to what we are discussing today-that I hope that the Government revisit their home information pack policy. The HIP scheme does not seem to be delivering anything particularly useful to householders and, in the words of my hon. Friend the Member for Taunton (Mr. Browne), it is time for a HIP replacement. I hope we get that sometime soon. The evidence that we have seen from the Government's own surveys shows little faith in the HIP process among purchasers and, indeed, vendors of houses.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat): Does my hon. Friend agree that the Government should be a little more open-minded on the success of some of their other schemes, which are aimed at helping first-time buyers into the market? We see from the figures that uptake of the first-time buyers initiative has been very low. Just last week, I received an e-mail from a constituent who has been trying to take part in the home-to-own programme for more than three years. It concludes: "For a company and scheme that is supposed to be designed for young working couples or first time buyers, they are not giving us a chance. I also think 3 years to be on a waiting list is ridiculous. It's not as if we are waiting for council accommodation". Do not the Government need to accept the failings of their own schemes?

Lembit Öpik (Montgomeryshire, Liberal Democrat): Individuals such as the one my hon. Friend quotes are not politicians; they are real people who are looking for real solutions. To that extent, I hope that the Government accept the circumstantial and anecdotal evidence, which adds up to a clear mood music that this country is experiencing frustrations with some of the laudable proposals made by the Government. I understand that, so far, only 700 individuals have been assisted by the £100 million first-time buyers scheme, so while some of those schemes have potential, they are not realising it yet.

I thank my hon. Friend the Member for Taunton for his HIP replacement joke, which I shall not use again, and conclude with these thoughts. Liberal Democrats, like members of any party, like to compete with the Government and spar for advantage. It is perfectly legitimate for us to make party political points. Indeed, I was quite impressed with the Minister when I saw that normally mild mannered and gentle lady turn into a ferocious tiger at the merest scent of a Liberal Democrat "Focus" deliverer. But this issue is too important for that. If we get it wrong, we all lose.

Whatever the Minister says here in the Chamber, I hope that the Government are listening privately to the sage and considered advice from my hon. Friend the Member for Twickenham and others on the Liberal Democrat Benches who are more concerned with averting a housing catastrophe than with winning short-term points off the Government. The Minister, if she is listening, will accept that we raise those issues with good intentions and in good faith, and we hope that the dialogue can proceed in that way on a cross-party basis.

Ignoring the warnings is the psychology of denial. The path thereof can spell disaster. Accepting the dangers rationally and working together to do something about them may yet avert a repossession catastrophe and prevent some social damage that goes beyond words but which it is in our power to prevent.

. . Jeremy Browne (Taunton, Liberal Democrat): I am grateful for the opportunity to speak at the conclusion of this important and timely debate. The context of our discussion is a Government who have lost a degree of control and ability to self-analyse with regard to economic policy and who are, as my hon. Friend the Member for Montgomeryshire (Lembit Öpik) has just said, in a state of denial. It was truly bizarre to hear the Financial Secretary to the Treasury-at a time of global credit crunch and when the country is on heightened economic alert-talking about the good old days when Derek Hatton ran Liverpool city council. Surely even Labour Members must regard that as a truly incredible reaction to the circumstances that we face.

It is worth going through in turn the bald statistics on the current state of the British economy. Personal debt stands at £1.4 trillion. House prices are more than nine times average earnings, compared with five times at the start of the last housing crash back in 1990. As my hon. Friend the Member for Twickenham (Dr. Cable) said, house prices have fallen for five consecutive months. Real inflation for real people is far in excess of the official Government figure.

It is also worth pausing to consider the tale of the two Opposition parties and two very different approaches to what is a state of national alert. One tale is that of the Conservative party, whose future policies are as embarrassing as its past failures. Furthermore, it is worth looking back to the grim statistics-the record of the Conservative party in government-in case we forget quite how catastrophic its stewardship was of the British economy.

Between 1990 and 1997, 420,000 families had their homes repossessed. Between 1990 and 1995, house prices fell by 14.5 per cent., on average. Average interest rates when the Conservatives were last in office were around 11 per cent. and at one point reached 15 per cent. The average rate of inflation when the Conservatives were in power was 5.8 per cent. That is a truly embarrassing and appalling record and I am not surprised that they do not wish to dwell on it.

What about the Conservative party today? Its position, as I understand it, was summarised by the leader of the party, the right hon. Member for Witney (Mr. Cameron), in his Budget response on 12 March, when he said in the House that

"in the years of plenty, Labour Governments put nothing aside. They did not fix the roof when the sun was shining. . . in good years you put aside money for the bad years".-[ Official Report, 12 March 2008; Vol. 473, c. 300-301.]

That point was made by the hon. Member for Fareham (Mr. Hoban) during his contribution to this debate, but it is not what the Conservative party was saying during those so-called good years, seven or eight years ago.

When he was the shadow Chancellor, Michael Portillo, speaking at a Conservative conference on 3 October 2000, argued for more funding and tax cuts. This is what he told the conference in the good years:

"We will cut taxes on business, so that they can compete and create prosperity and jobs. We will reform Labour's taxes on entrepreneurs and on inward investment. . .We will help pensioners and hard-working families. We will restore a married couple's allowance. We will cut the duty on fuel. That gives you a flavour of my budgets".

That fiscal incontinence was not a one-off. At a repeat event, Michael Portillo as shadow Chancellor speaking at the next Conservative conference on 1 March 2001-again, in the good years that we hear so much about from the Conservative Front-Bench team-said:

"Analysts believe the Chancellor has about £5 billion more than he thought. It is perfectly possible to cut the fuel tax this year without any impact on government spending or public services. Everyone knows that Gordon Brown has a war chest."

In other words, he wanted lower taxes and higher spending.

The truth is that the Conservatives now have just two economic policies. The first policy is to criticise the Labour party for taxing and spending too much. The second policy is to tax and spend exactly the same as the Labour party is suggesting. The Conservative shadow Chancellor told "BBC Breakfast" news on 3 September 2007:

"The Conservatives will spend the same as Labour-if there is a Conservative government there will be real increases in spending."

I urge the House not to believe too readily the Conservative analysis and their changing tale about the economic circumstances in this country.

The Conservative shadow Chancellor started his time in office back in 2005 by making a trip to Estonia to see how he could introduce a flat-rate tax in Britain. He is now instructing his shadow Chief Secretary not to bring forward any proposals for Conservative tax cuts until 2015. It is no wonder that on 15 February the online version of The Spectator, a journal generally sympathetic to the Conservative party, commented:

"The Conservative leadership attacks Gordon Brown for being a ditherer and ordering endless reviews to put off making decisions. But the Tories are not averse to such delaying tactics themselves. The Conservatives' policy on taxation in recent years feels like one colossal dither".

I agree with that assessment. The shadow Chancellor and the Conservative party have no policies on the credit crunch, Northern Rock or tax.

The other Opposition party, the Liberal Democrats, by contrast, have led the debate. My hon. Friend the Member for Twickenham is too modest to say so himself, so I will quote on his behalf what he told the House on 13 November 2003-almost five years ago, before I was elected. It is worth Members listening to this. My hon. Friend said:

"On the housing market, is not the brutal truth that with investment, exports and manufacturing output stagnating or falling, the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level?"

It is amazing that someone could have made that speech in the House five years ago and that the Government paid so little heed to it. In response to my hon. Friend, the then Chancellor, now Prime Minister, said:

"The hon. Gentleman has been writing articles in the newspapers, as reflected in his contribution, that spread alarm, without substance, about the state of the British economy."-[ Official Report, 13 November 2003; Vol. 413, c. 398.]

No wonder the Prime Minister has acquired a reputation for complacency and dithering.

In an interview in The Independent on Monday this week, the right hon. Member for Norwich, South (Mr. Clarke), the former Home Secretary, was asked:

"What has been Gordon Brown's biggest mistake since taking over as Prime Minister?"

The right hon. Gentleman's answer was:

"Allowing a sense of indecision to develop".

For understatement, that almost matches the first line of the recent annual report from our most high-profile financial institution:

"2007 was a difficult and challenging year for Northern Rock".

Members who are in government at the moment are equally critical. The Under-Secretary of State for Health, the hon. Member for Bury, South (Mr. Lewis), quoted in Progress, described the attitude of the British public. He said:

"at a time of growing insecurity their anger"-

that is, the British public's anger-

"is ignited when they feel the government is losing touch with what fairness means to the mainstream majority who work hard, play by the rules and are feeling squeezed by rising utility bills, the cost of petrol and rising council tax."

According to The Mail on Sunday, the solution to that problem has been identified at No. 10: the Prime Minister is to try a new speechwriter. The newspaper ran an article in which an insider at No. 10 is quoted at length, saying that the Prime Minister's

" 'cluttered' way of delivering the Government's messages, the lack of 'personality' in his speeches and the 'stilted language that he tends to use' "

were among the problems stopping the Government from getting over their apparently entirely positive record. The helpful, loyal source went on to say that what was needed were a "few good jokes". We have been listening to Labour Members this afternoon and when it comes to a few good jokes, they were pretty good-although not in the way they meant to be.

Indeed, the Financial Secretary came up with this solution to the current problems in the housing market: better primary school education so that people can do their sums. As the average first-time buyer buys a house in their mid-30s, that sounds an excellent way of starting to address housing problems 30 years from now. However, it may not be an immediate solution.

The hon. Member for Newcastle upon Tyne, Central (Jim Cousins) appeared to blame all the country's economic woes on the speeches of my hon. Friend the Member for Twickenham. If it is that simple to stop the Government's economic problems, I am sure that, as an act of charity, my hon. Friend will make fewer speeches.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat): My hon. Friend has been speaking, ironically, about the success of the child trust fund-

Mark Hoban (Fareham, Conservative): No he hasn't.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat): He talked about the long-term potential of the child trust fund.

David Gauke (South West Hertfordshire, Conservative): No he didn't.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat): He did mention it. Although I can imagine the Secretary of State for Children, Schools and Families in his school playground aged seven discussing the rise and fall of the value of his trust fund, does my hon. Friend agree that the funds are not likely to have such an effect on the vast majority of primary school children?

Jeremy Browne (Taunton, Liberal Democrat): I agree with that excellent intervention. I regret that Members of the Labour and Conservative parties do not recognise its importance. The salient point is surely this: it is woeful for a Government Minister to say that the Government are putting in place measures to deal with today's housing problem and, when asked what they are, to reply, "We have a programme for better education in primary schools so that the children can add up better when they take out a mortgage in future." Can the Government do no better than that? It is no wonder the Blairite spin doctor Phil Collins, whom No. 10 begged to rescue its drifting ship of state, is reported to have said:

"Brown doesn't need a speechwriter. He needs a magician."

The Prime Minister certainly needs the hard-headed, practical policies that address the current malaise and were outlined and proposed by my hon. Friend the Member for Twickenham at the start of this debate. I will dwell on three key points that he made.

First, we must stop mass repossessions and fire sales of property. Before repossessions, banks must have offered free financial advice and explored all other alternatives, such as renegotiating the terms of the loan and offering shared-equity schemes. Secondly, we must change the Monetary Policy Committee's mandate so that house prices are taken into account when setting interest rates, which would be more flexible and responsive and enable the Bank to damp down housing booms. Thirdly, we must have better regulation. We need to come to terms with the fact that the Financial Services Authority has been found wanting and that banking regulation should include active, counter-cyclical management of bank reserves to prevent future cycles of excessive lending and contraction. Those are positive and responsible suggestions.

Instead, we have a Government with their head in the sand. The disaster at Heathrow airport provides a perfect metaphor for this Administration-huge budgets, inflated expectations, management incompetence, communications ineptitude, public anger and a state of total denial. This is a terminal 5 Government who are in terminal decline.

. . Question put, That the original words stand part of the Question:-

The House divided: Ayes 71, Noes 299.