We must not repeat the mistakes of the past, when unrealistic LTVs were advanced and dangerous income multiples were allowed. There must be a clear statement of lending policy and this could take the form of regulation or a model mortgage – an uncomplicated product that is regarded as a standard for the industry.
So you agree with the ban on 100% LTV mortgages?
Prime Minister Gordon Brown has been slow off the mark on this. He was advocating 100% LTV deals until a few weeks ago, years after many of us were condemning them as dooming borrowers to negative equity. We advocate the idea of what we call SafeStart mortgages which would be uncomplicated products at 85% LTV, falling to 75% LTV over five years with repayments. If there were any state guarantees involved – which of course there would be in a nationalised industry – they would apply to products of this kind.
When you announced this to the Council of Mortgage Lenders said the deals might be too restrictive. What do you think?
At the moment there are hardly any deals of this sort available. If we made SafeStart more generous in terms of deposits all that would happen in a falling housing market is that borrowers would get themselves into negative equity, with all the problems associated with that.
What would the income multiple be for SafeStart morgages?
We’ve specified an LTV but there is an argument for adding an income multiple to this. I’m less fussed about this but it would be dangerous to go much beyond 3.5 x income.
What do you think of the government’s decision to embark on a policy of quantitive easing?
This is one of the standard techniques of monetary policy although it hasn’t been used for years. It reflects the fact that the problem is not the cost of credit but its availability, and there has been a sharp contraction of money supply. So in principle this move is necessary and right but we must be careful. Expanding money supply rapidly can be inflationary unless it is done with finesse.
Do you think the government is late in doing this?
No. It’s a drastic remedy and the government has prepared the ground in terms of economic endorsement and political support.
What do you think of the fact that Northern Rock has beaten it’s target for repaying it’s loans and is to start lending again?
The government is in danger of putting the cart before the horse. It was important to specify what kind of new mortgage lending would happen and the model for this before deciding that Northern Rock should lend more. I would not want Northern Rock to lend more on the old basis of high LTVs but if it lends safely, of course it should be trading again. Circumstances have changed radically since the original terms of reference were established.
Do you believe that nationalisation of banks is inevitable, and if so why?
The nationalisation of some banks is inevitable. It was inevitable for Northern Rock or we would have been in a position whereby the government was taking all the risk and shareholders were taking all the profit, and that’s not right. In the present situation it’s important that the government provides strategic direction to banks.
For example, RBS is already de facto nationalised but the govern-ment is not exercising responsibility for it in the way it should.
But if Lloyds Banking Group was nationalised, wouldn’t it be going against some shareholders who didn’t approve of the merger?
Well, they agreed to it and voted for it. I’m not suggesting it should be nationalised but if it was to come back to the government for more money this would be in the form of shares which would take the public holding to more than 50%. We can’t just hand out money without conditionality and conditions can only be imposed if there is majority government ownership on a temporary basis,
Commentators are treating this as if it’s a radical suggestion but pundits such as Alan Greenspan, former head of the US Federal Reserve, and US senator John McCain say in the present circum-stances there is no alternative but to nationalise banks to protect the public interest.
How should the government exercise its responcibility for nationalised banks?
First, by maintaining a strong flow of lending to sound businesses and second, by separating good and bad loans. Also, it should hive off high-risk operations that don’t belong with low-risk high street lending, stop tax evasion, clamp down on bonuses and prepare banks for eventual privatisation at a profit to taxpayers.
What high-risk practices do you have in mind?
And what specialist lending such as self-cert and buy-to-let – should high street banks steer clear of these?
Buy-to-let raises specific issues but investment banking deals with vast volumes of derivatives at high risk, involving internal hedge funds. That is not acceptable because it exposes taxpayers to risk.
You say in future we need simple mortgages, so do you think mortgages got too complicated?
Yes, there were too many and they were too complicated. There was an obsession with variety and competition and now few are available. We need to be clear about the basic model.
So is competition not necessary?
A degree of competition is desirable but there were thousands of products at one point.
Another thing your party has said is that the government’s efforts to cut repossesions are having little effect. Where is it going wrong?
Top of the list is the operation of courts and its guidance to them. The government has intervened on this but without further legal changes judges are still obliged to proceed with repossessions. There needs to be legislation that gives residents faced with repossession the same kind of rights that private tenants would have if faced with eviction. The law must be changed.
Second, in relation to council rent-back schemes – which is one way of rescuing consumers – the sector should be opened up because at the moment only a small number of individuals are considered. Many are ineligible because councils are effectively choosing only top quality consumers, so those in the greatest need can’t access the facility. The criteria must be broadened.
Also, sale-and-rent-back in the private sector must be properly regulated. There have been a lot of dirty tricks.
You’ve critised the Mortgage Support Scheme. What is wrong with it?
The principle is an enlightened one and it is good that the CML is supporting it but the scheme is so circumscribed that only a small number of people are eligible. We need to take a fresh look at the conditions of the initiative.
You have also said you would be in favour of scrapping the HomeBuy Direct scheme. What is wrong with that?
It doesn’t seem appropriate to be encouraging consumers to buy properties when we are experiencing a falling housing market. Also, most of the developers we’ve talked to have been pretty scathing about its effectiveness.
What do you make of the US approach?
It has been quicker off the mark than any other country, first under Bush and now under Obama. The US can’t be accused of dragging its feet as it did in the 1930s. It has an active monetary policy and has put in place a big fiscal stimulus. And the government has intervened in banks’ operations in a dramatic way.
On the other hand, the ring-fencing of toxic debt has been a bad idea as it means the government has effectively taken on open-ended risk. Also, the stimulus package has worryingly protectionist ele-ments but by and large the US has led the way.
What do you make of the bonus situation?
I’m not sympathetic to bonuses being paid to staff at any level in an environment in which institutions are being funded by taxpayers because they have failed. Many professionals in the banking sector are fortunate to still have their jobs. The banking industry is the only one that has been systemically rescued by the government and these people must know that if they were in the car industry they would be out of work.
So they have jobs and are being paid salaries – why do they assume they should be paid bonuses on top? It’s fundamentally wrong and unreasonable, particularly for highly paid professionals but also for other bank staff.
So is it the end of the bonus culture?
It must be. In certain roles incentive payments are justifiable but these should only be made to carefully prescribed traders. Bonuses should be paid in stock that is redeemable only after a number of years, so staff are committed to their companies and do not take excessive risks.
I’m broadly sympathetic to profit-sharing schemes such as that operated by retailer John Lewis. Of course, the implication of this sort of arrangement is that staff share in the profits and the losses of a business.
Who was to blame for silly lending – the government or lenders?
Both. Lenders behaved badly but they did so because they were operating in a liberalised market, and it was politicians who created this market. Along with some others, I was warning about these problems four or five years ago so the government has had plenty of time to reconsider.
What do you think of Sir Fred Goodwin and Co being brought in front of the Treasury Select Committee?
The committee is one of the few ways in which bankers can be held to account so to that extent it was helpful. The bankers did say sorry but they did not give the slightest indication that they had learnt any lessons. Of course, a lot of other individuals and institutions should bear some of the responsibility for failures in the banking system, including the regulator and the government.
Should there be a government representative on each bank board?
The government should be an active shareholder in banks in which it has a substantial equity stake. I’ve been critical of UK Financial Investments, which consists of five people. One is a Treasury official and the other four are financiers. I think that’s wrong. The government should bring in business people who have had experience of running large companies.
What do you think about the FSA’s role?
It is obviously at the heart of a lot of the failures of regulation. It is now widely accepted that the FSA’s so-called light regulatory touch did not work well and supervision was inadequate in many cases. It has acknowledged that in the case of Northern Rock it got things badly wrong. But the organisation is now under good new management and has an energetic and intelligent chairman, so hopefully it will be sorted out.
What do you make of the controversy surrounding Sir James Crosby’s time at HBOS?
Apart from the whistle-blower incident, he has long been known as having an aggressive mortgage lending strategy.
Who would you have chosen to do a review of mortgages?
It would take a group of people to look at the sector, some of whom should have experience in mortgage lending. The sort of professionals I would want to make more use of are those in the building so-ciety sector. They were never caught up in the frenzy of irresponsible lending. Larger societies in particular have had a pretty good record, so I would hope their top people would be available to give advice.
Would you serve as chancellor under Labour or the Tories
I’m deputy leader of my party and I work within a framework of loyalty. I’m not interested in being brought in by the government. We’ve already had experience of it attempting to broaden its tent by bringing in people from other parties, and we won’t work on that basis.
My party’s philosophy is that we are in a serious economic crisis and we are interested in working with other parties in the national interest but on an individual basis. We’re not going to go off and work with another party’s government.
If the Liberal Democrats got into power, what would be your five-point plan to combat the crunch?
There are lots of points I’d like to make but the top priority is to sort out banks and get new lending going. I think this will involve a period of temporary nationalisation. Second, we believe there has to be substantial tax reform and have argued for cutting the taxes of consumers on low incomes, funding this by getting rid of tax loopholes that favour the rich.
Third, if we were moving into government tomorrow we’d scrap the recent VAT cuts and concentrate on a sensible programme of public investment – a green new deal focussed on investments that have long-term environmental benefits.
Fourth, we would institute a crash programme of social housing because of the pressing need for this but also because the building industry is on its knees. The National Housing Federation recently made some interesting proposals in this regard.
And my fifth point would be that we need a fresh approach to the way we regulate the financial sector. Banks should be split between low-risk high street operations which should operate as utilities while investment banking-style high-risk activities are hived off. We must also ensure that so-called shadow banking institutions are subject to capital adequacy rules. Of course, all these measures would need to be properly internationally coordinated.
Do you think Brown has had the final role of the dice?
The government has few options left, particularly now quantitative easing has been introduced. Of course, the UK has limited flexibility because we don’t have a global currency – we can’t borrow in our own currency like the US. And although our public debt position is not too bad, we have big structural deficits because of the collapse of income from the financial and housing sectors. This means any future government will have to be highly disciplined in its approach to public spending.
Finally, when are things going to get better?
Those who claim to know the answer are bluffing because the crisis is not fully understood even by those of us who claim to know more than others. There is massive uncertainty but my instinct tells me that because our government and the US have been active in addressing the issues, we are in a position whereby we won’t have to suffer the agony of the 1930s.
Also, so far governments have not fought with each other. They’ve been broadly cooperative although there have been lapses here and there so I’m moderately optimistic on that score.
But we are in a difficult position because we are seeing a combination of global recession, collapsing housing markets and banks that are bust or in dire straits, and all these things must be resolved simultaneously. It’s an enormous task.
Confidence is low among consumers and investors, who need to see evidence that the economy is picking up. This will happen and when it does, confidence will return. The government must do what it can to maintain demand but also ensure that new lending goes to companies that are sound. At the moment, a lot of good firms can’t even get access to capital to pay their staff.