Financial Markets: Stability

Lord Kestenbaum Excerpts

Thursday 3rd November 2022 Lords Chamber

[Lord Kestenbaum (Lab)]

My Lords, I thank the noble Lord, Lord Sharkey, for securing this vital debate, the urgency of which is of course prompted by an experiment in fiscal policy as calamitous as it was unprecedented.

Recent weeks offer a cautionary tale of how such mayhem—stemming in part from political incompetence—spirals, demanding costly intervention and creating misery for so many. As we survey the wreckage, we are left with two salutary observations. First, the nervous breakdown in the system, such as we saw in recent months, matters to every single household in the UK. Let us remember, these rising markets of recent years have been fuelled in some measure by a striking injection of personal finance from the retail investor. Market analysis suggests that small individual shareholders’ share of equity trading volumes in the largest stocks has climbed to 24%. Gone are the days when stock markets were the sole preserve of large institutional investors. So every time we hear phrases such as the markets are “correcting” or “repricing”, they are just euphemisms for the utter misery felt by large numbers of households in the country.

Market instability, as in the title of this debate, is not an economic technicality affecting the privileged few. It profoundly touches many millions of citizens. It is not uncommon for as much as 35% of a stock to be owned by everyday, small investors, often representing a meaningful percentage of their liquid assets. The Government would do well to be less zealous—certainly less frivolous—in toying with a system in which so many will be harmed if things go wrong.

These spillover effects are felt even more acutely in the housing market. Noble Lords will know the disastrous effect on mortgage rates—as the noble Lord, Lord Sharkey, suggested—following the mini-Budget and subsequent market meltdown. The numbers of those affected speak for themselves: 25 million homeowners in the UK have gained a home with the help of the mortgage sector, and let us remember that the UK has the highest total outstanding value of all residential mortgages in Europe. This is a country where homeowners are critically reliant on the stability of mortgage rates.

In those chaotic 12 days, we heard how the numbers spiralled. The catalyst for what played out in front of distraught mortgage holders is all too well known and worth repeating: the announcement of vast unfunded tax cuts, leading to ratings agencies taking fright, risk premia reacting accordingly and a spiralling yield on gilts that placed mortgages out of reach or, worse, unable to be serviced.

If my first observation is that the trauma in financial markets had a political catalyst, my second is that what lies beneath may be equally damaging. The entrenched view has been that, for the last 15 years, we have lived with a monetary experiment as a reaction to the disasters of 2008. Such an experiment comprised the dual anaesthetic of the unlimited printing of money together with near-enough zero interest rates—all designed, reasonably perhaps, to prop up markets.

However, the spillover effect on us all was, we must admit, that more risk was taken than was advisable: too much risk in our mortgages and too much illiquidity exposure in domestic expenditure, let alone what felt like unlimited government borrowing. A judicious appetite for risk was exceeded because the implicit message was twofold: we can always print more money and we can always keep interest rates low—so keep borrowing. In doing so, all involved forgot the golden rule that one day the music will stop and, when that day comes—and with it unaffordable mortgages and debt that cannot be serviced—the entire system is at risk.

Against this backdrop, we have had the calamity of recent weeks, which saw dramatic intervention by the Bank of England and the undignified spectacle of pension trade bodies rushing out statements to say that they believed UK pensions should be safe. It seems to me that the mere fact that such statements were required should be a cause for alarm. But this cannot be seen as a “Thank goodness that’s over” moment, which leads me to my conclusion.

The case I make today is that the trauma of recent market instability is both episodic and systemic. My concluding comment, however, is about something equally significant, namely a reckoning. The last time we experienced market shock of such magnitude was in the crisis of 2008. Perhaps the most important question posed in that tumultuous time was asked by our late Queen, who, not the first time, spoke for the entire nation when asking a group of economists, “If this crisis is so large and so far-reaching, how come you didn’t see it coming?”. We may well ask that again—and we do.

Some calm has been restored but the debris is everywhere, with unaffordable mortgages, new entrants to the housing market priced out and pensioners with hard-earned savings in funds that have lost meaningful, material value. Amid much talk of good judgment being restored, one cannot help feeling that the lasting consequence of this instability is that, ultimately, the British electorate will exercise their judgment and, when it comes, a reckoning will be made.

Budget Statement

Lord Kestenbaum Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Kestenbaum (Lab)]

My Lords, as with the eager anticipation of the first cuckoo of spring, we have been greeted in recent days by the suggestion of some stirrings—this time amidst our economy—and it would be entirely churlish of noble Lords in all parts of this House, including on these Benches, to seem reluctant to acknowledge such stirrings.

So what have we been told? Well, supposedly, growth is now well and truly back. Sales are up; house prices are flying again; and unemployment is falling. One can almost feel Sir Humphrey striding in with a beaming face and announcing, “I have good news, Minister”.

Might this just be an appropriate moment then for the Prime Minister’s own, dignified yardstick for recovery to be the appropriate measure for improvement rather than excitable pundits and pre-election spin? This is what the Prime Minister said when he came into office four years ago:

“We want to create a … more balanced economy, where we are not so dependent on a narrow range of economic sectors …We will support sustainable growth and enterprise, balanced across all regions and all industries”.

He went on to say that the Government’s most urgent task was to tackle our public debt.

With the Prime Minister’s own scorecard before us, what do we see? I regret to say that we see telltale signs of headline growth which do not give the full picture. Yes, of course, we can tackle a range of economic indices over the short term and, these days, you do that with that deadly cocktail of cheap credit and government debt, laced with, as the noble Lord, Lord Myners, artfully pointed out, a dash of presentational panache. That cocktail is exactly what lies beneath last week’s excitement. As a recent column put it, we have become,

“drugged up on cheap money, subsidised credit and rock-bottom interest rates”.

What about those two measures that the Prime Minister rightly put to us: reduction of public debt and rebalancing? While there has been much talk of paying down debt, according to both ONS statements and the most recent OBR forecast, net sector public debt is expected to rise from £1.2 trillion in 2014 to £1.5 trillion in 2018. This year alone, the Government are likely to spend £100 billion more than they take.

Equally worrying is how short we have fallen measured against the Prime Minister’s second yardstick: rebalancing in general and, as we have heard in this House today from my noble friend Lord Hollick, productivity in particular. We have heard so much about rebalancing our economy in the past few years. Now that the growth siren is being sounded, it is hardly the balanced version. I said earlier that the Government would hold themselves to account against economic rebalancing between sectors and regions. That is not happening. We can all admire the crispest of last week’s soundbites—“We must make more, build more, produce more”—but the hard fact is that there are few signs of this kind of serious investment in machines, infrastructure and skills which produces the kinds of shift that the Minister spoke of. We are still waiting for business seriously to rebound. In the mean time, infrastructure investment, as the noble Lord, Lord Myners, pointed out, proceeds slowly, most of it being in the south-east. Let us consider this analysis in the recent IPPR research on transport, which states that,

“where transport infrastructure projects involve public sector spending … the spend per head of population is £2,595.68 in London but just £5.01 per head in the North East”.

This is not rebalancing, neither by region nor by sector. There is, truly, no march of the makers. Growth, such as it is, is being led by the south-east and by business services. That makes it vulnerable, and much of the country is not feeling the benefit.

Why are those headline numbers ultimately so worrying for us? Because, at their heart, they do not sufficiently fire the single most important engine of sustainable growth, that which has been referred to so freely in the House today—productivity. Indeed, the Minister acknowledged the importance of that. The productivity gap is back with a vengeance. Our workforce is once again 25% less productive than France and Germany and even further—29%—behind the United States. Hence, the recovery, regrettably, is not what it seems. As my noble friend Lord Hollick said, many of the jobs being created, which produce falling unemployment statistics, while low wage, often part time, make little of our country’s talents and, let us be frank, are undignified, let alone not doing anything for the sustainable growth that the Prime Minister spoke of. Low-paying, low-productivity jobs are the sign of a troubled economy, not a healthy one, however helpful they are to pre-election unemployment statistics.

The trap set for the economy—inadvertently, perhaps—is the inevitable crushing headache that results from too much of the cocktail referred to earlier. It is the headache of short-term flickers. We know that for the economy to be resilient and the recovery to follow it, it must travel to sustainable economic growth via innovation—a reference that the Minister made earlier. We know the facts. Innovating businesses create more jobs and grow faster. Two-thirds of the productivity in this country, according to NESTA’s index, is the result of innovation.

Innovation as a national strategy, as we have seen around the world, is surely the most important driver of long-term prosperity. We know exactly why: because those two elusive measures to which the Prime Minister referred of rebalancing and productivity are at the heart of an innovation economy. Look at the three areas of our emerging competitive advantage today. First, there are the big differentiators: advanced manufacturing, aerospace and pharma. Secondly, there are the smaller fields of video games, visual effects, design and the creative industries. Thirdly, there are the potential golden eggs of the economic future: graphene and biotech. Once you look deeper at those real engines of growth, not just the sectors but the firms, a picture emerges and all the evidence shows that innovative, high-growth firms create the high-productivity jobs of the future. Some 7% of businesses in the UK classified as high growth in the past decade are responsible for half the new jobs.

What do those firms all seem to have in common? Again, the evidence is clear. They are not concentrated in particular sectors. Pleasingly, they are not found predominantly in one part of the country. That is good news when it comes to rebalancing. Rather, one factor links them all: they are disproportionately likely to innovate. Those pockets of the innovation economy, from semiconductor clusters in the south-west of England to the creative industry hopes of the east of Scotland, will be the heartbeat of any sustainable recovery.

We know that the most imaginative global economies—the US, Finland, Korea and Israel—have substantial measures of supportive public policy and effective financing to drive their innovative capacities. They have active, assertive, long-term, growth-oriented government. So, although modest measures in that regard were welcomed last week, I fear that they do little to attack the real causes of low productivity in the UK.

Then there comes the rhythm of announcements. Consider the new graphene centre, but this time against the science capital budget dramatically, drastically cut in 2010, followed by a series of small new initiatives in subsequent years that account for a tiny fraction of the amount previously cut. These are pinpricks in comparison to the opportunity and the need. For example, what progress has been made in using government procurement budgets to drive innovation in our businesses? Such a move—as the Minister acknowledges, at no extra cost—will have a transformational impact. For example, 2% of government procurement towards innovative businesses would be an extraordinarily potent measure.

I fear that such ambition comes second, certainly over the next 12 months, to the lure of the announcement. Too many timid programmes, often disconnected, are launched with fanfare and quietly closed 18 months later. We would instead hope for an assertive, ambitious national programme running right through government which drives the innovation revolution and would produce the type of real, sustainable growth that all parts of the House want.

Budget Statement

Lord Kestenbaum Excerpts

Thursday 21st March 2013 Lords Chamber

[Lord Kestenbaum]

My Lords, today’s debate in your Lordships’ House increasingly reflects a wider and urgent economic debate in chambers around the world. At one end of the argument, there is a fundamental belief, as we have just heard, that debt reduction for its own sake will eventually clear the path for strong growth. The alternative view is that debt reduction for its own purpose is not only an all too narrow goal but is destined to fail unless economic growth is pursued with equal and relentless vigour.

Although the Minister said that our focus on the deficit does not mean that we cannot attend to growth as well, that focus does not feel equally spread. With yesterday’s slashing of growth forecasts, we are beginning to confront the painful reality that the latter argument prevails. The evidence is sadly clear that the multiplier effect of austerity, its economic misery, let alone the human cost, is more severe than even the Office for Budget Responsibility had warned. In short, austerity as a fixed policy in the sand, and in the absence of a well constructed, ambitious, aggressive tapestry of active government, will never produce growth. However much pain is administered, however deep the incision of cuts, ultimately the failure genuinely and aggressively to grow the economy will lead to the failure to balance the books. The evidence was announced yesterday. At a time of unparalleled spending cuts, paradoxically, the UK’s national debt will rise to 85% of GDP.

If the urgent national imperative is growth—we are all united in that—and we know that it does not travel through austerity for its own sake, what might we expect from active government? The first thing is to dispense finally with the tired false choice of either a constant flurry of well intentioned interventions or staying, as we have heard in recent years, firmly out of the way. We must lay to rest the myth which says that you have a pro-growth environment only if government leave the stage. We urgently need intelligent and active economic policy which nurtures—indeed, drives—growth. Look at the most imaginative global economies, our real competitors: the United States, Finland, Korea and Israel. They all have large measures of supportive public policy and effective financing mechanisms—in short, active, aggressive, growth-oriented government.

Secondly, we know exactly what the engine of growth will be. We know now how clearly the path travels from innovation to economic growth. We know the facts. Innovative businesses create more jobs and grow faster. Hence, innovation as a national strategy is the most important driver of long-term productivity and prosperity. Yet, despite this, NESTA’s innovation index showed that innovation and investment in innovation declined by as much as £24 billion last year. This was at a time when we also know from the same index that fast-growing, innovative businesses make a disproportionate contribution to our national fortune. Just 7% of businesses in the UK, classified as high-growth and innovative, have been responsible for half of the new jobs in the past decade. The evidence conclusively shows that innovative, high-growth firms will produce the jobs of the future. They will be the productivity drivers of the economy of the future.

If we know that the road to growth travels through innovation, what might we expect from those with their hands on the policy levers, which the Minister dubbed “managing well the things we have control over”? This financial crisis offers the chance to put in place on a serious scale often talked of plans to channel large parts of the £220 billion government procurement budget to innovative businesses. As my noble friend Lord Bhattacharyya said, the announcement yesterday about the SBRI—the programme which drives government businesses to innovation—is certainly welcome and using the TSB as the catalyst is wise. However, the quantum is a pinprick in comparison to the opportunity and the need. The target yesterday was merely £100 million of redirected existing budgets in an annual spend of £220 billion. Consider what a little more ambition could have done at no extra cost. Just 2% of government procurement toward innovative businesses would be nothing short of transformational.

These are very modest steps in transforming government budgets from blank cheques to intelligent, demanding drivers of innovation, but it is on a tiny scale and at a time when new customers for innovative businesses will determine whether they thrive or go bust. My noble friend Lord Eatwell correctly identified the urgent need to stimulate demand. Can we not bring this part of our national effort to real scale, such that active government purchasing will have great and lasting impact on the innovation economy in society more broadly? We know—we have seen it around the world—that government being a lead customer was the major factor in the growth and development in Silicon Valley. It is no exaggeration that whether it is the GPS navigation system that none of us can live without or internet protocol software, government purchasing of these technologies in the United States was the basis of the most transformational global innovations of recent decades. Getting this to scale could be a central plank of the new growth, at no extra cost.

I urge for there to be no more tiny programmes, timid in scale, often initiated with great fanfare and then quietly closed 18 months later. We hope for an aggressive, ambitious, national programme running right through government, perhaps facilitated by the TSB, which does nothing other than force a procurement revolution.

I have made today a particular and practical remark about one of the engines which could power our desperate need to go beyond austerity and from innovation to real growth. It could be an engine which is fired up without any additional cost to the taxpayer and with no increase in the deficit, simply by dramatically, ambitiously redirecting current spend away from unimaginative vested interests and towards making government the most dynamic and effective customer for buying new products from innovative businesses.

The alternative is dire. A commitment to simply reducing national debt has not shown enough signs of enhancing our nation’s prosperity. Our growth programme is looking inferior to so many of our competitors. There may be no plan B, but it is becoming increasingly clear that something else is needed to deliver growth more comparable to the world’s most dynamic economies and, in turn, sustain the society that we must nurture here in Britain.

Economy: Growth

Lord Kestenbaum Excerpts

Thursday 31st March 2011 Lords Chamber

[Lord Kestenbaum]

My Lords, I begin by expressing gratitude for the generosity and warmth with which I have been received into your Lordships’ House. I have experienced kindness and consideration from everyone I have encountered. I have also discovered that the wisdom residing in this House is quite extraordinary. My sponsors, my noble friends Lord Sainsbury and Lord Puttnam, did much to ease my nerves, and the dedicated staff have been a remarkable source of guidance—in one case literally, as a distinguished doorkeeper gently stopped me from walking straight into a broom cupboard on my very first day here.

Perhaps this challenge of losing and then regaining one’s bearings is an appropriate personal metaphor. As my family name, Kestenbaum, indicates, home until the traumas of the 20th century was Germany. Leipzig and Frankfurt were our origins. At the time when Europe turned dark, our family, together with millions of endangered others, fled. It was a circuitous route, first to the United States and then to Japan, where I was born, then back to the US, and finally, as a child, to Britain. It was here that our community learnt that this country did not expect you to make a choice between loyalty to one’s faith and loyalty to the national interest while both are pursued with dignity.

But as I enter into this debate on economic growth, it is no coincidence that I should reflect on the two economies in which I grew up: Japan and the United States. My parents, while bringing up a young family in Japan, saw at first hand what has since been dubbed the Japanese economic miracle, a transformation in the standard of living powered by growth. But the lost decade of the 1990s, as it became known, is yet to be found. The United States, our family’s pre-war refuge, became the world’s largest economy not least by virtue of new technologies which saw GDP per head grow sevenfold in the 20th century. But despite this, more recently President Obama has said that the US economy, in order to grow, will need to reach a level of innovation not seen since the space race. So I am grateful to my noble friend Lord Hollick for calling urgent attention to this matter. We are now learning the same lesson as those other economies—that growth is not a national birthright, and the heady days when economic power was concentrated in the hands of a few are over.

In recent years my colleagues and I have been privileged to back some of Britain’s brightest young entrepreneurs. During my time as CEO of NESTA, and now as chief executive of Lord Rothschild’s family investment interests, we have scrutinised thousands of business plans and met hundreds of young high-tech innovators; and I have watched their concerns, particularly among a group of young entrepreneurs in Manchester with whom I worked closely. Those talented graduates did not just want to build new businesses, they wanted to feel that the embrace of new ideas and new technologies was central to our national purpose. The prize is great. Research published last week by NESTA entitled Vital growth shows that these fast-growing, innovative businesses continue to punch way above their weight, with just 7 per cent creating half of the new jobs. As your Lordships consider ways to increase this number, we might also consider the lessons of those Mancunian entrepreneurs. Innovation has to be embedded in our culture—it must be central to the national story.

This national culture of innovation so often provokes false choices, either a constant flurry of well-intentioned interventions or staying firmly out of the way. After all, say some, Thomas Edison did not need state aid to create the incandescent lamp—a lot of pluck and a little luck was all it took, so the argument goes. Yet an economic culture that produced innovators like Edison and others did not emerge by chance. Edison benefited from a postal service, new roads, public libraries and a stable banking system. All these were the public goods that made innovation flourish and showed how economic growth is built on a tapestry of skills, science, finance and regulation all working in tandem.

So often this interplay takes place where one might least expect it. Many of the high-tech entrepreneurs that I have worked with in recent years took their inspiration from Silicon Valley. The conventional wisdom is that, “There’s an economy entirely sustained by individuals”, and yet, subtle and intelligent public policy is everywhere in Silicon Valley. Defence spending funded a generation of microwave technology there that created the foundations for the semiconductor industry; the procurement strategies of DARPA kick-started hundreds of technology businesses. This combination of technological talent, supportive public policy and effective financing mechanisms is at the heart of great innovation economies.

This debate focuses quite rightly on the conditions for economic growth, but perhaps I may make one final, wider observation. Growth as a public policy imperative can do much: it can create jobs; it can reduce welfare dependency; it can over time help finance public services—it can do all these things at its best. But rapid economic growth simply for the relentless pursuit of wealth alone will do nothing for the long-term health of our nation. Economies never measured progress by the yardstick of growth in isolation, but, rather, how that growth made for a better society. So this debate, I suggest, is as much about the society that we wish to build as it is about the economy which will help build it.

I offer thanks to your Lordships’ House for giving me the opportunity to make my maiden speech on a subject that I feel will underpin many of our concerns in the months ahead.