Sajid Javid tells MPs that banks should not bear full responsibility for financial crash

In a speech last week Sajid Javid, Conservative MP for Bromsgrove, took on the popular notion that banks were entirely responsible for the financial crash. In his speech, delivered without notes, and republished in full below, he also sets out what should happen next to banking structure and regulation.

"I thank the right hon. Member for Oldham West and Royton (Mr Meacher) for securing this debate, which is a valuable one to be having in the House. I draw the attention of hon. Members to my entry in the Register of Members’ Financial Interest, which is a legacy of my spending 18 years in the banking industry. Before Labour Members get a bit too excited by that revelation, as many have unfortunately done in the past, I should say that for the past three or four years I felt that the profession of banker was possibly the worst to have in the eyes of the public, but that was before I became a Member of this illustrious House.

The motion states that we want to

“prevent a recurrence of the financial crash”.

Obviously we are all united on that, but it is important that we examine the causes of the crash, which we could debate for a long time and go round in circles. I am sure that many rational people will disagree on the responsibilities of banks and bankers. I may have misunderstood the motion, but it seems to suggest that banks are entirely responsible for the financial crash. That is wrong and it does not do justice to Members of this House or to our constituents in preventing something like this from happening again.

1. The financial crash happened because too much money was chasing too few assets—financial assets or real assets such as real estate. There are three principal reasons for that, the first of which was that world financial reserves, particularly in the east, were growing at a substantial rate. Indeed, they continue to do so, as more people in the west consume goods from the east. To give just one illustration, China’s financial reserves in 1990 were $165 billion but today they are $2.65 trillion. Those reserves needed to find a home.
2. The second reason is that commodity prices have grown substantially, partly as a result of the growth of the east and other emerging markets, and that has led to a substantial increase in sovereign wealth funds, both in the middle east and in other markets. Those funds also needed to find a home, and they created a colossal wall of money when combined with the financial reserves.
3. The third reason is something that bankers have called the “Greenspan put”. Alan Greenspan became chairman of the Federal Reserve in 1987, just before the Wall street crash, and one of the first things he did when he found a problem in the financial markets and a potential crisis brewing was to lower interest rates as quickly and as substantially as he could. That happened again when the US Federal Reserve led the way after the dotcom bubble burst in 1991, again when Russia had problems and there were problems in Asia, and it has just happened again. Bankers have got used to that approach and it results in what the markets call a “put”, whereby they feel they can sell assets if things go wrong. That has encouraged bad behaviour and a moral hazard: the idea among many bankers of “heads we win, tails the taxpayers lose”.

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Sajid Javid MP answers ConHome's Twenty Questions for the Class of 2010

In their maiden speeches, Sajid Javid makes the case for sound public finances and low taxation as Nadhim Zahawi argues against increasing capital gains tax

There were a large number of maiden speeches during yesterday's final day of debate on the Queen's Speech.

Sajid Javid, who is the new MP for Bromsgrove, used his real world experience to put the case for "sound public finances, low taxation and light regulation":

"To the dismay of the right hon. Member for Holborn and St Pancras (Frank Dobson), I have to tell him that for 19 years I have been an investment banker. In my case, this is one brain that was sucked up by the City and has now come to serve the people in this Parliament. I worked in London, Singapore and New York. I readily admit that being seen as an investment banker was not the most useful thing on the campaign trail, but it helped prepare me for a profession not well liked by the general public. Let us hope that all of us, on both sides of the House, can work together over the coming years to help restore the nation’s respect for our great Parliament.

"In view of my background in finance, I am particularly pleased to give my maiden speech during this debate on economic affairs. There are many global economic uncertainties at the moment, and they have potentially grave consequences for our economy. First, the euro is only just beginning to have problems. It was always a political contrivance that had virtually nothing to do with economics. Secondly, the world’s largest emerging market economies, which have buttressed global demand since the onset of the credit crisis, are about to go through a period of monetary tightening, and we can no longer rely on them for global growth.

"Thirdly, industrialised nations, including our own, that have issued vast amounts of sovereign debt over the past three years in particular can no longer go on that way. We have to make sure that when we look at these issues, we never forget the traditional disciplines that have stood Britain in good stead—sound public finances, low and simple taxation, and light and flexible regulation. It is when we forget these disciplines that we put our future prosperity at risk."

Another new MP with serious business experience, Nadhim Zahawi who was elected MP for Stratford-on-Avon, put the case against increasing capital gains tax:

"I am someone with first-hand experience of a start-up. We must be careful what we do on capital gains tax. Of course I understand the need to raise some taxes and to help to create a fairer tax system. It must be right to relieve the lowest earners of the tax burden. I would go as far as labelling it a moral tax cut. However, it is important to remember the job creators, those who back them and those who join them and work for them. It would be counter-productive to penalise people who invest in start-ups—in itself a high-risk thing—by increasing CGT on their investment. It would also be wrong to penalise employees who join a risky start-up from possibly a safer occupation and, of course, to penalise entrepreneurs themselves.

"In the Gracious Speech there was a strong focus on freedom, fairness and responsibility. It would be unfair and wrong to penalise people who have acted and saved responsibly with a further tax at a time when we are introducing incentives to act responsibly in marriage and partnership. Penalising responsible investment would be to send a contradictory and unhealthy message to the country."

Jonathan Isaby