Published on 27 Sep 2010

Bank of England’s home truths for savers

I did not expect the rather uncompromising tone that I received from the Bank of England’s Charlie Bean on the fate of Britain’s savers. I had thought that they would focus on contrition for the financial position of the prudent pensioners who had saved to supplement their retirement.

And while the deputy governor did say he “fully sympathised”, the tone of the rest of the interview indicated a bank trying to communicate some home truths to savers.

So he pointed out that savers rode “swings and roundabouts”, that many of the older savers suffering now would have rode the house price boom to large capital increases. He said that right now it might make sense for savers to “eat into” their capital.

“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn,” he said.

Even more candidly, he twice corrected my assertion that the impact on savers was an unfortunate side effect. Squeezing savers in order to make the spend more, is the point of policy, not a side effect.

The “savings squeeze” is one of those fundamental changes to the way the UK economy works, which is rarely discussed or debated. It is the organic, natural, unavoidable consequence of attempting to save the economy from the ravages of a once-in-a-century financial crisis.

But the slashing of interest rates and printing of money does have a clear distributional impact.

Put simply, at least temporarily, savers have been crushed at the expense of borrowers. The prudent have been sacrificed at the altar of the feckless. Pensioners who have saved meticulously for a modest retirement have lost thousands from their annual income, whereas buy-to-letters with ten properties and a tracker mortgage have gained thousands per month.

The headline official figures suggest that, yes, the slashing of interest rates to 0.5 per cent has pumped a net £8bn into UK households per year. But that consists of a £26bn boost to borrowers, and £18bn taken away from the income of savers. There are winners and losers in society from interest rate rises.

All credit to the Bank for taking this issue head on. It is the issue about which Mervyn King receives the most letters. I have a feeling that the answers given by Charlie Bean won’t satisfy aggrieved savers.

Even more importantly, we are constantly told by politicians and the Bank that increasing Britain’s savings rate is our long term way out of avoiding absurd credit and property bubbles. The issue is that the Bank does not want anybody to do this right now. It is the so-called “paradox of policy”, and more on that tomorrow.

13 reader comments

  1. Gerry says:

    Savers could (should?) unite… withdraw their cash from the big banks, bust them up, force them to be broken up, their multi-million earning bosses sacked, multi-million pension pots destroyed. The politicians haven’t got the balls to do it, but savers probably have.

    It will hurt, of course, but a better, more sustainable banking system would arise out of the ashes, at which point savers can return their cash to the new banks who could then pay a decent interest rate on savers’ deposits.

    What do you think of that, Mr Bean?

  2. Georgie says:

    If young people don’t save how can they get a deposit together to get on the housing ladder? As for the poor pensioner who has prudently put money aside in order to survive inflation, not to mention the dreaded care home, what about them. Life gets daily harder for them as they can’t get any return on their savings. They will be forced to draw on social services whom we are continually being told have to be cut. Saving should be encouraged and rewarded. If people have surplus income they will spend.

  3. John White says:

    I watched with interest the interview with Mr. Bean and while I sympathise with him I feel the policy being followed of expecting savers to suddenly turn to spending is a mistake. They are unlikely to do this unless under serious pressure as it is not their habit to spend. In effect they will where possible reduce their spending, because their income has fallen.
    On the other hand the current approach increases the risk of people taking on significant levels of consumer credit for short lived consumer items, which ,correct me if I am wrong is how we collectively got into this situation.
    So yes there is a paradox of the BoE’s making for which those of us who depend on our savings and investments are carrying a disproportionate load in trying to return to a stable situation. All of which makes me feel outraged and poorer!

  4. Eric says:

    It makes no sense.
    As I need to use the interest I ought to be getting on my savings to live, running down my savings just reduces the future interest I will get – whatever the interest rate.
    And, as I need to use the interest on my savings to live, where will I get the money to increase my savings if an when interest rates do go up?

  5. David Shackleton says:

    This man should be summarily sacked. As your report says, the prudent have been sacrificed. The BoE has abandoned the idea of controlling inflation and now we are being asked to spend our savings as they are being made deliberatley worthless. The whole establishment is now panicking at the effect of the VAT rise in January and the cuts to come this month, on the economy.

    As savers we should do the opposite of what they want – STOP SPENDING – and force some acknowledgemnet of the double whammy of inflation and low interest rates which is the payback for our prudence.

  6. Peter says:

    Mr Bean glibly suggests that now might be good time for savers to use some of their nest egg to supplement their income, adding that in better times they can rebuild their capital.

    Does he not realise that some pensioners and others do not have the income to do this.
    Also when interest rates are higher, inflation is quite often high, for savers its the differential which is important.

    With Mr Bean’s salary I suspect it would not take long to rebuild his nest egg, although I doubt if it requires rebuilding.

  7. Hilary says:

    I just could not believe my ears something is very very wrong. We should withdraw all our savings and put it under the matteress, where it is probably safer. We save for our future then we are told to spend it so we can end our days in penury.
    The system really is broken.

  8. Paul Begley says:

    Someone needs to tell Mr Bean that we’re not complete idiots. If you’re worried that you’ll lose your job, you’re hardly likely to spend every penny you have. If you’ve aleady lost your job, any savings you have will be needed to cover job search costs (explicitly NOT considered when benefit levels are set) for an indefinite period, and any up-front costs for accepting a new post (deposits on rental accomodation etc).
    I would quite like one of these experts to explain how it can be that commercial organsations which need deposits to rebuild their reserves and have funds to lend, cannot (or will not) offer small savers a real return on their savings.

  9. James Darcy says:

    So, just to clarify, Fergus and Judith Wilson get to keep 200 overpriced houses that they bought up using too much leverage at too high a price, and in order that they can do so, the group who conspicuously did NOT cause the credit bubble, i.e. net savers, are the ones who must pay for the Wilsons’ houses?

    Not only is this grossly, infuriatingly unfair, it also sends a clear message to everyone: jump aboard any bubble you see, and fill your boots. It may make the system unstable, and lots of people will suffer, but it won’t be you doing the suffering.

    This is a classic game theory scenario, where the payoff matrix means it makes sense for all rational agents to defect against each other, and drive the system to destruction again and again, in repeated tragedies of the commons.

    It’s simply appalling. It is terrible governance.

  10. Andrew Dundas says:

    Eric’s got this right: “It makes no sense”.
    However, Eric, you plainly don’t appreciate that all human activity is integrated. Moreover, there’s no such thing as ‘savings’ – only legal ‘claims’ upon other people’s future earnings.
    So, if you and I save, someone else has to spend and the balance between the ‘savings rate’ and the ‘spending rate’ is reflected in the ‘price’ of those claims. That price is the ‘savers’ claims on future income and the prices of claims are described (for simplicity) as the ‘interest rate’.
    Right now, most families and businesses are so spooked with fear that we’re collectively not spending. Instead we’re either ‘paying down debt’ or storing up claims for the future. Which is the real reason interest rates are so low.
    Those low rates are also a danger signal that Charlie Bean is drawing to our attention: if we don’t spend, other people don’t sell their services and those people don’t get paid. So they don’t spend either.
    Pretty soon, if it goes on like this, no-one will be spending and no-one will have a job either.
    Which is maybe why Charlie Bean is emphasising – spending more is good, saving (for now) ain’t.

  11. Andrew Dundas says:

    Charlie Bean’s nearer the truth about our economic health then the IMF’s report: we need to sustain our economy NOT bash it to bits.

    Dominique Strauss-Kahn’s a French socialist head of the IMF, and only interested in exchange rate parities.

    Since June, spenders have become spooked.

  12. FRP Advisory says:

    The recession should have signalled the end of the binge borrowing and excessive spending culture – so it is worrying that cautious individuals who have put some money aside for a rainy day, or their later years, have apparently been advised to throw caution to the wind and dip into those savings in an attempt to prop up an ailing economy.

    For years we have witnessed unprecedented borrowing levels by individuals. This – and the consequent spending that took place – was largely to the benefit of the High Street, but also contributed to record levels of personal insolvency.

    We have also seen unprecedented levels of public sector borrowing. In the same way that the Government’s Comprehensive Spending Review (CSR) will cut spending to ensure the state reduces its debt levels, as a society we also need to learn to live within our means. Now that over-committed consumers are unable to prop up the High Street, cautious investors should not help to boost the economy by raiding their own savings pot.

    David Thornhill, partner, FRP Advisory

  13. Andrew Dundas says:

    If I were an insolvency specialist – as David Thornhill is – I imagine I would focus on micro-economics too. And that very narrow focus would mislead me just as much.
    Most firms that go bust have over-estimated the potential demand for their offerings, what ever they are. And then not reacted to those lower than expected demands. [Sometimes they can’t because they’ve over-invested in debt-fuelled spending, so receivership is their only solution. Which is tough on those who lent to them.]
    Macro-economics looks at these issues through an wholly different lens.
    Adam Posen reminds us that drastic falls in aggregate demand is undermining every businesses’ forecast of sales. Much of that is because of a steep drop in ‘confidence’ as people prefer to pay back debts than spend. Which is why the value of interest rates are negative.
    As this trend continues, more and more businesses will be sucked under (a silver lining for FRP Advisory).
    Government is the biggest actor in our economy and can stop this happening – except that David’s ‘common sense’ is spooking them too. Posen’s correct. The IMF is just flaky (see today’s FT letter from Simon Mohun)

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