Savings Accounts: Past, present and future

Until the late 18th and early 19th century, there was no facility for most people to save. Banks did not accept small deposits and had no interest in anyone but the rich. Although building societies existed then, their purpose – as the name suggests – was to finance the building of houses.

The idea for savings banks evolved against a background of severe economic decline and appalling poverty. The philanthropists who set them up were motivated by a strong belief in thrift and self-help. But their establishment was not purely a philanthropic gesture; savings banks made sound economic sense. The rudimentary welfare system of the day, based on charity and local taxation, was proving woefully inadequate in tackling widespread poverty. Enabling and encouraging people to save would reduce the burden on the system and provide those who saved with a better quality of life.

The customers of savings banks were some of the poorest in society. The banks provided a secure store for their savings and rewarded saving with a good rate of interest. By helping people to help themselves, they believed saving was a force for the common good. … Continue Reading

Mervyn King misleads on household debt

In October, Bank of England Governor Mervyn King warned that we could be suffering our “worst financial crisis ever”, more serious even than the Depression of the 1930s. Two months later, just as it is confirmed that the UK has dipped back into recession, he’s more cheerful, telling us not to despair: “There is no reason to despair… All crises come to an end”.

One thing in particular struck us about the speech he gave yesterday evening. He said: “The increase in households’ borrowing came to an abrupt halt in the 2008/9 recession.”

While that may have been true at the time, it gives the very misleading impression that UK households have stopped borrowing. This could not be further from the truth. A look at the Bank of England’s own figures shows that British households are as indebted as ever and that the only reason headline totals have fallen is because the banks have written off so much bad debt.

Take total consumer debt for instance. This stood at at £1,461 billion in November 2008 and £1,452 billion in November 2011. It seems to have declined slightly and yet the banks had written off £26.7 billion. So the total excluding bank write-offs has actually risen by £18.4 billion.

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The dangers of prolonged low interest rates

The Centre for Economics and Business Research believes that the UK economy has double-dipped back into recession. To pile on the misery, it predicts bank rate will remain at 0.5% until 2016, which would make a total of eight years. Not only this, but it expects the Bank of England to increase its programme of Quantitative Easing from £275 billion to £400 billion this year. This is appalling news for savers, who currently lose £44.5 billion through the gap between inflation and average interest rates.

Not everybody agrees that the Bank of England has got it right, however. We pointed out Anthony Hilton’s article in the Evening Standard which asked whether it was time to think about raising rates. Last week’s minutes of the Shadow MPC revealed that Andrew Lilico of Europe Economics, a former supporter of the Bank’s policy, has changed his mind.

“Current official policy appears to be to try to keep households clinging on, through maintaining policy interest rates at approximately zero, even if that comes at the expense of inflation and significant further deterioration in the value of the pound… It cannot be right to maintain such a policy for more than an emergency period… How long is it morally defensible to protect those that over-indulged and that made mistakes at the expense of those that were more prudent and restrained? A policy that can be perfectly correct if implemented over a year or two years might be the wrong policy if it must be repeated for ten years… There should be a rapid normalisation in interest rates – perhaps to 3.5% over a four- or five- month period.”

The Bank of International Settlements warns of the dangers

The prestigious Bank of International Settlements, the Central Bankers’ bank, also sees dangers in maintaining low interest rates. As we pointed out recently, the BIS reckoned the Bank of England had exaggerated the positive effects of QE. The Annual Reports of the BIS also question low interest rate policies. In June 2010, a section was headed: “Low interest rates: do the risks outweigh the rewards?” … Continue Reading

Why we need sound money and a restoration of savings

Politicians, bureaucrats, academic economists and their disciples in public service broadcasting all fundamentally misunderstand the workings of a global modern economy. Together they have wrought the greatest peacetime debt crisis the world has ever seen.

Let me explain where we have gone wrong and how it might be put right. It is not possible for an individual, a family, or a small business to permanently spend more money than it earns. Applied to the nation state, money can only be raised legitimately through taxation or borrowing. Too much of either burdens an economy, stifles growth and eventually leads to bankruptcy. Technically, this has already happened – current UK debt is £97,000 per head and we are not alone, although we are one of the worst offenders.

The current crisis has been caused by a complete disregard for the fundamentals of money. Money is merely a medium of exchange, invented because the alternative, barter, is a cumbersome and inefficient means of facilitating trade. … Continue Reading

MPC holds base rate at 0.5% for 35th month in a row

Another month, another MPC decision to keep base rate at 0.5% as it has been since they first brought the rate to that level in March 2009.

This week’s political buzzword that is being bandied about is “fairness”. Yet not a word has any politician from any of the parties spouted about the huge injustice of the Bank of England’s policies.

How can it be fair to confiscate £44 billion annually from savers and pensioners and transfer it to those in debt, to penalise those who have struggled to put something by in order to support those who ran up debts and caused this financial crisis, to reward debt and penalise savings? Of course it is not fair. But it is politically convenient to inflate away debt and so they stay shamefully quiet.

Low interest rates are hurting the economy

The most annoying thing is that the policy is now doing the opposite of what is intended. Negligible base rates have not produced growth as was hoped. What was an emergency measure has been extended to last almost three years and is now actually harming the economy as commentators such as Anthony Hilton and Andrew Lilico have recently recognised. … Continue Reading

Are low interest rates the answer – or the problem?

There is a near universal belief among economists, politicians and the public at large that low interest rates encourage economic growth. In the UK, we have had 0.5% bank rate since March 2009 and City economists keep putting back their estimates of when it might rise. The current consensus is that it will not happen until November 2015!

Having painted itself into a corner with interest rates, the Bank of England conjured up Quantitative Easing to further stimulate the economy. QE has not been without its detractors, both for its inflationary impact and because some think it benefits the banks rather than the real economy. The Bank of England admitted that the first bout of QE increased CPI inflation by 0.75% to 1.5%, but claimed that it boosted the economy by between 1.5% and 2%, reducing yields on medium-dated gilts by 1%.

The Bank of England gets its sums wrong

But was the Bank of England right? The Bank of International Settlements – the central bankers’ bank – thinks not. Instead of 5-25 year gilt yields falling by 100 basis points (1%), the BIS believes QE pushed them down by just 27 basis points (0.27%). And while the Bank reckons that the second bout of QE will be as effective as the first, the BIS disagrees: “It may be harder to achieve the same degree of effectiveness as with the initial programmes once the surprise or novelty element wanes”.

We have been arguing that the Bank is not only wrong about QE, but also about the effect of long-term negligible interest rates. On The World at One before Christmas, Bank of England Deputy Governor Charlie Bean was challenged on this. Less fluent than elsewhere, he stammered that, “Had we tried to rein inflation back sharply this year that would have led to too sharp a contraction in activity and what we would also find is inflation dipping well below the target next year.” … Continue Reading

Why the MPC has failed

Members of the Bank of England regularly give speeches. Often they are technical and dry and go so far over our heads, they are practically in orbit. Less so last week’s speech by Spencer Dale. The Executive Director of Monetary Policy and the Bank’s Chief Economist gave a talk with the zippy title “Prospects for monetary policy: learning the lessons from 2011”.

The section most heavily reported concerned savers. It is only a little over a year since Charlie Bean caused outrage by saying that savers should stop complaining about low returns and instead go out and start spending. More recently, however, the Bank has softened its stance. After Save Our Savers demonstrated outside the MPC’s October meeting, Governor Mervyn King expressed his sympathy for savers. Shortly after our December carol protest, Mr. Dale offered this consolation:

“I have the utmost sympathy for the hardship faced by many pensioners and other households dependent on the flow of income from their savings. They played no role in fuelling the financial crisis, but have been badly hit by the reduction in interest rates that followed. I understand that the burden of interest rate cuts falls most heavily on savers. And I can understand why, to many, it seems unfair that those with high levels of debt and borrowing should now benefit from lower rates.” … Continue Reading

Carols at the bank

A big thank you goes out to everyone who came along to sing songs from our Save Our Savers Christmas Song Book outside the Bank of England on Thursday, 8^th December.

The day started early with an appearance on the BBC breakfast show at 6.50am. We weren’t able to corral many people at that hour to sing the songs, so it was left to Simon and Nette Robinson to do the honours.

Following the BBC interview they stayed at the BBC and appeared on several local radio stations, including Radio Gloucester, as well as Radio 5 live just before the 9 am news.

Videos of our “choir” singing outside the Bank can be found on FT Adviser , Lovemoney and, rather unexpectedly, Arirang, a South Korean news site

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P2P Lending – Cutting out the banks

Over half a decade ago, in 2005, a new company called Zopa (which stands for “zone of possible agreement”) launched the first lending and borrowing exchange.  The concept was simple and innovative – a marketplace where creditworthy individuals could borrow money from others who were happy to lend, without a bank in the middle.  Thus peer-to-peer lending was born.

At the time, as someone who had been burnt by the tech crash a few years earlier, I was looking for something safer than the stock market, but with more growth potential than a standard savings account.  So I took the plunge and signed-up. … Continue Reading

Prime Minister is wrong: Credit card debt is still rising

Remember the kerfuffle over David Cameron’s speech at the Conservative Party conference? The Prime Minister had planned to say: “The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills.” After a panic, it was changed to: “That is why households are paying down the credit card and store card bills.”

It turns out that both statements were wrong. Households are NOT paying off their plastic debt. True, headline totals have fallen. But that’s only because the banks have written off bad credit card debt.

According to the Bank of England, in September total outstanding credit card debt was £57 billion. That was £2.1 billion less than a year earlier but, over the same period, the banks wrote off over £3.9 billion in bad debts.

The reality is that, over the year, borrowers put another £1.75 billion of debt onto their credit cards. Perhaps that’s not surprising when it’s still so easy to borrow at 0% interest on credit cards. … Continue Reading