Putting the saver’s case to the Treasury Select Committee, part two

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The Treasury Select Committee is conducting an inquiry into Quantitative Easing and the way it has redistributed wealth in the UK. After providing written evidence, Simon Rose of Save Our Savers and pensions expert Dr. Ros Altmann were asked to give oral evidence to the Committee. The first part of the session concerned the effects of the Bank’s policies on savings and pensions. In the second part, interest rates and the legacy of QE were discussed.

After a question to Rose Altmann about how low interest rates had helped the economy, Simon challenged the commonly-held view that low interest rates produce growth. “Suppressing the price of money artificially does not necessarily benefit an economy. If that were the case, why do we have interest rates at all? If you suppress the price of something, it is no surprise if the supply of it diminishes.”

He went on, “You have a body of savers in the country who are desperate to lend money, and you have people who want to borrow money but can’t, so it’s clear that at this level of interest rates the system is not working.”

Later, responding to Pat McFadden’s questioning on whether many retirees were dependent on savings, Simon pointed out that, according to the National Pensioners Convention, 5 million pensioners relied on cash savings for at least half of their income. Pressed by Mr. McFadden on whether he thought interest rates should rise, Simon said it was clear that low interest rates have created a zombie economy and that they should indeed rise, not only for the sake of savers, but the whole economy.

For her part, Dr. Altmann felt that, as a result of the Bank’s policies, the markets might force rates up more sharply than would otherwise have been the case.

The legacy of QE

Welcoming the committee’s inquiry, Dr. Altmann expressed indignation that the Bank could institute a policy with such wide-ranging effects on so many people. “If the Government were to stand up in Parliament and say, ‘We have decided the economy is in a hole and we have to take away 10% of income from older people, from savers and from pension funds, and we have to give that money to the banks and to people who have borrowed a lot to be able to afford their borrowings more,’ Parliament could debate that and could decide whether there is a valid case for redistributing income from older people to younger people, from middle asset owners to the very wealthiest. We have not had that.”

She also pointed out that QE had been brought in as an emergency measure. “If you look back to 2009, the reason given for trying quantitative easing was to avoid deflation. That was the original remit and the Bank of England’s forecasts were that we faced a Japanese-style deflation. Having overcome those risks most clearly, the Bank continued with its policy of QE and it has not given a clear explanation of why there is a need for further QE if its remit is indeed inflation targeting.”

Simon agreed, pointing out that, “the Bank of England’s own booklet on QE talks about reducing the risks of inflation falling below the 2% target. It says, ‘If inflation looks set to rise above 2%, the MPC could put downward pressure on spending and inflation by raising bank rates, removing the extra money.’ Well, it has been above 2% for 39 out of the 45 months since QE began.”

He also took the opportunity to put the all-important case for savings in the economy, pointing out “the importance of savings not just for savers, but for the economy as a whole. The Bank seems to underrate this considerably, but our savings provide the money for investment, which enables the economy to grow. Undermining savings, not only for this generation but for future generations, risks decapitalising the country, so that we cannot maintain our capital stock or grow it. It is extremely dangerous.”

Jesse Norman remarked that, in this recession, people had not been thrown out of their houses to the same degree as in other recessions because of the Bank’s easy money policy. Simon demurred, saying that “you could argue to some extent that ameliorating the effects of the recession has been a form of pain relief rather than of cure. Perhaps to have seen a little less support for companies that are now being kept alive by forbearance from the banks, for instance, might enable other companies who can’t currently get finance to have started up.”

Summarising her arguments, Dr. Altmann said, “What the Bank seems to be doing is concentrating on protecting the downside. But you are not going to get out of the hole unless you find the upside. With pension funds, buying gilts may stop you getting worse, although it hasn’t, but it does not give you the returns you need to make up your deficit. With QE, by helping banks rebuild balance sheets or borrowers afford loans that would otherwise be unaffordable, you don’t get growth. There is nothing coming through from the Bank that says, ‘This will create growth,’ and it hasn’t created growth.

“The evidence is clear. I believe that ending QE is much more likely to herald a period of growth and I would predict that, if we do not have any more QE, the economy will be much freer to grow than if we do.”

The chairman of the Treasury Select Committee thanked Simon Rose and Ros Altmann. “That is admirably clear. Both of you have given very forceful advice to us on this important aspect of the whole QE question of the distributional effects, and we are very grateful to you for coming this morning to do that.”

The inquiry is continuing but we understand that it is unlikely to progress much further until the other side of the Budget, which is on March 20th

Video highlights of the evidence session are available by clicking here.

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9 Comments

1. Neil

   February 21, 2013 at 6:01 pm

   Simon’s response to Jesse Norman’s comment on how low interest rates have saved homeowners touches on the main problem at the heart of the financial hiatus we are in. Professionals and politicians have displayed little intelligence in developing financial mechanisms to penalise the irresponsible and protect the innocent. How have the borrowers of 125% mortgages and 6/7 times income been allowed to benefit so much from base rate at 0.5% when they happily took out the loan at base rate at around 5%, many of them on the basis of false self -certification. Surely some emergency powers could have been introduced to limit the benefits they are enjoying and boost the returns to the financially responsible. The real impact of this mismanagement will not be felt until mortgage rates eventually rise again. In the meantime a lot of pain has been caused because of the crude way the balance between debt, consumption and saving is being handled.

   Recommend (18)
2. Steve

   February 24, 2013 at 8:45 am

   I have just returned from working in South East Asia for the last 3 years and I can confirm that the economies of Vietnam, Thailan, ect are booming under a tsunami of money from investors, who are moving money out of the UK, the US and Japan in order to avoid the effects of QE. During my time there, I encountered countless engineers and other experts from the UK, who were escaping the effects of high inflation, low wage rises and permanently being undermined by outsourcing. It does make me wonder how Merv, Mark, George and Dave expect this renaissance in manufacturing to take place, when we seem to be giving our competitors all the skills and funding. Indeed, QE in the US, UK and Japan has provided the one thing that these countries were lacking – massive investment.

   Rather than continuously undermining the pound, thereby exaccerbating the problems outlined above, perhaps a more constructive approach, centered around a much smaller state, coupled with skills encouragement, retention and skills growth, would be more sensible. Alternatively, we could carry on relying on economic theories which were developed before the advent of global internet trading and global skills mobility.

   Recommend (18)
3. john in cheshire

   February 25, 2013 at 7:02 pm

   The path to recovery can be summarised as :
   1. stop taxing
   2. stop spending
   3. raise interest rates
   will that happen?
   Oh, and put many central bankers, bankers, regulators, mps and government employees in prison where they belong.

   Recommend (12)
4. Dead Wood

   February 26, 2013 at 1:29 pm

   Just when we thought it could not get any worse, the Bank of England’s Deputy Governer has revealed that they are considering charging a negative interest rate to encourage banks to lend out their cash. This would, of course, reduce savings rates to near zero which would make the existing effects of Quantative Easing and Funding for Lending sound like a good deal.
   Despite our considerable numbers it is clear that the passive approach taken by savers, which is reflected in numerous petitions signed by only a handful of people, is resulting in our continually being disadvantaged by the UK authorities with impunity.
   Perhaps now is the time for Save Our Savers to take a more aggressive approach when dealing with the media and start drawing attention to our case using similar tactics to those engaged by various minority and interest groups throughout the UK.
   Whilst I am politically neutral, it seems that a small part of UKIP’s manifesto suggests that they might be open to an approach by SOS to promote our interests given the large number of potential votes they could gain. There now seems nothing to lose…

   Recommend (18)
5. frances

   February 26, 2013 at 2:24 pm

   The entire problem is the majority of savers most affected by this debacle are elderly and not computer literate let alone own a computer plus their incomes are so depleted they cant even afford the cost of a stamp

   When your income has nosedived by 60% and neither Merve or Cameron or Clegg or Osbourne give a damm nor will they honour their PROMISES TO HELP SAVERS who benefits THE DEBTORS and THE RICH from all our years of prudence and sacrifice

   They are stealing from the poor to fill the coffers of the Rich and the debtors

   Recommend (16)
6. Neil Bloomer

   March 3, 2013 at 12:54 pm

   Just a quick update to my comment at the top which illustrates the immorality of the current financial situation. In today’s Sunday Times a married couple in their thirties related how “it was like a miracle” that their mortgage repayments had plummeted from £1,800 to £250 a month saving them nearly £50,000. Compare this to our 83 year old neighbour who has stopped having days out so that she can continue to heat her house as a result of her savings paying hardly any interest. Does no one in a position of influence feel the urgent need to do something about this?

   Recommend (10)
7. Dave

   March 4, 2013 at 8:05 pm

   @Neil Bloomer

   Savers are not shouting loud enough!

   As Max Keiser asked on an earlier post “why aren’t people taking to the streets?”

   That’s the problem here.

   Recommend (12)
8. frances

   March 7, 2013 at 1:28 pm

   I will say this again

   The vast majority of Pensioners / Savers so severely affected by interest rates are too old or not computer literate

   Their incomes are now so low they cannot even afford the cost of a stamp to write to their MPs

   Only when this idiot Government and Chancellor is hit by Pension Credit claims will they face the enormity of what they and the ridiculous policies of Mervyn King have reaped

   I have been screaming at my MP for 18months but she thinks my free bus pass and free prescriptions that i do not even use make up for the loss of 9K a year

   She also thinks that CPI increase on my miserly 63 pound a week state pension covers the enormous increases in food alone

   They live in another world of luxury the lot of them and all should be tried for Treason

   Recommend (6)
9. Brentwood Buff

   March 12, 2013 at 7:31 pm

   QE and the Saver? Its the wrong question!

   Has anyone spotted that the Treasury Select Committee is inquiring into the ‘distributive’ effects, of the BoE & MPC’s Quantitative Easing and the like, while the real question has to be “Where can the Chancellor find sufficient money to fund; the budget deficit of next year, this year, last year, etc; and to fund necessary infrastructure, eg A new ‘National Industrial Bank’, and a ‘Bank in Waiting’ poised ready to pick up the pieces of the next failed bank. NB Not a failing Bank, a ‘failed bank’. Zombies need not apply.
   Why does the UK expect to fund FBB roll-out by a TV licence ? Fast Broadband looks to me like necessary infrastructure. For this the country needs a revenue stream.

   Is the Chancellor required to tax the rich to give to the poor? No. He is required to find a new source of revenue to pay for both the required infrastructure and many past years of excessive government spending.

   The poor will benefit, but not as much as the rich. Was that not the conclusion of the TSC report?

   It is of interest that (1) redistribution favours the richest, and (2) we can not tax the rich, even when we know the benefits of government spending gravitate to the rich. We recall that when a daughter wants an ice-cream we use her pocket money to buy the ice-cream? We don’t use her brother’s money.

   So, ‘just a thought’ , What new tax can we think of which will be cheap and easy to collect, annually raise sufficient revenue to; take the place of ‘the deficit’, provide for infrastructure spending, and leave some for the ‘rainy day’ ?
   How about the Lottery? No. How about a Mansion tax? No. How about a Land tax? Warmer ?

   How about a fixed wealth tax set initially at say 0.3% p.a. for all ‘fixed wealth’ above say £1,000,000 ? After all Savers are paying an average real Capital-tax of more than this, every year the real Capital-tax comes into play.
   Not all savers are millionaires, some are too poor to pay income tax, but they still have to pay the Ex-Inflation tax, and today’s rate is what, 3.3%?
   Look at the BrentwoodBuff blog to view how Savers are usually required to pay two out of three real-taxes each year, each one a sub-set of ‘income tax’ on savings interest or the Chancellor’s real ex-inflation tax.

   What annual amount would this suggested tax raise? Over to you Mr Chancellor !

   Thanks,

   BB

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