The problem with the Bank of England

I’ve written before about the way in which quantitative easing (QE) and very low interest rate policies redistribute wealth, and how that isn’t necessarily a good thing.

Ros Altman has more depressing figures on the matter. She has analysed the Bank of England’s statistics on interest rates in mortgage and savings markets since 2007 with a view to calculating the losses and benefits of super-low interest-rate policy. The results show much what you would expect.

Anyone with a tracker or a standard variable rate (SVR) mortgage of £100,000 is paying around £3,300 a year less than they were in 2008. That means that around one third of households (those with mortgages) have effectively been given a huge income boost since the financial crisis began.

On the other side, savers have done predictably badly. If you have £100,000 in a cash Isa, you are making £4,250 less than you were back in December 2007 (you used to get on average £5,350 a year, now you get £1,090).

This isn’t a perfect way to look at it – who knows where interest rates would be if they were allowed to be set by the market rather than by central planners. But it makes a clear point: our monetary policy is set specifically to benefit one group of the population above others – debtors above savers. I’m not sure that’s a good idea.

Back in 2009, Masaaki Shirakawa of the Bank of Japan made a much ignored speech in which he mentioned just this issue. He talked about the unconventional monetary policies the Japanese government had put in place, and then about the lessons to learn from them – alongside the reasons for his reluctance to indulge in much more QE, or in Western-style QE.

“When central banks try to create ‘productive’ policy measures, in an environment where the effectiveness of traditional monetary policy is constrained, they naturally come close to the area of fiscal policy. As a result, the policymakers need to face up to the issue of who should be responsible for such policy actions in a democratic society.”

Later in his talk, he made the same point – there is a “fine line between monetary policy and fiscal policy.”

There are two points here. The first is that monetary policy is not supposed to redistribute resources – just to keep interest rates at a level that keeps inflation knocking around 2%. When monetary policy comes close to being involved with the redistribution of resources on a micro level, it is almost a fiscal policy.

The second is that once we have recognised that, we need to face up to the issue of who should be responsible for it. In a democracy, the answer is the elected representative body.

So, here is one of the problems with today’s Bank of England: it redistributes income and wealth as part of policy rather than as a side effect of policy, but it does so as an unelected body.

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  • Critic Al Rick

    I suggest that it’s a myth that it’s a myth that the Bank of England (and other Central Banks) is not a puppet institution whose strings are pulled by the real powers-that-be.

    In consideration of the deteriorating state of Western economies, what feasible rationale is there for considering otherwise?

    • Critic Al Rick

      Apologies, the word “not” is what is colloquially termed an ‘unintended consequence’ and should not be there!

  • Ellen12

    I don’t think anyone would disagree with you. If you are a saver, you are being robbed by the central bank every day. Mervyn King and Mark Carney both apologise for robbing savers and, instead of being put in jail for it, they carry on robbing them some more. New borrowers are paying inflated prices for their houses, so while they may gain on the interest rate, they lose on the capital. I agree with Critic Al Rick in that there are probably lots of political sponsors pulling the strings of our supposed representative politicians. Democracy has been dead for some time now, his cousin Propaganda survived and is thriving though and is full of ‘spin’. Maybe we need another french revolution to redress the balance for the majority.

    • SimonW

      Indeed; I think Cronyism also applies! We can see as much in how the structure of banking has remained unchanged since the financial crisis as a result of the “lobbying” of the banking community on the politicians both in the US and the UK.
      There is, and was, a simple answer for the banks – separation of mandate to prohibit gambling and socialising of losses (Volcker & Glass-Steagall). There can only be a form of corruption prevailing when such simple answers fail to be, simply, applied!
      Come the revolution…

  • Anonymous

    Yes Ellen; but I think the situation will have to deteriorate a lot more before enough people have awoken to reality. By then there will be very little, if any, of Savers’ Savings left to be robbed.

    Greed is a well cited property of human nature; other less referred-to properties are selfishness and short-sightedness – al all levels…

    • Critic Al Rick

      Ohh! I thought I was logged-in!

  • MarkW

    The Banks are able to set the spread between their borrowing and savings rates. In this way they can maintain their profitability and pay off the massive debts that they have built up from gambling with our money! Competition is now creating some new Banks which can offer better rates. But maybe some control over the spread would be in order?

  • clive

    Its not just the savers like me that have lost out, surely the Treasury has also lost out on the tax on savings interest. I used to pay Income Tax on the basis that the interest on my savings took me above my Tax threshold — no more. I wonder how much that equates to over the last 5 years ?

  • Chris

    I am a pensioner with money tied up in financial institutions and my income is falling due to the so-called ‘management’ of interest rates. Inflation continues despite the government assurances it is falling (using massaged figures no doubt).
    So when market forces return to the fold there will be a massive failure of institutions to support the status quo.
    Moving 10% of investments to a ‘safe’ haven is a must for this coming year because governments are no longer in control of spending and are way out of their depth to curb that ever increasing debt. Even crisis management can not stem the correction that is to come. Be warned we are the losers every time because governments steal from the only source of ‘free’ cash, us.

  • Paul

    Savers out number borrowers 6-1. Almost half of mortgages given from 2005-8 were Liar Loans, people lied about earnings often with 1 pay-slip (their highest). Not one lender, broker or borrower has been punished, the FSA turned a ‘blind-eye’ as did the Government and BOE.

    Yet, these borrowers continue to benefit from low interest rates whilst Savers are robbed, to underpin asset prices (property). In order for the Government to gain votes at the next election, the Coalition want people to feel richer by higher property prices, already another dangereous bubble is forming in London and Gov’t, Treasury, BOE collectively turn their ‘blind eyes’ to this.

    Savers are robbed, Savers should withdraw monies from Banks paying puny rates, and Savers should bring a ‘class action’ against the BOE unelected body, as well as Osborne.

    We want our lost interest back, stop letting fraudulent borrowers benefitting further!

  • Tony

    Totally agree… Question is this: What can we savers do about it other than to flees to more risky investments?
    Class action would be great… Let’s get on the social networking sites and get it going!

  • Jonathan Carr

    While one third of households with borrowings profit at the expense of two thirds who are savers, the biggest borrower of all, namely the government, could not afford to finance its huge borrowings at true market rates of interest. It would have to raise more taxes and cut expenditure even further, causing even more damage to both groups and perpetuating recession.

  • Ron

    Totally agree!! The Bank and the government seem to be completely biased towards supporting those who have mortgages. Not only do they use the savings of those who may not be able to afford a mortgage but they use the taxes they have collected from same to give low interest loans.

    It is time this is halted and the ‘savers’ cease to be robbed of their rights.

  • Paul

    5 Years ago I raised the Liar Loans fraud with Mervyn King, and have continued to do so with the Government, our MP, Mark Carney etc. Under a FOI request I asked the inept and negligent FSA to investigate, they did nothing, and their Hector Sants evaded questions and has since left for a ‘job with the boys’ at Barclays Bank.

    Save our Savers has 4000 members signed up, yet there are 24 million Savers. If those 4000 each paid just £20, so £80k we could start a class action against the unelected body (BOE) who fix rates in favour of borrowers (rather than the market fixing them).

    Savers could demand repayment of robbed interest, asking why Liar Loans fraudsters have not only received fraudulent loans, but continue to benefit from low interest rate, a fraud on a fraud that Gov’t, BOE, Banks, Regulators and Mortgage Lenders are too afraid to investigate.

    On 13th November 2013 Mark Carney said on Channel 4 News that ‘I have my reputation to lose, we have to root out corruption in the financial markets’, he has been told of this umpteen times so now Mark Carney back your statement up and use the BOE regulator and investigate this fraud whilst giving honest Savers the market interest rate on savings.

    Money Week and Save Our Savers, let’s bring this Class Action!

  • greg

    I agree with most of the above – no proper democracy, politically appointed governor of B of E, savers robbed at the expense of those with fraudulent loans, house prices artificially propped up by Govt. to create a feel-good-factor so they get voted back in – yes, we need a revolution!!

  • Martin G

    As a result of many years of mismanagement and pandering to vested interests such as the banking “industry”, the developed world’s monetary system has descended into little better than chaos with all kinds of jerry-built add-ons – including QE – often dressed up as financial engineering. As Merryn writes, we are now with hindsight able to analyse some of the redistributive consequences – whether politically intended or not. There are many other consequences – which also need to come out into the open.
    At the heart of this is an inevitable consequence of the way capitalism is run today – money, and with it power, gets concentrated in the hands of the few. We have reached a point, with several precedents in history, where the wealth at the top is once again massively out of balance with that of the average person. Those fortunate few would be physically unable to redistribute their wealth efficiently – even if normal human nature (greed and fear) did not apply. Revolutions have been founded on less.
    We the public expect our politicians to do something here – but the political and “democratic” system of government really doesn’t motivate them to do so (money = power), so we see a bit of vote-seeking tinkering such as the 50% tax proposal.
    Savers naturally feel short-changed when interest rates are as low as they are now. But do they have a right to expect a risk-free income from capital just by putting it in a bank? Banks don’t need their money at the moment. Time to move on the perhaps riskier propositions for lending your money, such as crowd-funding (covered in MW). Maybe part of the revolution is we don’t need banks. Now that would be a long-term democratic movement that might stimulate the economy and bring about monetary redistribution for people willing to take risk on one side with their money and on the other with their labour in new ventures.

  • SteveN

    Surely the main reason that all the central banks are keeping interest rates low, is that is the only way hugely indebted countries and banks can afford repayments on what they owe. A rise in interest rates would cause the economic collapse of the aforesaid countries and banks, and they would have to enact instruments to sieze all available wealth, a’ la Cyprus, only worse. Savers had better just hold on tight. I am thankful that I made the decision to invest in property when I was younger instead of savings/pension schemes.

  • Ken Cookes

    Yes, interest rates have been suppressed by QE but what goes down eventually comes up again. The B of E can’t beat the market. Interest rates will have to be raised in due course to suppress inflation. You can’t issue so much money via QE without suffering the consequences. Milton Friedman was always right & it’s a shame he has become the forgotten man. So the savers will get their turn fairly soon now.

  • Wotan

    I agree with Merryn Somerset Webb. Unfortunately, the BoE as well as the MPC are populated by intellectual pygmies with the possible exception of Andrew Sentance. They have absolutely no grasp of macroeconomics. They have failed to understand that the so-called recovery has been caused by the strength of Sterling (which is really the result of the weak Euro and Dollar). This has arrested the ongoing increase in the prices of our imports, i.e. mainly food and fuel, and as a result has stabilised disposable household incomes, which in turn has stabilised and possibly boosted demand. This effect would also have been achieved by a deliberate increase in UK interest rates as part of government policy. As it occurred as a consequence of external circumstances it can only be regarded as fluke. If Cameron & Co. were really smart they would now increase interest rates by at least 2 – 3% over the the next 12 months, which would eliminate the threat of inflation, support disposable household income, normalise the housing/property sector and boost the economy further by creating investment income (savings, pensions, etc.). Moreover such a move would probably win Cameron the next General Election.

  • Chin

    Setting interest rates is neither the business of governments nor central banks. It should be negotiated freely by willing borrowers and lenders as was the case before the creation of the Fed in 1913, and reflect the aggregate demand for money in the economy thus ensuring that reward and risk are finely balanced between savers and entrepreneurs.

    Redistributing income should be left to thieves, muggers, highwaymen, banksters and politicians.

  • Duncan Black

    Indeed – a class action against the BoE is an excellent idea. As part of the process we can expose that it is far from being a publicly-accountable body – for a start, try getting the Articles of Association of the BoE from Companies House – you can’t, because “it is protected by its Royal Charter status” – try for yourself if you don’t believe me, the Companies House website address is: http://www.companieshouse.gov.uk

    To whom should I make the £20 cheque?

    DB

  • David Cockburn

    It was the politicians, Brown and Blair, who chose to borrow during the boom years and then hugely more in order to save the system from the results of their folly and that of the bankers.
    Given the huge overhang of debt, the Bank of England could only do its bit to help by stealing value from savers, as you describe.
    But the blame for the problem lies with the elected politicians.

  • JamJam

    I am surprised to hear that there are no other options! Why can’t we just let it run by natural determination by the market. If we have committed a crime by borrowing beyond our means, we need to correct it by sufferings, and not by some one sitting on a pile of printed rubbish. All that we are doing is transferring one problem to another.

  • Alec

    I agree with all the comments here.Just 14 months to go before the 24 million savers have their say.

  • Gobosly

    Whilst I completely agree with the sentiment of savers subsidising borrowers, I’m not entirely sure that an elected Politician setting rates is better. I was one of the first to celebrate when the Bank of England started to set rates independently of politicians with a mandate to keep inflation at a pre-defined level. I had hoped this would be the start of better long term planning in the economy rather than short-term policies by politicians.

    The problem is that for a while it seemed to work (remember no more boom and bust), but now the economic situation with regard to the deficit is so dire the bank seems to be working in cahoots with the politicians. I would actually like to see more separation not less. After all, do we really feel that political choices for interest rates would have benefited savers? I really doubt it!

    I think the BoE remit has become too large and too politicized. I mean, QE? Honestly, is this the best that can be done! I am sure that in the future it will looked back with the derision it deserves. We’ve missed the boat now, and the deficit is way out of control, but the answer was to let capitalism work unabated and let the country have an almighty short sharp shock. It would have meant a few banks, failing, over borrowed home owners defaulting, but I reckon the recovery would have been quicker and the deficit wouldn’t be such a disaster.

    On a side track, does anyone else believe that the office of budget responsibility should dictate that every year the budget should at least be balanced, if not generate a surplus? Otherwise there seems little point in it?! I’d be interested in people’s views.

  • Richard Coundley

    Companies and their employee are fined and potentially imprisoned for fixing Libor. Whereas, when politicians and central bankers fix rates to rob savers and to hand the money to profligate and reckless borrowers, they get off free. One law for the little people, and another for politicians and their cronies. No sign of democracy there!

    The politicians are using savers money to get themselves re-elected by creating consumption driven growth and by reflating the property bubble. There have only been limited steps to address the long term problems of the UK economy. For example they need to reduce the size of the state significantly, and massively improve the education system by promoting the study of maths, science, engineering, the use of technology and design in the broad sense of the word. What can be said in favour of the coalition is that they are significantly less worse than the labour party returning to power.

  • Dennis Hutchinson

    The Banks are being re-financed with savers money. Reductions in mortgages have come about more slowly, but they are still well above bank rate. I am retired, but have had a small overdraft for many years, just in case I might overspend. When I took it out, you could get 1.5% above bank rate, now it is 19.9%. Look at any other rates if you like, the margins are massive.
    The BOE rate is firmly controlled by bankers, and the wide margins available to banks will always continue as long as this is so, as well as huge bonuses for being so clever. What bankers do may be clouded with impenetrable language, but in reallity the maths is simple.
    The collapse suprintended by Labour was of course the result of easy credit, over borrowing and lack of due diligence regarding major investment purchases by banks. What worries me is that Labour look like trying to do it again, and may even get the chance.
    The Conservatives are hampered by the will they wont they Lib Dems, but even so they are unlikely to cotton on to the obvious remedy of having the Chancellor take back the power to set rates. A rise in the ridiculously low interest rate would indicate confidence in the economy, and give it a boost. Banks would not be able to continue as now and be forced to reduce their margins. Let the BOE try to keep the banking system in some sort of order if it can and leave important decisions to the politicians, I am sure that there are some who have a good enough grasp of maths, and a balanced view of real life.
    Dennis Hutchinson.

  • PhilH

    ‘Twas ever thus. Bankers, politicians, CEO’s all went to the same schools, uni’s etc and hence scratch each others backs. Why their pay goes up in 10’s of %. Why they lobby so well without been seen – in the Club!! Democracy is mere noise around these people making themselves extremely rich and powerful!!

  • herder winkelman

    Unless we are content with the status-quo of manipulation- we must demand of ourselves to examine (theory) that is critical of present practice. Chin was as close as anyone in identifying some fundamental flaws- flaws that are incorporated into our textbooks as valid practice. When you allow yourself to “step back” and view with sensible critique, it will astonish most as to how satiated you may have been with conventional ideas of central banks, money, and interest. The benefactors of our ignorance will concede nothing without demand, and we must not be satisfied with being complacent.

  • http://moneyweek.com john123

    THE RULES: MONEY IS KING!

    Whoever possesses it in abundance will almost always be given impunity for whatever misdeed or malfeasance committed and shall be overlooked.

    Mistakes, corruption, ineptitude, financial robbery and even treason et al can and will be hidden, but shall be swept under the mat.

    Those who have been projected to the upper levels with ‘position’ shall be covered by cronyism and ‘ways out’ of their misdeeds.

    The banks are inviolable, whatever they do and are ridden with crooks feathering there own nefarious nests – this is a universal fact. They shall be safeguarded from responbibilty

    Those who are thrifty are penalised by natural inflation and assisted by QE shall be robbed of their savings.

    Those who wear out their cards become debtors and may have to depend on food banks, or take bankruptcy shall pay back nothing of their debt.

    Malpractice shall be acceptable to those who have been elevated.

    Let’s be honest and face up to the fact that protests against it will not change anything – they cannot be beaten.

    “Exterminate, Exterminate”

    A Dalek

    “The love of Money is the root of all evil.” 1 Timothy 6:10

  • mark antrobus

    The BoE carries out monetary policy in order to meet the inflation target set by the government and to ensure their is sufficient spending in the economy to fuel economic growth. There is a trade off between these two objectives, which has been especially acute during the banking crisis. The BoE has probably got the balance right; yes inflation has been consistently above target of 2% by an average of about 1% but the reasons for these are not to do with an over loose monetary policy but imported commodity price inflation and government policy such as the raising of VAT and student tuition fees. If monetary policy had been tighter, including higher interest rates, the recession would have been worse, and we are fortunate that this time unemployment only reached about 8.4% against the almost 25% in the 1930s. It is unfortunate that savers have lost out, and one might have thought that the government might have suspended income tax on interest. However it is not and never has been the role of the central bank to set monetary policy to favour the interests of either savers or borrowers but instead to meet the economic objectives set by the government.

  • Critic Al Rick

    The Bank of England, as with other Central Banks, has for some time now been serving the perceived best self-interests of the real Powers-that-be.

    Anybody else in the UK who may have benefitted from the administrations of the Bank of England at one time or another has been/is being a purely incidental beneficiary.

    Ultimately, should the status quo continue, the real Powers-that-be will have stolen all of the wealth off of the rest of us.

    Democracy is effectively DEAD.

  • Alan Cotterell

    In 1971 Nixon came off the gold standard because the USA could not pay the outstanding debts of the Vietnam war in gold. Since then ‘fiat money printing’ has sent everything pear shaped with unlimited paper credit. I note that somebody is desperately selling off big trances of gold to help keep the US dollar viable. The days of the dollar as the global reserve currency are clearly numbered with China steadily amassing thousands of tons of gold rather than relying on more US treasuries with their current $17Tn US debt still going unpaid. Soon there will be a global reckoning so buy gold now why its still possible or simply go broke!

    AC.

  • Kevin Glennon

    I consider the reason that people are complaining about the interest rates of banks and other ‘Saving” institutions is that they have failed to consider any other investment vehicle. If as savers, you are not happy about the rate of return on your invested capital, you must, as a matter of being responsible to yourself and those you support, find somewhere else to invest you money! I am tired of all the complaints I hear from people about the level of interest on offer. You must take responsibility and learn to invest your own money where it will offer a better return. The game of the banks and saving institutions has always been to erode the value of your money to their benefit. The UK pound has lost 99% of it’s value since 1904. Wake up and take control of your own money!

    • Critic Al Rick

      So, I could invest, say, £100,000 at 6% and receive an income of £6,000 /annum for a fixed period of, say, 6 years, giving me £36,000 overall. Relatively good return in the prevailing circumstances. But in the meantime my original investment could have, say, halved. Fantastic control!

      It strikes me the “game” of financial advisers, etc is to take your money and charge you a ransom to drip-feed it back to you until there is nothing left.

      Any fool can do that for his/her self for free.

      In the status quo of a profusion of rigged markets anyone other than an insider who ends up a significant winner is not in control but lucky.

      It’s such as those who are in charge of the Bank of England who have the control. They are the ones who ‘make’ their own luck.

  • Pierre Grigorian

    I’m surprised that no one has mentioned the funding for lending for schemes. Surely these have done far more to lower the saving rates offered by banks than the current base rate. Prior to these schemes the banks were raising interest rates in order to attract deposits, but they dropped like a stone once this scheme got introduced.
    Savers have far more power than they realise. If more of them started withdrawing their capital from the accounts (they may as well as they are hardly paying anything) then saving rates offered would rise. Therefore rather than moaning about it take your money out – I have!

  • Bayard

    “Savers should withdraw monies from Banks paying puny rates”

    and put it where? Try taking it out in cash and putting it under the mattress and the bank will accuse you of money-laundering.

  • Paul

    Pierre is correct about the FLS effect on reducing interest to savings accounts.

    Here’s a fact you may be unaware of, there is a list on line of all Banks/B. Societies who signed up for this scheme. Our own B. Society in response to me asking them why they kept lowering our savings rate, told me it was due to FLS giving them cheap money to borrow. I assumed that was correct, only to find later that they had not even signed up to it and therefore were not borrowing that cheap money.

    Scam or Sham, they ripped us off. Incidentally they are still known as a Mutual however instead of charging borrowers .5% over savers’ rates as Mutuals should, their spreads are now 4-5% over their savers’ rates. No longer Mutual, just another greedy Society ripping their customers off to increase their capital at our expense.

  • Sergio36

    If you are not happy with an investment you have then you must make changes, dont blame the BOE. Banks are not for storing money or making money they are for making transactions. Income generating assets like property are for making money then reinvesting profits into other income generating assets or precious metals if that takes your fancy. Savers can not realistically think they can make a profit by parking money with some one, sitting back and forgetting about it? Debt is not a bad thing if some one else is paying it down for you and if rates are low then the sensible thing is to borrow and fix, not moan.

  • Paul

    Actually the BOE can be blamed for low rates, they’re an unelected body that redistributes income and wealth as part of policy (rigging it’s called), rather than as a side effect of policy. So they are helping the minority group of borrowers many of whom lied about their earnings whilst stuffing honest savers who are not expecting to profit out of ‘parking money’ just get the fair and proper market rate for savings to supplement income in many cases!

    Not ‘moan’ but FACT!

  • Paul

    Today 18th March 2014 the BOE announce they are appointing two new Deputy Governors at vast expense to UK taxpayers to support the struggling and damaged Governor Carney. Meanwhile they continue their daylight robbery of one of the largest groups in Society, ‘Honest Savers’ whilst underpinning the smaller group of Borrowers half of whom obtained Liar Loans.

    Yes, ‘we’re all in it together’ Cameron, Osborne and Carnet et al!

  • mikeT

    I know this is rather late in the day but a BoE official recently reported on how QE had impacted positively GDP, inflation and the “real economy”. I am at a loss to understand how any of this “new” money has got into the real economy because it has been used to inflate financial assets, no? Or, even worse,have banks in the UK just followed the US example and deposited it with the central bank for a riskless ,little spread – all, of course, at the expense of the tax-payer. Could you comment and explain please, Merryn?

  • tot777

    The elephant in the room is the broken link between savings/desposits and loans. Until banks are only allowed to only lend out money that has been deposited with them, savers will continue to be shafted. Presently, banks can create the money needed for a loan ex nihilo, regardless of how much savings are deposited with them (subject to minimal reserve requirements). The interest rate should reflect supply and demand between borrowers and savers, but it doesn’t. This is why house prices / asset prices have been able to multiply many times – the money supply is constrained only by the demand for credit from borrowers. Gold used to constrain the money supply, but I don’t see this coming back anytime soon. A more feasible solution would be 100% reserve banking, as proposed in the Chicago plan.

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