Savings: Mr Bean was blunt, but he should be thanked
There is something of a media storm over Charlie Bean’s interview with me.
I wasn’t entirely convinced that Britain’s savers would take Charlie Bean’s comments in the way that he probably meant them. For a start, his points seem to have been slightly inflated by our friends in the newspaper headline writers’ guild.
He did not go as far as saying ‘Spend for Britain’ or ‘Spend Spend Spend’ of ‘Savers Stop Moaning’. In his interview with this programme, broadcast last night, he suggested that ‘in the short term’ households spending ‘a bit more’ could help boost the economy.
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However, the interview was undeniably noteworthy. The Deputy Governor did say three things that I did not expect him to.
1. He suggested that “eating into” their capital might be a sensible strategy for savers in the current temporary period of low interest rates. From a robotic, equation-based, economic perspective, he is just stating the numerical reality. Capital can be drawn on in bad times, and added to in better times. The current post-inflation negative return on saving means that it makes more sense to spend now, than wait until your savings are worth less. Right now, however, many conservatively minded savers are doing the opposite, and the savings rate has gone up, despite their being no return on savings.
2. He also emphasised that savers gained on the swings and are now “losing on the roundabout”. And he said that those swings are periods of higher interest rates in the past and future, and also the huge increase in property prices. This is an old Bean favourite. And however uncomfortable it is for many older people who feel times are tough, there can be no doubt that the great house price boom has been the biggest redistribution of wealth that Britain has ever seen. It was worth hundreds of billions of pounds, and dwarfed the efforts of Gordon Brown to redistribute through the tax credit system. Now, not all savers who are now suffering, were the same people who gained from the housing boom, but the overlap is considerable.
3. He explained that squeezed savers were not a “side effect”, but “part of the point” of the Bank of England’s interest rate policy. Now this is something that you suspect as an economics journalist, but you don’t imagine being told this so candidly. As I said yesterday, interest rate policy has a distributional impact, Bean recognises this.
However, his job in law is to take absolutely no notice of the distributional impact and set interest rates to hit the inflation target of 2 per cent (now there is a separate debate about whether the Bank is really doing that, but another time). The issue is that at some point the losers will get so fed up that it becomes a political issue. In opposition, George Osborne waxed on about the fate of savers, even offering a multi billion pound tax break. But then he started making the argument about how his austerity plan would help the Bank of England keep interest rates lower for longer. So, I don’t expect to see the Chancellor crying tears for savers.
Underpinning all of this, and some of the anger of savers is this paradox of policy, that in the long term the economy needs more saving, more investment, and less bubble. Yet not right now (see below for a transcript of Charlie Bean’s answer on this, that we didn’t fully broadcast yesterday). This paradox has now lasted two years. At some point it starts to become less of a paradox and more of a reality. When Japan started its ZIRP (zero interest rate policy) few would have predicted it lasting over a decade.
So yes, savers should be angry at the current situation. But at whom? Mr Bean can back up everything he said in his Channel 4 News interview, even if it was rather blunt.
Do savers really think that the Bank should have kept interest rates high? Well in that case many savers and their children would have had no savings because they would have no job. It is much better to be talking about these issues than not. If savers are frustrated, they should write to the Chancellor, and lobby him to change the Bank of England’s remit.
Mr Bean on the policy paradox
“It is what you might call the “paradox of policy” that we face at the current juncture. If you go back before the crisis happened one can make the argument that the UK as a nation wasn’t really saving enough relative to the level of investment, that was reflected in the fact that we had a trade deficit and we had been saying for some years that at some stage there would need to be a rebalancing of the economy.
“However, what we have seen in the crisis is households saving a much higher proportion of their income so savings are not low at the moment, the problem is savings are high and at the same time businesses have slashed their spending so investment spending has collapsed.
“The combination of those two factors with households saving a larger fraction of their income and businesses not spending very much is that the level of demand in the economy has fallen very sharply. What we’re trying to do by our policy is encourage more spending, ideally we’d like to see that in the form of more business spending but part of the mechanism that might encourage that is having more household spending, so in the short term we want to see households not saving more but spending more.
“Further down the road as the economy picks up steam as we hope it will and the world economy recovers and our exports pick up and investments pick up then, so there may be room for a higher level of household savings in the economy and I would fully recognise that in the longer term we would expect to see a higher savings rate than we saw in the decade or so before the crisis.”