What has happened to savers in the credit crunch era?

Sometimes official new releases are more revealing than they would wish to be. For example there is a planned Help To Save scheme being floated ahead of tomorrow’s Budget. As the Help To Buy scheme for houses indicates a situation in distress with house prices far too high to be affordable we are immediately on yellow alert as to the state of play in the savings market. From the BBC.

Millions of low-paid workers who put aside savings could receive a top-up of up to £1,200 over four years, the government has announced.

Employees on in-work benefits who put aside £50 a month would get a bonus of 50% after two years – worth up to £600.

That could then be continued for another two years with account holders receiving another £600.

These schemes always initially look a good idea although those who are in similar circumstances but are excluded will no doubt find it frustrating. One may also have a wry smile at the fact that this is very similar to the Labour governments plan for a savings gateway which was abandoned because it was “not affordable” But fundamentally we are left wondering why savings needs such help.

The Bank of England is not so keen

Back in September 2010 Deputy Governor Bean of the Bank of England made a right Charlie of himself in a car crash style interview with Channel 4.

Indeed when asked this question.

This bad news for savers is the point of what you are doing?

He replied “yes”.

Mr Bean continued.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.”

Savers are still waiting Charlie! Meanwhile he revealed the plan such as it was.

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 … is having more household spending, so in the short-term we want to see households not saving more but spending more’.

The attempt at sympathy fell rather flat too.

“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

Charlie himself was doing the opposite as his index-linked pension grew by £522,900 that year according to the accounts published by the Bank of England. Of course he has been provided with additional work in retirement via the Bean Review of UK Economic Statistics making his pronouncements head down the ” let them eat cake” road. Or as Hall and Oates pointed out.

You’re out of touch
I’m out of time (time)

Help To Buy

Whilst lower mortgage rates can improve mortgage affordability for a time they cannot help with the issue of raising a deposit or equity. So we have the Help To Buy ISA.

If you are saving to buy your first home, save money into a Help to Buy: ISA and the government will boost your savings by 25%. So, for every £200 you save, receive a government bonus of £50. The maximum government bonus you can receive is £3,000.

Such is the desperation on this front that the providers seem willing to make a loss on it. From Moneywise.

First-time buyers can now get 4% interest from Santander’s Help to Buy ISA as the bank has today matched Halifax’s market leading best-buy rate.

These interest-rates as I shall explain later are far higher than can be got in other circumstances. Perhaps we get a clue here as to how much banks make from their UK mortgage books and can afford to subsidise deposits to get borrowers on the hook.

For those unaware of the UK system Individual Savings Accounts or ISAs offer income tax relief.

Savings and Deposit Interest-Rates

Moneywise gives us a theme that keeps being repeated or as the great Yogi Berra put it “It is just like deja vu all over again”

Banks and building societies continue to cut rates on both their fixed rate bonds and cash Isas…….On easy-access cash Isas, Post Office has cut its Online Isa rate from 1.45% to 1.2% for new savers. Virgin Money pays the top rate at 1.41% on its Defined Access Isa, but you are restricted to three withdrawals a year. Coventry BS Easy Isa pays 1.4%.

You may note that the Post Office has acted as if there has just been a Bank Rate cut of 0.25%, are they getting ready? The Bank of England records it like this.

The effective rate paid on households’ outstanding time deposits decreased by 2bps to 1.44% in January and the rate for households’ new time deposits increased by 4bps to 1.36%.

Interesting isn’t it how everybody seems to get the top rate? Perhaps they should invest everyone’s savings.. Oh hang on maybe not.

The Bank of England has chopped and changed in the savings rates used in its database ( I wonder why…) but the ISA rate nearly goes back to Charlie’s speech as we have 2.41% in January of 2011 as opposed to the 0.81% of February. So savers have continued to lose over time as interest-rates have fallen as they wonder when they will be doing very well as Charlie Bean promised? Oh and is 0.81% the new 1.4%.

How much do we save?

This is measured except the number produced includes imputed saving described as “conceptual payments” and yes our old friend imputed rents gets a mention. Well to its credit (sorry…) the Office for National Statistics tried again last month and sang along to this from Stevie V.

Dirty cash
Dirty cash
Dirty cash
Dirty cash

On this basis negative saving began in 2003 and might reasonably be considered a sign of the times and a warning. This fell to an annual rate of around -6% in 2008 before springing up like Zebedee from The Magic Roundabout to just over 5% in early 2009 in a clear reaction to the credit crunch as fear led to more saving as well as more fear at the Bank of England! Next we saved for a bit until it went negative again in late 2013 where it has remained.

Under the series including imputed saving the savings ratio is usually some 5% or so higher.

Comment

In essence official policy in the credit crunch era has been to reward debtors and to punish savers. Charlie Bean made that plain and this was reinforced in the summer of 2012 as the Funding for Lending Scheme was brought in to reduce further mortgage and savings interest-rates. Unlike Lewis Carroll it is always “Jam Today” for the UK establishment. It is a bit like the famous saying of St.Augustine.

Lord, make me chaste (sexually pure) – but not yet!

This has even moved into the world of inflation as savers have recently benefited from the fact that it has fallen. If we move beyond which measure to use then real rather than nominal interest-rates have improved especially compared to 2011 when the dilatory efforts of the Bank of England saw most inflation measures go above 5% per annum. It failed to spot that punishing workers, consumers and savers would have only one result. However of course it wants inflation higher as the game continues! The moral hazard issue continues also as Lewis Carroll reminds us.

Alice:How long is forever? White Rabbit:Sometimes, just one second

Meanwhile today we get an update on the basket for the UK official inflation measure. Apparently it is more important to include coffee pods and cream liqueur than owner-occupied housing.

I will be on Share Radio which has gone national on Dab after the 1pm news today.

 

 

 

 

 

 

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26 thoughts on “What has happened to savers in the credit crunch era?

  1. Shaun,
    Slightly off topic – any thoughts on new wheeze of interest on savings accounts not being taxed directly in 2016/17 ? Does this mean tax take deferred until Jan 2018?
    Banks no longer collecting tax but having to check on customers for HMRC?

      • the reason is that when we goto the MIRP on savings you will have to claim back against HMRC -ergo it’ll cost ya!

        or

        if you dont declare tax on 10p interest they’ll slap you with a £1000 fine for none compliance…..

        Forbin

  2. great article as always Shaun.

    it just goes to show that the boe in their ivory towers have no grasp of reality. forcing savings rates down to force savers to spend didn’t work. They just saved harder. Does the negative savings rate include paying down the mortgage?

    • That’s the problem with zirp; credit is too cheap to encourage saving for purchases, so the overwhelming majority of saving is being done for “security”.

      People instinctively know that things are not right when we have eight years of “emergency” rates, when, after everything possible has been thrown at the banks to normalise the economy, without even a semblance of success, things do not pick up, what do they do? They save harder.

      I’d say, “Hoist with their own petard!” if I believed for one second that savers were being punished to help the wider economy, but I find it impossible to credit them with such stupidity.

      The idea that ZIRP costs banks money is tosh too: RBS had an operating profit of £4.4bn last year.
      It’s true that it was down from £6.1bn in 2014, but that was during Zirp too, and was due to RBS’s retreat towards core.

      The truth is this: the banks are still bust, they need the absolute minimum of non-performing loans just to survive, the lower the interest rate, the better the banks’ chances. F*ck, savers, f*ck pensioners, f*ck the rest of the economy, they don’t pay our corrupt post-career sinecures.

    • ‘forcing savings rates down to force savers to spend didn’t work. They just saved harder. ‘

      Quite,they’ve just relentlessly driven the velocity of money down despite their intention being the exact opposite.What’s amazing is the disconnect between the reality we all experience and their perception of it.People hoarding is a natural reaction to rates being driven down.

    • Hi Anteos

      It should but I do not think it does. I have looked up a 2008 paper from the ONS on the subject that for shares differentiates between dividends and capital repayments. If the same principle is applied to mortgages then repayments do not count. However it does not mention them specifically.

  3. The only way to get these guys to understand this is to FORCE them to live as we plebs do, i.e :
    1. You save up money for a pension;
    2. You get the pension that your pension provider gives you.
    When I see the words “index-linked pension” for the elite, my blood pressure rises to dangerous levels. After all, why bother to save and who cares about savings rates/annuities etc if you have a golden pension plan (of course also paid for by us plebs)?

    • Hi James

      The disconnect between an establishment and the many is a sign of trouble. In a way it is highlighted by politics where governments were different badges but then implement similar policies. Pink Floyd were on the case years ago.

      “Us and them
      And after all we’re only ordinary men.
      Me and you
      God only knows it’s not what we would choose to do.

      ‘Forward’ he cried from the rear
      And the front rank died.
      The general is sat and the lines on the map
      Move from side to side.”

  4. Hi Shaun – “What has happened to savers in the credit crunch era?” I’m still here, saving harder than ever!!

    Of course, if the establishment had sorted out the economy than I wouldn’t view the future with trepidation and would probably be spending all my income relying on solely on investment returns to increase my savings.

    So far we’ve had:

    1. Help to Buy

    2. Mis-sold Payment Protection Insurance refunds and now

    3. Help to save which of itself is busily fighting official policy of “Lower for Longer” thenatural outcome of which will be forpeople with no savings and low income to think “why bother” thereby storing up future pension problems.

    I have 2 words to cover it – Helicopter money.

    This demonstrates the depth of the establishment’s panic and fear although it is to the Establishment’s credit that it has actually managed to look beyond later today and recognise a new growing problem (entirely of it’s own making via emergency rates, funding for lending, QE and Help to Buy) of people with little or no savings giving up on saving due to the low rates available and making themselves even more financially vulnerable in the long term when they retire. .

    Inappropriate Payment Protection Insurance was being complained about in the mid 90’s but the Establishment’s response at that time was “Caveat Emptor” Now it has changed. So what happened to make them change? Could it be collapsing real wages and thereby underlying demand? Requiring ever cheaper credit and helicopter money to keep the show on the road?

    Help to save targeted at low income people is a good idea in principle but it is the motivators behind it that cause me disquiet.

    • “….. of people with little or no savings giving up on saving due to the low rates available and making themselves even more financially vulnerable in the long term when they retire. ….”

      One could speculate that this is part of the plan …

      Dune , here we come

      Forbin

    • ‘I’m still here, saving harder than ever!!’

      So you’re the problem with the global economy Noo2?

      ‘This demonstrates the depth of the establishment’s panic and fear although it is to the Establishment’s credit that it has actually managed to look beyond later today and recognise a new growing problem (entirely of it’s own making via emergency rates, funding for lending, QE and Help to Buy) of people with little or no savings giving up on saving due to the low rates available and making themselves even more financially vulnerable in the long term when they retire.’

      Petard hoist own their by

    • Yes – you’re not alone in saving more. Me too. Savers faced with diminishing returns send to save more – much to Charlie’s chagrin, I hope. I read recently (can’t find the link) that there is now 3 times as much money on deposit at retail banks than in 2008. And, distressingly, the longer this goes on the more likely it is to go on longer.

  5. Shaun. I was amused to see your reference to St Augustine as I was thinking of it only the other day when I read John McDonnell’s alleged Damascene conversion.

    “A Labour chancellor will have to show at every budget, according to Office of Budget Responsibility (OBR) calculations, that s/he can balance the books in five years’ time.”

    Note the “can” – not “will”.

    • Having lived through several Labour chancellors, all I can say is ha bloody ha. We all know what will happen if/when Labour get into power. They will spend more than we can afford. That is it. End of story.

      • To be fair James,the Tory imitation of Labour hasn’t been limited to Cameron being the self styled ‘heir to Blair’,George has been ‘investing in public services’,just like that great ‘saviour’ of the world,Gordon ‘The G Man’ Brown.

        Whoever is in power,we’re broke.

        • “To be fair James, the Tory imitation of Labour hasn’t been limited to Cameron being the self styled ‘heir to Blair’…”

          To be fair James, the last five budget surpluses have been under a Labour Chancellor.

  6. HI Shaun
    It has just been announced that
    as of midnight the SFO will be known as
    the SFOE The Serious Fraud Overlooked
    Eventually!

    JRH

    • Hi JRH

      I have been following the activities of the SFO for nearly 30 years and in that time they have only ever convicted the small-timers. it would be cheaper to scrap it!

      There are genuine issues with prosecuting complex fraud and we need to regroup. Some years back my boss at the time was called as an expert witness in a case. When he returned I asked him how it had gone? Shaun they didn’t understand a word…..

  7. hello Shaun

    I wonder if anyone asked Charlie “the Clown” Bean if he cashed in his pension to buy a yacht or some art work ? After all if he thinks spending it all will help , then he should lead by example !

    ( I’d posit he’s really a mean old coot with his own pennies )

    Forbin

    • It’s allegedly probably all in sterling,those on the inside knowing full well they’ll be hiking rates should cable weaken below 1.30.Whilst the BoE’s first public duty/remit is to target 2% stability,it’s first private remit is to protect the foreign holidays of it’s pensioners.

  8. ‘Meanwhile today we get an update on the basket for the UK official inflation measure. Apparently it is more important to include coffee pods and cream liqueur than owner-occupied housing.’

    Shaun I read this today,you missed off women’s leggings.More easily affordable than a house.

    I am considerably reassured by these ONS changes and retract any previous criticisms I may have leveled at them.Today,in squaddie parlance,they have proved,’they are all over it’,when it comes to measuring price changes.

    Clarity and logic are permanent bedfellows at the ONS.
    https://www.ons.gov.uk/economy/inflationandpriceindices/articles/consumerpriceinflationbasketofgoodsandservices/2016
    ‘Both the CPI and CPIH baskets contain some items excluded from the RPI basket such as university accommodation fees and unit trust commissions. Similarly, the RPI and RPIJ basket contains some items (eg mortgage interest payments) that are excluded from the CPI and CPIH baskets’

    Red is the new white and white is the new green.

    • Hi Dutch

      You can add the exclusion of Council Tax to the problems of CPI and even more bizarrely to those of CPIH. As to weights they vary simply because the owner occupied housing sector in RPI reduces the availability for other areas .

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