The Bank of England comes under the microscope...
WELL DONE to the members of the UK's Treasury Select Committee for suggesting an investigation into the effect the Bank of England's monetary policies – including quantitative easing – are having on savers and pensioners, who have borne the financial brunt of the Bank's response to the financial crisis, writes Simon Rose of Save Our Savers.
It is a bitter irony of the current situation that, had savings been properly encouraged in the past, the effects of the financial crisis would have been considerably less severe.
On one hand, the government is trying to encourage people to save into pensions – a matter of urgency, according to the IMF. Yet, at the same time, savings are being confiscated through the Bank of England's policy of negative real interest rates and quantitative easing, which has had an appalling effect for those who are retiring.
Even though easy credit and a lax monetary policy is responsible for our current financial plight, its continuation over the past three years has, we calculate, seen a confiscation of almost £100 billion from savers and pensioners, enough to pay for the Olympics 10 times over.
Business Secretary Vince Cable called quantitative easing an "experiment" which was "unorthodox" and "imperfectly understood". Yet Bank of England Deputy Governor Paul Tucker told the Treasury Select Committee that it was "supporting demand in the economy".
It is not. Mr Tucker is wrong.
He and the members of the MPC may understand theoretical economics but they demonstrate little understanding of basic human psychology, which is what determines the direction of the real economy. As the Committee's report points out, the most important component in the UK economy is consumer spending, accounting for two-thirds of total demand. Running an "extremely lax monetary policy", with inflation persistently higher than the government's 2% target, reduces demand.
Demand comes from millions of individuals spending their money. But above-target inflation and negative real returns on savings gives people less to spend. The MPC's policies are thus reducing demand and making economic growth more unlikely.
As so often, recent inflation figures have been higher than the Bank of England forecast and make it likely that, for a tenth successive quarter, Sir Mervyn King must write to the Chancellor explaining why the government's 2% inflation target has not been met. Over the past six years, the MPC's failure rate in this, its primary statutory aim, has been 87%.
The Bank's "extremely lax monetary policy", to use the Committee's words, was a major contributing factor to the financial crisis. Persisting in this wrong-headed policy is not only prolonging the crisis, it is also destroying the nation's savings and making the country more vulnerable to any future economic shocks. As David Cameron said in 2009, undermining savings is "economically stupid and morally indefensible".
While applauding the Treasury Select Committee for its sterling work, we would urge it to go further and ensure that in future the Bank of England's Monetary Policy Committee considers the state of the nation's savings in its deliberations and that it is properly held to task for failing in its statutory duty of controlling inflation.
The Bank of England's anti-savings policies are threatening the future financial security of the country. Savings must be at the heart of the management of the economy. There needs to be a well-structured government savings policy which caters to the needs of all levels of society and does not undermine people striving to invest in their future.
An examination by the Treasury Select Committee into the state of Britain's savings would be an excellent first step on the road back to a sound, well-constructed economy.
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