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| Negative interest rates are not the answer to Britain's economic woes | Negative interest rates are not the answer to Britain's economic woes |
| (30 days later) | |
| The Bank of England's deputy governor has floated the idea of negative interest rates being applied to commercial banks' deposits in an effort to force them to increase lending. | The Bank of England's deputy governor has floated the idea of negative interest rates being applied to commercial banks' deposits in an effort to force them to increase lending. |
| Paul Tucker's desperation is well-founded. The revised GDP data for the final quarter of 2012 was unchanged at minus 0.3%. In two-and-a-half years of coalition policies the economy has grown by just 0.7% and is still 3% below its pre-recession peak. At this rate, it would be 10 years before the economy regained its previous peak. The acknowledgment that Britain has entered its own Japan-style "lost decade" lies behind the recent loss of its AAA credit rating. | Paul Tucker's desperation is well-founded. The revised GDP data for the final quarter of 2012 was unchanged at minus 0.3%. In two-and-a-half years of coalition policies the economy has grown by just 0.7% and is still 3% below its pre-recession peak. At this rate, it would be 10 years before the economy regained its previous peak. The acknowledgment that Britain has entered its own Japan-style "lost decade" lies behind the recent loss of its AAA credit rating. |
| Talk of negative interest rates is simply the latest unconventional measure which has recently been floated by Bank officials. Despite their own forecasts of mild recovery and moderating inflation, the departing and incoming Bank governors have surprised financial markets by supporting further quantitative easing. | Talk of negative interest rates is simply the latest unconventional measure which has recently been floated by Bank officials. Despite their own forecasts of mild recovery and moderating inflation, the departing and incoming Bank governors have surprised financial markets by supporting further quantitative easing. |
| Faced with prolonged economic stagnation and the consequent rise in government debt and deficits, officials are resorting to ever more arcane and ineffective monetary measures because fiscal measures – actions by the government on spending or taxation – have been officially ruled out. | Faced with prolonged economic stagnation and the consequent rise in government debt and deficits, officials are resorting to ever more arcane and ineffective monetary measures because fiscal measures – actions by the government on spending or taxation – have been officially ruled out. |
| The phrase "pushing on a piece of string" is widely associated with Keynes' estimate of the capacity of monetary policy to deal with an investment-led slump. Recent experience validates that judgment. Quantitative easing globally has simply led to increased speculation in assets and led higher inflation. In countries where basic commodities form a large part of household budgets, this is disastrous. In Britain it has meant an unprecedented run of declining living standards for most people. | The phrase "pushing on a piece of string" is widely associated with Keynes' estimate of the capacity of monetary policy to deal with an investment-led slump. Recent experience validates that judgment. Quantitative easing globally has simply led to increased speculation in assets and led higher inflation. In countries where basic commodities form a large part of household budgets, this is disastrous. In Britain it has meant an unprecedented run of declining living standards for most people. |
| Negative interest rates are now being considered. But interest rates on government debt are already negative in real terms, after inflation. And if the government's aim was to revive growth, it would not be cutting its own investment at a faster rate than the private sector. | Negative interest rates are now being considered. But interest rates on government debt are already negative in real terms, after inflation. And if the government's aim was to revive growth, it would not be cutting its own investment at a faster rate than the private sector. |
| In reality, the government has a host of investment opportunities. A huge housebuilding programme would deal with a housing shortage which has been chronic and become acute, and put the construction sector back to work. The rents on affordable council homes could provide a yield way above the government's long-term cost of borrowing (currently 3.3% for 30 years) and it would ease the spiral of house prices and rents generally. The government could invest in large-scale infrastructure, energy and transport projects, nationalising those firms which stood in the way. It could invest in education by scrapping fees and bringing back the education maintenance allowance. According to the OECD, the additional public return from each graduate is £55,000, far outweighing their cost of education. | In reality, the government has a host of investment opportunities. A huge housebuilding programme would deal with a housing shortage which has been chronic and become acute, and put the construction sector back to work. The rents on affordable council homes could provide a yield way above the government's long-term cost of borrowing (currently 3.3% for 30 years) and it would ease the spiral of house prices and rents generally. The government could invest in large-scale infrastructure, energy and transport projects, nationalising those firms which stood in the way. It could invest in education by scrapping fees and bringing back the education maintenance allowance. According to the OECD, the additional public return from each graduate is £55,000, far outweighing their cost of education. |
| It is rejecting these options because the purpose of "austerity" is not growth or deficit-reduction, but boosting the profits of the private sector. Government policy is to reduce its own investment in these areas, and others like health, so that the private sector can reap the benefits. | It is rejecting these options because the purpose of "austerity" is not growth or deficit-reduction, but boosting the profits of the private sector. Government policy is to reduce its own investment in these areas, and others like health, so that the private sector can reap the benefits. |
| Despite its shortcomings the negative-interest idea does have one important merit in that it highlights the dormant power of government institutions over the banking sector. Penalty interest rates on banks are part of an armoury that includes majority ownership of RBS and Lloyds, deposit guarantees for all banks, liquidity support and the ability to set capital requirements. | Despite its shortcomings the negative-interest idea does have one important merit in that it highlights the dormant power of government institutions over the banking sector. Penalty interest rates on banks are part of an armoury that includes majority ownership of RBS and Lloyds, deposit guarantees for all banks, liquidity support and the ability to set capital requirements. |
| Without spending an additional penny of government money, the government could oblige the banks to lend to key sectors to increase investment. Utilising the resources of large corporations, which Tucker correctly described as "flush with cash", the government could simply instruct the banks to lend productively. This would deal with the cause of the crisis – the refusal of the private sector to invest. | Without spending an additional penny of government money, the government could oblige the banks to lend to key sectors to increase investment. Utilising the resources of large corporations, which Tucker correctly described as "flush with cash", the government could simply instruct the banks to lend productively. This would deal with the cause of the crisis – the refusal of the private sector to invest. |
| Top savings accounts | |
| Coventry BS | |
| GE Capital Direct | |
| Skipton BS | |
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