Julian Knight: Quantitative easing is just teasing savers and pensioners
Printing £75bn is supposed to help the banks lend more, but they didn't last time and it has a cost
Sunday 09 October 2011
The odds are better than 50-50 that your bank or building society had its credit worthiness downgraded on Friday by Moody's.
But what does this downgrade mean for you? Not much, unless you have banking shares and saw them drop in value. It may result in banks finding it more expensive to borrow on the money markets, which will be passed through to customers. But, as we report on page 93, that's already starting to happen: the markets had priced in this downgrade earlier as Moody's review was announced back in May. Of far greater concern is what will happen to those markets once Greece defaults and the French, German and, possibly, British banks need money pumped into them again.
The downgrade also explains the timing of the Bank of England announcement to print £75bn. Quantitative easing, as it's called, works by allowing banks to exchange their securities for cash, which they can then supposedly lend out to business and to you and me. It's often overlooked that the last time QE was deployed the cash remained on bank balance sheets, or went overseas, while lending actually nosedived.
QE proponents argue that, without it, the credit crunch would have been much worse. But one harmful consequence of QE is that it generally hurts savings and annuity rates. If the banks don't need as much savings cash then why do they need to pay a top rate of interest? What's more, the purchase of securities from the banks depresses the market in those securities and it's just these securities that insurers buy to fund an annuity or income for life. Yet again, we are taking a sideswipe at savers and pensioners in order to correct the economy's overindebtedness.
More widely, QE also depresses the UK currency: there are more pounds about, therefore the price drops. This makes imports more expensive, so inflation jumps and that, slowly but surely, eats away at – you guessed it – savings as well as living standards.
Labour's silence on pensions
It's a sad indictment of Labour's view of pensions that Ed Miliband couldn't find a dedicated shadow in his new Shadow Cabinet. Instead, Liam Byrne, author of the famous note left at the Treasury that his government had spent all the money, is to fulfil both the work and pensions brief as well as being the policy review co-ordinator. We also have a shadow minister for care and older people. If pensions were to be drawn into that, this would be a clear indication that they are a policy backwater for the party. The former shadow pensions minister Rachel Reeves, meanwhile, has been promoted after only one year. When Labour was in power it had, on average, a new pensions minister every 15 months.
It's a great shame that when we are living through the most fundamental changes to our pensions in a lifetime, including radical reform of the state system and auto-enrolment being introduced into the workplace retirement savings sector, that Labour does not have a pensions shadow at the top table. Perhaps the questions around pensions are just too unpalatable for the party at present – particularly in relation to necessary reform of the public sector schemes – and are simply being ignored.
Jumpy over junior ISAs
Why are so many of the big banks hesitating before they launch a junior ISA account? You'd think they'd love the product: it's simple and could bring in a healthy flow of cash deposits at a point when we all know the banks need every penny they can get on their balance sheets. Perhaps they anticipate a slow start to junior ISAs (JISAs)and think that the main action will come just before the end of the tax year in April, just as most banks and providers see a flood of last-minute adult ISA deposits as the tax deadline nears.
However, there could be something else at play: the general disenchantment with politicians when it comes to such wheezes as the JISA. Remember, the JISA replaces the child trust fund (CTF) dumped by the coalition in its first days of power. This cost some providers dear, almost breaking the second-biggest player in the market, the Children's Mutual. Millions in back-office costs were lost.
But CTFs are just the most recent example of government changes of mind or half-heartedness damaging providers. Take stakeholder pensions, launched a decade ago with the promise that they would revolutionise the market and boost the numbers of those saving for retirement: over-complex regulation and pitiful marketing meant that stakeholders withered on the vine and insurers lost a packet.
And going back to 1999, when ISAs were first introduced, savers were initially allowed to put £1,000 into a life insurance scheme tax free as part of their allowance. Some providers offered this only to see it scrapped by the then chancellor, Gordon Brown, a couple of years later. In the light of the history, it's no surprise providers are taking their time over JISAs.
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