Vincent Cable: Confiscating savings from the poor is stupid and cruel

The danger now is of deepening recession mutating into deflation

Share
Related Topics

Four months ago, in September, the Bank of England was debating whether to increase interest rates beyond 5 per cent to counter mounting inflation. There were people who thought that crude oil, then $140 a barrel, would soon fetch $200 or even $250. That world now seems light years away.

As it became clear that we faced a serious recession we Liberal Democrats broke the taboo of the political and economic Establishment by calling on the Monetary Policy Committee to cut interest rates by 2 per cent initially. Our call was treated like a rude noise in church. But it has happened – and more – and we now have a two per cent base rate.

The danger now is of deepening recession mutating into deflation and a downward spiral of falling prices and wages. The Bank of England have to minimise that risk. They should cut further today and keep cutting: the classic response favoured by monetarists and Keynesians alike.

The base rate is, however, becoming a secondary concern in banking and monetary policy. The issue is now the supply of credit more than the price. Despite the injection of capital the banks are on strike. They are cutting lending, even to sound business customers, large as well as small. The Government must break the strike. But it should start by sorting out the confusion and contradictions in its own policy.

It wants banks to lend to business but simultaneously wants its investment back as soon as possible. And it demands that banks hold more liquidity in the form of government bonds: that is lending to Government.

Nor is it sensible to demand that banks pass on the full rate cuts to borrowers. They have to earn a margin on the money they get from deposits or the markets. Even mutuals like the Nationwide Building Society have the same concerns, and they cannot be accused of the sins of shareholder capitalism since they are wholly-owned by their depositors.

In the next few weeks the Government must clarify its objectives and direct the banks which it partly owns and has rescued. It may be that one or more of the big, partially nationalised, banks will have to be taken over fully and become a vehicle for new business lending.

Meanwhile, Barclays' eye-wateringly expensive deal with Arab investors has clearly failed to maintain lending on normal commercial terms, even to big British businesses. They must now begin talks with the Treasury about money.

In the meantime, interest rate cuts are provoking a savers' revolt. It is right to balance the immediate requirement for consumer spending with the need to maintain (and strengthen) a long-term savings culture for retirement, long term care – and mortgage deposits.

Savers will benefit from very low, or negative, inflation; their bank deposits have been given an implicit guarantee by the Government; and some – with money locked into good fixed interest deposits – are doing well. The real scandal is the penal treatment of savings under the means-tested benefit and pension credit system. The Government, in effect, is confiscating savings from the poor and thereby destroying their incentive to save: this is a stupid and cruel policy.

Some worry remains too about the effects of interest rate cuts on sterling. The danger of a flight from the currency has not disappeared. But so far the effects of devaluation have been largely benign – except for those poor souls on skiing holidays or living an expat existence in the Mediterranean sun. Coordinated cuts with the European Central Bank and the US Federal Reserve will help to minimise the risks however.

The big, looming, monetary issue is "quantitative easing": that is, printing money. What happens is that the government borrows from the Bank of England, not from the markets. It expands the money supply to keep the economy going and also to counter deflation without simultaneously increasing government debt. The attractions are obvious, as are the dangers.

The Robert Mugabe school of economics provides a salutary warning about uncontrolled monetary expansion in generating hyper-inflation. The road to Harare is not as long as we might hope. Monetary easing may prove to be necessary but will have to be managed with great skill and care: Too little easing and the crisis drags on – as in Japan. If there is too much, the authorities face the messy task of mopping-up liquidity by issuing bonds which add to the burden of borrowing or else we lurch back from deflation to inflation. So interest rates may soon become yesterday's story.

Vince Cable is the Liberal Democrat Treasury spokesman

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Secondary supply teachers required in Newmarket

£21000 - £35000 per annum: Randstad Education Cambridge: Secondary supply teac...

Programme Test Manager

£400 Per Day: Clearwater People Solutions Ltd: Our client are currently seekin...

IT Network Manager - Shepherd's Bush, London

£28000 - £30000 per annum: Ashdown Group: IT Network Manager - Shepherd's Bush...

Secondary supply teachers needed in Peterborough

£21000 - £35000 per annum: Randstad Education Cambridge: Secondary supply teac...

Day In a Page

Read Next
Yes supporters gather outside the Usher Hall, which is hosting a Night for Scotland in Edinburgh  

Scottish independence: Forget Yes and No — what about a United Kingdom of Independent States?

Ben Judah
Francois Hollande at the Paris summit on Iraq with ministers from Saudi Arabia and Bahrain on 15 September  

What's going to happen in Syria and Iraq? A guide to the new anti-Isis coalition's global strategy

Jonathan Russell
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week