Home—Blog—How the great property market bail-out is making you poorer
Sep 27, 2010, 03:17
Posted byMerryn Somerset Webb
Comments (41)
I've been participating in a Channel 4 live blog about savers and the miserable rates of interest they are getting on their cash.
The Bank of England's deputy governor, Charlie Bean, says that savers who don't think they are getting enough interest on their cash should keep their consumption up by spending their capital instead. Savers, obviously, find that a pretty unpalatable solution to their problems. They wonder if a better solution might be for the Bank of England to note that inflation is far, far higher than 2%, and to put rates up.
Sadly, that isn't going to happen. What we are seeing in the UK economy at the moment is a sustained effort to engineer nominal property price stability. Why? Because sustained property price falls and their knock-on effects through consumption to the rest of the country are currently considered to be just too damaging to our still-fragile financial system. But while everyone is worrying about deflation, it is entirely possible that this price stability (or the effort to create it at least – there is no guarantee that it will work) will come at the cost of inflation in pretty much everything else.
The idea, for what it is worth, is that at this point in the cycle, price inflation won't lead to wage inflation. That's because, with unemployment so high, only the very unionised think they stand a chance of wage rises any time soon. The net effect, then, is real wage deflation for most British workers, something that obviously makes them poorer. We are supposed to accept this without complaint on the basis that being paid less in real terms makes us more competitive on the world stage and hence more prosperous in the long term.
That might or might not be the case (it is worth noting that similar arguments have been used to defend sterling depreciation and worker impoverishment for decades). But I wonder, if everyone understood the price they were paying for the government's attempts to avoid a house price crash, whether they'd be altogether happy.
Published in Blog More articles by Merryn Somerset Webb
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(27 September 2010, 04:24PM) Complain about this comment
What about the savers that are only saving to get their first home, the people who are so, so important to property prices? Why should we go out and consume and in doing so perpetuate the disgraceful ponzi scheme?What a vile individual Mr bean is.
(27 September 2010, 05:06PM) Complain about this comment
"But I wonder, if everyone understood the price they were paying for the government's attempts to avoid a house price crash, whether they'd be altogether happy."I think this level of understanding is very much lower in peoples' priorities than, say, this week's X-factor
(27 September 2010, 09:48PM) Complain about this comment
Don't forget to add the increased tax burden in 2011 to inflation and non-existent pay rises to make people poorer. This made me chuckle. Charlie Bean: "very often older households have actually benefitted from the fact that they've seen capital gains on their houses" Surely you only benefit when you sell, and then don't buy. Like when you're dead. Fantastic.
(27 September 2010, 10:23PM) Complain about this comment
Keynes:"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some,... all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery"
(27 September 2010, 10:32PM) Complain about this comment
The spend spend spend mantra uttered by Mr Bean, that's Charles Bean rather than the intellectually superior Rowan Atkinson creation, reminds me of a big time football pools winner from the 60's. Sadly we all know where that road led her.
(27 September 2010, 10:34PM) Complain about this comment
Correct me if I'm mistaken (Moneyweek Team), but weren't you saying a while back that these attempts to hold up the housing market would fail? Do you still believe this to be the case?
(27 September 2010, 11:42PM) Complain about this comment
Spending has worked so well for the U.K. government that they are now forced to dip into dormant bank accounts to pay for some social and environmental programs. Fortunately, U.K. residents as well as Canadians and Americans can still access their old, forgotten bank accounts even though our governments would still rather that we spent money. Here is an article that explains how to find out if you have dormant bank accounts:http://viableopposition.blogspot.com/2010/09/spend-your-dormant-bank-account-money.html
(28 September 2010, 08:28AM) Complain about this comment
Elvis, Yes i do think they will fail, but that won't necessarily change the inflation dynamics they will have created along the way...
(28 September 2010, 10:01AM) Complain about this comment
I really don't understand that apparent economic orthodoxy which holds that the only type of inflation to be worried about is wage inflation. To me, this beggars belief.Surely price inflation is the measure to be worried about, as price inflation coupled with wage stagnation equals a lowering of living standards. Conversely, wage inflation coupled with price stagnation equals an increase in living standards. Why, then, is the latter situation seen as bad by all mainstream economists? (Price inflation doesn't inevitably follow from wage inflation.)Looking at this measure would seem a much better way to assess increasing wealth than GDP, which due to QE and government stimulus, and due to the fact that it ignores debt accumulation, no longer acts as a real indicator of economic wellbeing.
(28 September 2010, 10:39AM) Complain about this comment
croople @2. You are entirely right. The masses have been spoonfed property porn from the likes of Phil n Krusty, Beeny etc for so long they don't realise lower house prices are a good thing. As the great Bill Hicks said :"...Go back to bed, America. Your government is in control again. Here. Here's American Gladiators. Watch this, shut up. Go back to bed, America. Here is American Gladiators. Here is 56 channels of it! Watch these pituitary retards bang their f**king skulls together and congratulate you on living in the land of freedom. Here you go, America! You are free to do what we tell you! You are free to do what we tell you! "
(28 September 2010, 10:59AM) Complain about this comment
Merryn, thanks for the clarification. I wasn't having a pop, as a renter with cash in the bank what happens to nominal house prices is very important to me. However, I'm becoming increasing concerned that the only way out of this mess is for the central banksters to devalue currencies against hard assets; the debts that have been run up are just too big to pay back in the conventional way. Never thought I'd be faced with decisions [on housing] which, if I get them wrong, could ruin me financially.
(28 September 2010, 11:32AM) Complain about this comment
At what level of CPI would the BoE raise interest rates?There must be a tipping point. Surely if CPI hit 3.5% or above they must raise rates?The problem is that as Merryn and most people here are probably aware is that there are huge numbers of people who's mortgage deals have expired and are now on a very low SVR. The likely hood is that they wouldn't be able to get another deal and even a base rate of 3% would mean a mortgage rate of 6% or 7%, pushing them over the edge.The BoE must know this but how much longer can we have 300 year low interest rates
(28 September 2010, 11:34AM) Complain about this comment
(28 September 2010, 12:10PM) Complain about this comment
This is very much akin to 'the dog that didn't bark' remark in Conan Doyle's 'Silver Blaze'. What Mr Bean - apt name that one! - has effectively admitted is that the economic growth we have become accustomed to, and with it the businesses, jobs and lifetsyles, was dependent on reckless spending, fuelled by mickey mouse borrowing mechanisms. In other words, it was entirely bogus. Now that the kitty is dry, the only way forward is for the prudent to do the selfsame thing, but with their own money and so ensure that we all go to hell together. Of course, what it means is that there is no way out of this mess. As soon as the taps are turned off we face economic meltdown.
(28 September 2010, 12:33PM) Complain about this comment
Financially suppressing interest earned on savings will not encourage those fortunate to have put something aside for the future to go out and spend now at the discretion of the central bank. Currency depreciation and thus capital erosion encourages more, not less, risk aversion. I fear Mr Bean's 'stop saving' campaign coming just before the uncertain economic outcome of new tax hikes and sectoral job cuts is more akin to 'casino banking' than central banking.
(28 September 2010, 12:34PM) Complain about this comment
Why can't Mervyn & co instruct the bankers to spend their bonuses rather than saving them?Surely nobody needs the salary and the bonuses received every year and therefore they do not need to be saved but are way above covering the needs of the individuals. Also they are sums that would make a far greater difference than if the pensioner blows his savings and then has to go the the state to keep his basic needs covered.
(28 September 2010, 12:58PM) Complain about this comment
Yep, I am now bunkering down even harder. My savings rate is now up to about £1000 per month. I've been putting it up each time I hear of another burden I will have to pay for:£200 to save for a rainy day, £200 to save for my retirement, £100 to stop my pension pot eroding due to inflation, £200 for public sector pensions, £100 for eurocrat pensions, £100 for council pensions, £100 to cover loss of capital due to inflation.You will note that I am pretty annoyed at being a saver and a private sector employee and having to fund all the other layabouts!
(28 September 2010, 12:59PM) Complain about this comment
Well that is another fine mess you got us into. Labour is a totally busted flush, can never be trusted with anything other than a penny chew ever again, ever. So can the media stop fussing about Ed and Davids love in, and focus on the scale of the financial problem facing the country and support others trying to find ways out of this 'once every labour government' god almighty mess please?... and if Ed Balls and those other incompetent jokers dont stop pretending its 'all ok really' they should be taken to task over their lies
(28 September 2010, 01:19PM) Complain about this comment
The central banks have so fallen in love with the idea that they, and they alone, by pulling a lever here or turning a handle there, can return us to the halcyan days prior to 2007, they cannot and will not stop meddling. So determined are they, they will reject all rational and considered economic wisdom in pursuite of their believes. They are going to ruin us all.Even Ambrose Evans-Pritchard has seen the light!http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100007777/shut-down-the-fed-part-ii/
(28 September 2010, 01:20PM) Complain about this comment
At certain times the MPC have stated certain reasons for policies which did not turn out to be the real reasons. It's difficult to remember them individually. The original reason given for QE was one.Does the moneyweek team feel that an article detailing this apparent duplicity would be a good idea.
(28 September 2010, 01:22PM) Complain about this comment
The sad thing is that in the UK there is no real voice or opposition to the BoE's reckless policies. At least in the US people are speaking out against the FED and that idiot Bernanke - they even have a new political party aimed at ending huge govt spending.The real question is what happens after QE2 fails... I suspect that we will see a short term rally in equities followed by a huge bust. Sooner or later the powers that be will have to admit that their solution is only making things worse and let asset prices adjust downwards. My fear is that it will only happen after QE4 or QE5.The BoE should get a spine and raise interest rates to 3%+ immediately and get the house price crash over with. Only then can we really start to recover.If debt is the problem then repayment is the solution.
(28 September 2010, 01:56PM) Complain about this comment
It's amazing that we all sit here and allow the BoE to do whatever they want with the people's finances - they take vast quantities of public money (salaries) to sit on an unelected committee and take currency-shattering decisions; they ignore government-set targets and have been pulling levers and throwing switches for the past 13 years which turn out not to be connected to anything; meanwhile a financial bubble was building around them so big that even those with no financial sense whatsoever could see it, and they did nothing. Historians in 200 years will be writing about how those fools at the Fed, ECB and BoE did all the wrong things at the wrong time. Oh how they'll laugh.
(28 September 2010, 01:57PM) Complain about this comment
Sparky, A very clever observation. Yes it is the poorest that are being encouraged to spend, in other words hand over their money to the already rich, quite correct, they are not doing much spending themselves, to help the economy out of course.The longer this ridiculous economic situation that we find ourselves unfortunate enough to be living through is allowed to continue, then more people will come to the conclusion that the entire system is a sham, set up to support only those at the top. After already leaving us just the scraps to live on, they still want more, utterly senseless, this does not look good.How much worse can it get, being told to spend to save the economy.
(28 September 2010, 03:23PM) Complain about this comment
Elvis - I, like you, got out of property prior to the credit crunch and was renting for a few years in a vain attempt to try and time the peaks and troughs of the property market. I was going to be smug in a nice big pad boasting of my ingenious economic foresight. Regrettably, I have now come to the conclusion that it actually pays to be a lemming. It is now clear to me that the only politically-sane economic policy Mr Bean and his ilk can adopt to deal with the enormous private debt levels in this country is to inflate away the debt by printing money. He needs the lemmings to spend and pay taxes after all.So fill ‘yer boots and throw caution to the wind! Borrow everything the bank will lend you and put in a offer on that place in Chelsea!
(28 September 2010, 05:30PM) Complain about this comment
Mr Bean, what an arrogant idiot. He and the rest of the B of E con men presently skewed to Labours policys dont care about the 22million voters out there who do not have a huge pile of debt. His school boy interview last night was a joke. they cant fiddle their way out of this like he believes. (they may be able to slow/delay the enevitable adjustment)
(28 September 2010, 05:31PM) Complain about this comment
Inflation is a deliberate policy designed by the BOE and King in particular. Bean is only echoing his master's voice. All decisions taken by the Bank since 1999 have been incompetent .His predecessor George was just as bad following Greenspan in allowing credit to get out of control. Brown, of course, was the supreme architect in the UK condoning the nonsense. Why don't they leave it to the market where interest rate would rise to 7% or 8% and the housing bubble would finally correct itself.
(28 September 2010, 07:02PM) Complain about this comment
Lets get this over with quickly. Lets all default together. After thats whats going on all over the world with the big currency race. Its not about exports, its about backdoor derfault on each other debts!So lets join in. Make the banks write off the loans.
(29 September 2010, 12:43AM) Complain about this comment
Elvis @ 22Judging by all the sensible comments on this page and given the fact that the likes of Bean have a lot more financial info than us , I suggest that the Fed, ECB and BoE know exactly what they were and are doing.Beware people they are no fools. So apart from robbing us overtly and covertly, I suggest there must be some ulterior sinister motive that will become clear sooner than later. They are pulling levers and switches for a very good reason.I think that in 200 years the enslaved people may be asking themselves why we the people allowed these criminals to get away with it.
(29 September 2010, 09:50AM) Complain about this comment
@Jo (no.30)Here, here! I believe also that these institutions do know what they are doing and it is very sad that even with what is going on in the economy the mass populace do not want to educate themselves! As one of the commentators stated most of them know more about X-Factor than they do their own economy, an economy that is financially enslaving them and their future generation to debt!On a lighter note, if Mr Bean is happy to get the B.O.E to print me some money, I will be happy to spend it!
(29 September 2010, 05:42PM) Complain about this comment
And now what is the product of 250 years of economic research and studies since the days of Hume and Smith? The BoE screaming: Get out and spend!They reduce interest rates to near-zero, and that is the only game in town to revive the economy. Private sector debt still dwarfs that of the public sector, despite deleveraging of the former, and fiscal stimuli of the latter. I fail to see why private sector debt is so good, while public so bad.And what will QE do exactly? Be used again by banks to plump asset prices. Back to square one. Useless.
(29 September 2010, 09:15PM) Complain about this comment
Elvis 6, The Nationwide Hpi figures are out tomorrow morning and all will be revealed about where the housing market is headed... I was worried about the non-return on interest so I stuffed my entire deposit into leveraged Gold, working well so far plan to swap it back for Mervyns monopoly money when it's time to buy. So very Tired of getting robbed by the BoE.
(02 October 2010, 03:07PM) Complain about this comment
Suggest Mr Bean should get in touch with his banking brethren and tell them to start buying, after all on what some of these executives earn they would not miss it.Remember the secretary who fiddled a Goldman Sachs director, he did not notice it because it was so small! She got away with thousands, ye gods. From what I remember she made a mistake and was found out.
(02 October 2010, 08:01PM) Complain about this comment
Let's cut to the chase, artificial interest rates authorise guverments to spend our savings and pensions on our behalf and thereby did Mr Bean understand basic economics he would not need to make poorly informed statements such as he has recently made. Best to resign, let someone else have a go.
(03 October 2010, 08:27AM) Complain about this comment
Merryn - some very interesting feedback here, which I am sure reflects the frustration of the silent majorityIt would be very worthwhile doing a piece on just how this groundswell could be mobilised to "influence" a turnaround in BoE policyWe know Governments will always reacted to economic decline by following the path of least resistence - doing the easy, stupid things that distort markets and make things worse. The last 2 years have proved nothing will change this time around, where the consequences will prove even more seriousSo, just what can we do, short of outright revolution, to restore confidence in our financial leadership before it is too late?
(03 October 2010, 01:28PM) Complain about this comment
I have spent the last 3 years trying to explain to anyone and everyone why you MUST have precious metals. I even explain the silver ratio as getting Christ for 2 ozs of gold instead of 30 silver (close enough and simple enough for them to understand) They look at me as if I am an alien- well yes, but only South Africa not Pluto!I do not have a single convert so I don't think I'll consider getting ordained. But when the BoE finally pulls it off I suspect everyone will have a God moment.
(04 October 2010, 08:32AM) Complain about this comment
Several High Street banks (eg Barclays but there are others) allow you to open foreign currency deposit accounts without charge, provided you maintain a certain minium balance - equivalent to £2,000 or so. If you have such an account you get the moneymarket rate rather than the tourist rate on currency conversion.Since the BoE, guardian of our money's value, now admits they intend to debauch it I see no reason to keep my savings in sterling. Swiss francs and Nowegian krona are both attractive. NOK is the last European petro-currency, and the Swiss government is engaged in a continual struggle to keep the CHF down, and they are failing.Of course the interest rates in such accounts are minuscule, but then they are in sterling as well.
(04 October 2010, 01:28PM) Complain about this comment
when the deputy governor of a central bank advises you to get out of the currency they have stewardship of that is exactly what one should do, also be grateful for such forthright advice.
(04 October 2010, 02:13PM) Complain about this comment
BH no.30.You've converted me.The MW experts& meryn have been screaming gold for the past year plus.i guess silver is now good value cf gold but what about other metals and whats the best way to hold them.please advise.
(04 October 2010, 02:17PM) Complain about this comment
BH37you've converted me.The MW experts and merryn have been screaming gold for the past year plus.I guess silver is now good value cf gold but what about other metals and whats the best way to hold them.please advise
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