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Why punish savers?

Robert Peston | 08:15 UK time, Thursday, 4 December 2008

Part of the reason we're in such an economic mess is that, over the past few years, we (that's individuals and businesses, in this case) borrowed considerably more than we saved.

A cause both of the initial funding/liquidity crisis of our banks and of the subsequent solvency crisis was that the loans and other assets of our banks grew at a much faster rate than deposits from customers, such that the gap reached about £700bn earlier this year.

To put it another way, consumers and businesses (big businesses, NOT small ones), borrowed considerably more than what they deposited with banks.

We saved far too little in general. But, in particular, we placed far too little cash in the banking system. Or perhaps it's the other way round, that banks foolishly lent considerably more than we had deposited with them: they became lending machines, not havens for savings.

Either way, that gap of £700bn had to come from somewhere. And it came from wholesale markets, much of it from money managers and institutions outside the UK.

Since the summer of 2007, in fits and starts, those providers of wholesale funds have been demanding their money back. But those banks had already lent all that money to us, in the form of mortgages or massive corporate loans, so the cash wasn't readily available.

Which is why weaker banks, like Northern Rock and Bradford & Bingley, have had to be wholly nationalised and Royal Bank of Scotland is now largely state-owned.

And it's why the entire banking system is being funded to the tune of £600bn and rising by taxpayers, because taxpayers have had to step in to fill the funding gap created by the closure of wholesale markets.

To state the bloomin' obvious, our previous excess of borrowing over saving has now led the banks to lend considerably less than they were (to deleverage, to use the ghastly jargon), which has been a principle cause of the economic contraction that looks increasingly like a nasty recession.

If you're in a recession, what do you do? Well, if you're the Bank of England, you cut interest rates - to stimulate economic activity.

And today the Bank of England's Bank Rate will be cut again, perhaps by one percentage point to 2%, a rate we haven't seen in the UK for more than half a century.

As always, there'll be a massive political and media fuss to ensure that the cut in interest rates is "passed on in full" to borrowers of mortgages and other loans.

The chancellor and the business secretary will presumably warn the banks again that they're keeping a beady eye on them, to ensure that borrowers reap the benefit of the Bank of England's reduction.

But there is a paradox here. Part of the cause of our woes is that we saved too little and borrowed too much.

Yet by cutting interest rates the Bank of England is - in a way - punishing the thrifty and rewarding the feckless.

Although it's not quite as simple as that, because even the thrifty would be in the doo-doo if we plunged into the deepest, darkest recession.

Even so, there is an absolute imperative for banks to reconstruct their balance sheets in a more sound and stable way, and that means funding more of their loans from our deposits and funding fewer on wholesale markets.

For Royal Bank of Scotland and HBOS, for example, its vital that they attract more retail deposits - or they'll suffer very serious long-term shrinkage of how much they can lend (unless, as I've pointed out ad nauseam, we as taxpayers are comfortable financing them more-or-less forever).

So if the Bank of England were to cut interest rates by 1% today, would it be rational for a bank such as Royal Bank to slash savings rates by 1%?

If it did so, wouldn't it be punishing savers whose support it dearly needs?

But Royal Bank and others would only be able to afford to reduce savings rates by less than 1%, if it were to cut lending rates by less than 1%.

It's a dilemma, isn't it?

Small businesses are at the sharpest end of this dilemma, because for all the understandable fuss about banks restricting credit to them, as a group they actually save more than they borrow.

So although most of the banks are committed to passing on the Bank Rate cut to small businesses in the form of lower rates on loans, arguably small businesses would be more out-of-pocket if the meagre amounts they earn on their deposits were to evaporate completely.

For what it's worth, where banks have discretion, I'd be amazed if they passed on the full cut to mortgage holders.

Would that be a scandal?

Perhaps not, if banks were to maintain interest rates on savings accounts at higher levels.

In the scale of alleged bank boo-boos, what's worse? Failing to pass on all the interest rate cut to hard-pressed families, or slashing the retirement income of elderly couples who live off the interest on their bank and building-society savings?

As I say, it's a proper old dilemma.


Page 1 of 5

  • Comment number 1.

    I entirely agree. Why should I deposit my dosh for what will now be nothing with a bank whose solvency is dubious? Even given HMG's underwriting, political promises with this bunch are unreliable and may take months to come to fruition. There's less risk under my bed, now.

  • Comment number 2.

    Do give the full story.

    Yeah, we've had a decade of massive personal and business borrowing. But what of the third leg of the decade of irresponsibility?

    Massive government borrowing. National debt doubled already. And, if the PBR statement is to be treated as anything other than a work of complete fiction it will be doubled again.

    National debt quadrupled.

    I think we're being a bit hard on the banks and individuals here.

    The government was (and remains) the one leading the charge in irresponsible borrowing.

  • Comment number 3.

    n the scale of alleged bank boo-boos, what's worse? Failing to pass on all the interest rate cut to hard-pressed families, or slashing the retirement income of elderly couples who live off the interest on their bank and building-society savings?

    No contest. Brown will put pressure on to help 'hard-working families' borrow even more.

    To hell with the pensioners. They all vote Tory and they'll be dead soon.

    New Labour. New pragmatism.

    Labour will simply print money. That'll fix it.

  • Comment number 4.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 5.

    Quite right. We have saved a bit of money, not a vast amount and rates on our savings are dropping all the time.

    However the mortgage rates for people who have borrowed buy by Mercedes Jeeps, plastic surgery and five star holidays are dropping. Does not make much sense to me.

  • Comment number 6.

    A Grasshopper gay
    Sang the summer away,
    And found herself poor
    By the winter's first roar.
    Of meat or of bread,
    Not a morsel she had!
    So a begging she went,
    To her neighbour the ant,
    For the loan of some wheat,
    Which would serve her to eat,
    Till the season came round.
    "I will pay you," she saith,
    "On an animal's faith,
    Double weight in the pound
    Ere the harvest be bound."
    The ant is a friend
    (And here she might mend)
    Little given to lend.
    "How spent you the summer?"
    Quoth she, looking shame
    At the borrowing dame.
    "Night and day to each comer
    I sang, if you please."
    "You sang! I'm at ease;
    For 'tis plain at a glance,
    Now, ma'am, you must dance."

    And that, with thanks to M la Fontaine and Wikipedia, is the Bank's quandry. The investments the UK will need will flee the country, and Sterling' s plummet accelerate. Ths crash is not far off, I fear.

  • Comment number 7.

    I'm not sure it is that simple. The wholesale funding of 700bn of our banks you keep mentioning is also someone's savings. It just isn't savings in the form of retail bank deposits. For example, pension fund investments would count as wholesale, but they are still very much personal savings, just bundled up in a different way. Perhaps the real story is that the low interest rate environment of the last ten years has driven people away from bank deposits into much riskier investments in the search for higher returns?

  • Comment number 8.

    You're right that savers are doing very badly at the moment.

    As someone who is trying to ensure that I'm self-sufficient in my forthcoming retirement, it feels like I'm trying to fill a bath while Gordon Brown pulls the plug out. And I must say that with inflation still high, and interests rates still plummeting, it now feels like Gordon Brown's remedy to my slowly emptying bath is to fit another plughole for me....

    I do wonder why I bother!

  • Comment number 9.


    Which UK are you living in ?

    As a SME (Small Medium Enterprise), we cannot obtain a savings rate from the banks (as a business, not as a private individual) over 0.5%.
    And that is today, before the cut in interest rates !

    So you do not need to be a master BBC Journalist to work out that the banks cannot pass on a 1% rate cut to SME's.
    It is coming out of the bank's fat.

  • Comment number 10.

    Low interest rates mean savers will move funds to accounts that pay higher rates, eg, abroad. Banks need cash and will see savings reduce which in turn means loans - if there are any out there - will become even more endangered. In short, the recession slope will get steeper and more slipery. As always the measures put in place will create more damage than they will mend. I say put up interest rates, attract savers and investors and all those with mortgages to feed, can sit back for 2 years until the government extends it to 3 or 4 years of taxpayers paying your rent.

  • Comment number 11.

    Just another sign of our never never land.
    Another interest rate drop will devastate those who saved prudently, unlike a Government which has borrowed more than any before it. The only future is a council house, all expenses paid by benefits and no council tax and a tax credit pension. Why save hard and pay your way through life ! Is that really what Britain wants ? Obviously a socialists dream, one that will unfortunatly come to an end one day when there are NO real jobs and no one has any savings and we all become benefit claimants ourselves. What a sad and sorry outcome. But, one loved by dictators.

  • Comment number 12.

    It is not a dilemma.
    The economy can only flourish sustainably if we have savings to fund borrowings and if banks have strong balance sheets. This can only happen if a) banks can make profits on their lending and b) if savers are paid for saving.
    Interest rates should be held or raised and the pressure should come off the banks about passing on the cuts.

  • Comment number 13.

    Finally, a mention about savers who are paying for the mess through no fault of there own.

  • Comment number 14.

    Couldn't agree more... we have just inherited a small sum of money, but it has moved us from being in debt to savers status.

    Only problem is inflation at 4 or 5% means that our 1.9% rate of interest at the Post Office is meaningless.

    In fact we should all be borrowing now, as inflation 'eats' debt. This governments fixation with borrowers has to end, it is savers that will ultimately bring order back to the banking system.

  • Comment number 15.

    meagre is not the word. Nationwide and NatWest are at .5% for basic accounts down from 2.something a week or so ago. It seems banks lend ref. to libor and borrow ref. BoE. Nationalise and be d**mned I say.

  • Comment number 16.

    Crash is quite happy punishing savers because it doesn't help his wee pals in the City if we don't spend our money.

  • Comment number 17.


    "I do wonder why I bother!"

    I wonder too - I wonder if it's time to put my tiny ammount of savings in National Savings "Inflation +1%" bonds and sit tight.

    As someone who's only experienced 1 recession before (early 90s) I find it startling that we had really high interest rates then and no interest rates now........

  • Comment number 18.

    A very interesting explanation and clearly shows the problems faced.

    Mr Osborne's broadcast last night was disappointing as he could put forward no new ideas. The impression I got was that if you were having difficulties all you could expect from the Tories was to have David Cameron come round to babysit.

  • Comment number 19.

    Isn't all this talk of borrowing more money than is invested a completely circular argument, as by the huge rise in public borrowing and VAT cut, this appears to be exactly what the present government is doing on the pretext of spending its way out of the recession.
    In my simplistic view, people purchase what they need or feel they need and with the UK ever more reliant on service industries I do not feel we are best placed to weather any storms.
    As an individual who is reliant on interest on invested capital to provide the icing on my cake with the rounds of interest cuts it looks like time to hibernate.

  • Comment number 20.

    If banks are paying a much higher percentage to borrow money from the wholesale money markets, why not offer a similar rate to retail depositors. Gradually they would reduce their dependence on the markets and revert to being proper banks again.

    Then I suppose Flash Gordon would take our deposits for some other mad cap idea.

  • Comment number 21.

    Interest rates---------WHO needs them?


    If as stated they need to attract investment (savings) then it is suicidal for them to be cut as investors will flee to places of safety, national saving etc as there is no premiun for tying up your money in what can be a risky environment.

    Banks need to generate profit from mortgages and loans and as far as I see they are increasing margins by not passing on base rate cuts to businesses and individuals for overdrafts and loans.

    Low base rates are not being passed to new mortgage lending at all and if.......rates were to fall to ZERO then in theory there would be no charge for an interest only mortgage. this would allow the mortgagee to live for free in their property. (excluding endowment payment) with the banks and others footing the bill.

    How would hard up savers and those in rented accomodation feel about that?

    Prudent Gordon, Aistair and their band of not so merry men would be robbing the poor to pay for the foolhardy. The bail out package would also cost less if rates are slashed. in fact if rates are zero then it would cost nothing at all.

    The rental market would collapse and it would still not inject any monies into the housing market as banks would not lend to those who had no financial incentive ..

    Get rates up and let the free market decide

  • Comment number 22.

    "Or perhaps it's the other way round, that banks foolishly lent considerably more than we had deposited with them:"

    Mr peston, is this illegal? As a Fractional Reserve Bank, where did the fractional reserve go?

    Why did the regulators and rating agencies not spot it and put the brakes on?

  • Comment number 23.

    Yet again the thrifty are paying for the irresponsible.

    Retirement savings will yield next to nothing and there is now no incentive to save but to spend the lot and then go to No 10 with a begging bowl [which seems par the course these days]

    Can we ever get back to sanity?

  • Comment number 24.

    The last idea stated, "Failing to pass on all the interest rate cut to hard-pressed families, or slashing the retirement income of elderly couples who live off the interest on their bank and building-society savings?" gives a perfect knowledge of the affect it has on the generations. When we look back at this recession, we will see that two generations have been hit and will carry many 'scars' through many years to come. We will see many friends with some financial problem to resolve or inhibited because of bad loans. Hopefully, the very young generation will survive with a lesson well taught.

  • Comment number 25.

    two questions -

    how can Mr Peston ensure Mr Brown reads this blog every day?

    what would Robert do with 30k savings now?

  • Comment number 26.

    Saving will have to wait until the inevitable upturn. If business and individuals reduce their borrowing due to deflation which we are certainly in, then it is impossible for banks to pay interest on deposits The system depends on risk takers. For an economy to function there has to be confidence to invest. It is no dilemma, the first priority is avoid a deep reccesion.

  • Comment number 27.

    Excellent post Robert

    GB might have kept a lid on the PSBR but he completely missed that what really matters is how much the country borrows as a whole.

    The time to pay down the debt has arrived and the question is who should bear the pain, those who have spent above their means funded by debt, or those who have lived within their means and saved.

    I should have thought that, in order to protect future generations the (now apparently abandoned) rules of moral hazard should apply.

  • Comment number 28.

    The economics of this country are topsy - turvey at the moment.

    Work all your life, pay off your mortgage, don`t get into debt and what does the Govt do? Skew the inflation figures so your savings actually lose money.

    Now, if you have been reckless its a different story. Borrowed more on your mortgage than your house is worth? borrowed 5 or 6 times your wage? heavily into debt? Never mind the Govt will order the banks to leave you alone. The good old saving accounts can be raided to offset the bank charges and hey if it all goes wrong for you the good old tax payer will bail you out.

    No wonder this country`s finances have gone belly up. Its the economics of lala land.

    Gordon Brown has only one aim in life - political survival.

    Personally I have had enough and if I hear him talk about hard working families once more I will throw up.

    The Pms never never land should never never have happened if he had not buried his head in the sand when people were borrowing at insanely high levels.

    This is far from over - the worst unfortunately is yet to come.

  • Comment number 29.

    This may be a bit doomsday-ish but can any of you see a time in the future where the country has to basically nullify everything, debt, currency, GDP etc and start again from a blank canvas?

    A year ago i would have thought of myself as a nutter for even thinking this - but now?

    I was in Belgium last week talking to a business buddy of mine. The recession is not really being felt there, he told me, as Belgians dont like to owe money and take on massive debt. At the moment to my eyes at least taking actions such as joining the Eurozone, and behaving more like the thrifty Belgians seems very attractive.

  • Comment number 30.

    Two weeks ago I moved £10k into Euros at the moment I am nearly £300 up. Show me a deposit account where I could earn £300 in a year never mind 2 weeks.

  • Comment number 31.


    Individuals and banks taking the flak for borrowing and lending too much. True to a point but egged on by this government and a lack of effective regulation.

    How about some real examination of how this government in the last ten years has raided the tax payer by stealth, windfall tax scams, pension funds, oil revenues, the gold reserve, and seen how far up the wall it can........

    In the 1970's a labour government thought it could run car factories and shipyards to create wealth and employment even though there were no buyers for those cars and ships. Now it has created a bloated public sector to feed with cash, (how many times have I heard the intellectual pygmies that make up the governing party tell how how they are "investing") while the pension and off balance sheet PFI liabilities mount.

    So we reach the end game and like a tired and emotional gambler in the early hours of the morning this government lurches from gaming table to slot machine emptying out it's pockets and borrowing monies from passing stangers, pulling levers and rolling the dice in a bid to rescue it's fortunes with just one last bet.

    .......and the real kicker in this? Where is an effective opposition holding this outfit to account. If anyone sees young George around please let me know.

  • Comment number 32.

    This is all about the strong (politicians, bankers, journalists - "system managers") attacking the weak (the old, the infirm, the poorly educated).

    Those in the middle will simply exit sterling and the UK.

    So, there is no dilemma at all - If you are too weak to defend yourself you are going to get crushed, if you can defend yourself your money and possibly yourself will leave the UK.

  • Comment number 33.

    Never mind not passing on the cut in rates in full to borrowers. The banks' are abusing depositors too.

    I run a small business that regularly has signifciant sums on deposit with NatWest (RBS). Following last month's 1.5% cut in base rates, our deposit rate went from 4.99% to 2.44%.

    Try explaining that one to me.

  • Comment number 34.

    This is not a dilemma, Robert, it is the huge hole in this government's argument.

    As Prudence thrashes around in the ecstasy of a collapsing economy he excites himself by making initiatives ostensibly to keep demand moving. He will thrill at the crowds in the shops for Christmas and feel that his policies are working.

    These policies might be working after a fashion and in the short term. In the intermediate term, that is after Christmas, these policies will fail as they are based on the same illusion as Brown's Noughties Bubble.

    It was necessary to stabilise the banking system in October but as it was soon discovered this could not alter the economic fundamental that the economy has been in a leveraged bubble puffed up by Brown for the last five years. The effects of this bubble now deleveraging were going to happen anyway. Now no matter how much cash is thrown at the problem now, the economy is going for a hard landing with many unemployed. This angers me as it was avoidable.

    Like many others I am a saver without a mortgage who has worked in the private sector for nearly forty years with a small pension to look forward to.

    What is Gordon doing for me? What he is doing is destroying forty years of my hard work. He will not be forgiven and I will do anything peaceful it takes to destroy this wastrel government.

    Yes, he can send the anti-terrorist police round my house if he wants. We will make them tea but the hospitality will not extend to cake: we can't afford it.

    Time for a national government to rebuild our country, our constitution and our economy.

  • Comment number 35.

    I don't know why the low interest rates are such a surprise, low interest on savings will mean some folk spend savings to buy a cheap car, kitchen ,tv or whatever before the value of their savings fall too much and then GB, AD etc will have gotten their hands on the last available cash to be injected into the system.
    Of course some of us will find somewhere else to put the savings where the value will not erode quite so much.

  • Comment number 36.

    "Or perhaps it's the other way round, that banks foolishly lent considerably more than we had deposited with them: they became lending machines, not havens for savings"

    I should say so! Yes, people got greedy, but a simple "no" to credit would have ended that! The banks are at fault and we're paying (literally) the price -

  • Comment number 37.

    A very good article but a couple of points need to be made.

    It is not a foregone conclusion that the banks have to alter lending and savings rates by a similar amount. They could actually look at cutting overheads. Do they need all those people and fancy high street premises if business is down and online facilities are available? Certainly we don't need people "selling" credit and credit cards, and we don't need inadequate Chief Execs on big bonuses.

    They've bled the public for long enough - now it's time for them to bleed.

    Secondly, how about the Government giving us an incentive to save in the long term? I will not invest any more in pensions because:

    1) the tax advantages for pension funds have been withdrawn by G Brown

    2) I want an alternative to losing my life savings in return for a compulsory poor value annuity

    3) I have absolutely no protection. As an Equitable Life policyholder I know that this government offers no protection at all for pension fund investors whilst it hurls taxpayers' money at Northern Rock et al. There will be some loud noises in the press if they shirk their obligations to compensate us for their failure.

  • Comment number 38.

    The banks may not be interested in small saver amounts but people who have reasonable sums can find reasonable rates.

    I have a small business and in October I fixed £75K at 6.8% for 6 months. The same bank offers a business bonus savings account paying 5.25% until April. (More than I could get on the money market through another bank!)

    So if your bank is paying 0.5% I suggest you switch - after all the chairperson of the BBA did emphasise the competition between banks - although as she, you and I know most people don't bother swithcing due to inertia.

    Of course the problem with banks and businesses is that they have borrowed expecting an increase in growth to enable them to receive interest/ pay off the debt. However as any (non-Labour) fool could tell, you can't have unlimited growth. Government policy theough the 00s has been to try and keep this growth gowing by ever more desperate measures - until they ran out of them (no-one believes the PBR surely?) This happened in Japan - there the banks failed, here the Government has committed billions to save them - but if there is a gap of £700 billion then £35 billion is a very small amount to recapitalise.

    Somehow the country has to find £665 billion: pick your choices.

    1) Increase taxes - deepening recession - the 'cold-turkey' treatment.
    2) Cut Government spending - with Labour????
    3) Contact the IMF - who presumably will tell us to do option 2 anyway
    4) Print it - inflate the debt away.

    The Government is panicing about deflation - witness falling prices due to sales and employees accepting pay cuts - because it increases the actual value of debt - i.e. you repay with money that is worth MORE than when you borrowed it instead of less.

    Option 4 will be the last throw of the dice and I don't think it will happen - for about a year to give it some effect before the 2010 election.

  • Comment number 39.

    Dead on Robert and also poster #27

    Very low interest rates in my opinion actually create stagnation in the money markets.

    Something else it's mentioned in the blog and Mr Brown keeps mentioning his "hard working families" does this include me? I live on my own have some small savings, pay all my bills have reasonable mortgage (but not a silly 100% one) and pretty much get nothing from HMG. Has HMG forgot there are an awful lot of people like me who contribute a lot to the country but as we are not a "hard working family" get diddly sqat!


  • Comment number 40.

    "Or perhaps it's the other way round, that banks foolishly lent considerably more than we had deposited with them" you say.

    I think we all know it is this way round. The banks had nowehere near full deposit reserve cover, and lent 20 or 30 times more than they had on deposit.

    I look forward to your post on Fractional Reserve Banking - people need to know. Why be embarrassed by off balance sheet debts then. It is a scandal, verging on pyramid selling cashflow fraud.

    The Banks have created money from nothing, and the £700bn hole is nowhere near the full extent.

    Sadly for savers, the reality is Bank's desparately need our deposits, but are skint and can't afford to pay any more interest than the measly offerings.

  • Comment number 41.

    This is a day to day dilemma for any bank - let alone in our present crisis.

    Doesn't this show just how far off good banking principles our major banks have got that they appear to be unable to manage a dilemma that is inherent in the business of banking.

    As for savers moving money abroad - where to? With an exchange rate to the $ at well below 1.50 the hit would be too high!!

  • Comment number 42.

    Base rate... 3%..............???

    Libor rate ...4.5%

    SVR ......5.5%--6.5%


    Overdraft rates ... 10--17%

    CC ...15%

    Store cards 25%.....????

    Get Gordon to outlaw store cards, make the banks to reduce CC charges and limit further borrowing limits.ban the introductory rates as these stoke the financial crisis and fool the fools into thinking that they can spend likre there is no tomorrow or at least no day of financial accounytability.

    But no these are the real profit making machines of the Bank and if a few simple measures that help would the needy and not the greedy are not in the banks interest.

    Financial reality would come return and stability sometime after after the medicine had its time to reward, not punish the prudent ...only problem is that banking profits would be down.

    But then again it is us, the poor taxpayer that is funding these excessive rates and allowing them to be the only ones who are not feelong the pinch

  • Comment number 43.

    @ 2

    Isn't it funny how when the government tries to implement certain measures cries of "nanny state" abound yet now people perceive they haven't done anything they are getting the blame. It doesn't seem very reasonable.

    I think one has to accept that there are a number of guilty parties contributing to this mess we are in:

    - bank for lending recklessly
    - individuals for taking on far too much debt
    - the government for targetting inflation around the CPI rather than RPI
    - rating agencies for not really doing their job properly
    - estate agents for contributing to the house price bubble

    What beggars belief is that we are now being encouraged to spend spend spend. When will they realise that people need to rebuild savings and reduce personal debt. Unfortunately that will destroy retail spending and cause us all a great deal of pain.
    Sadly I don't see how we can avoid this one.

  • Comment number 44.


    ""Or perhaps it's the other way round, that banks foolishly lent considerably more than we had deposited with them:"

    Mr peston, is this illegal? As a Fractional Reserve Bank, where did the fractional reserve go? "

    No the banks themsleves went out and borrowed the money from someone else to lend onto mortgage holders. Not illegal but, in that case of some of them (Northern Crock, B&B etc) bonkers as they relied on this borrowing totally.

  • Comment number 45.

    My German grandmother told me that out the outbreak of the Second World War she had stocked up on LAVATORY paper buying all she could. Her thinking was that in the long term it would be more valuable than CURRENCY notes. How silly was that ! Perhaps she could be forgiven - she was then a very young housewife.

    She argued that she had learnt a lesson from her own mother and grandmother who had lived through Weimar inflation.

    We do live in INTERESTing times. Do we not, Mr Peston ?

    The UK becomes more like Weimar Germany everyday. Just ask Herr Braun.

  • Comment number 46.

    It really isn't interest rates that are a problem, or a solution. It is liquidity. Before banks lend, whether you are an individual seeking a mortgage, or a small business you are now expected to have a greater proprtion of the capital needed yourself. If interest rates reduce again, it will take longer for savers to reach the required level of deposit - hence extending the downturn. I have met few borrowers that have problems with interest rate repayment problems at the current level (or indeed the old higher level); but several that are simply unable to secure a loan that they are able to pay back. The MPC and treasury should not just be using the blunt tool of interest rates, but should start recognising that we have entered a new economic paradigm that requires a new approach to liquidity in the broader economy.

  • Comment number 47.

    10 peter

    'low interest rates mean people move their savings abroad for higher rates'

    Like where?

    Iceland, perhaps?

    Speaking as a saver, rates must be cut all over the world to counter the risk of deflation.

    In the short term, deflation is great for savers, as even 2% is great if prices are dropping by 2% per year.

    When the effect of time lag / gross profiteering by energy companies is taken out of the equation, the real rate of deflation is probably at least 2%, ie inflation of -2%. You can't see it yet, because our beloved friends at Eon, Centrica etc. claim that we must pay because they bought gas at vastly inflated prices- this is the real scandal.

    So real interest rates are 4%, or at least will be when the energy companies are forced to cut prices drastically- which will definitely happen in the New Year, unless they do it voluntarily (don't hold your breath for that one).

    Savers are still doing OK at the moment, in comparison with those without jobs etc.

    Also, it is good for us all that banks make some profit back (from borrowing low and lending a bit higher).

  • Comment number 48.

    There has to be a balance between risk and reward. If we make "safe" investments to lucrative relative to "risky" investments than we discourage equity investments in real businesses that, in the long run, make the economy grow.

    Unfortunately, the banks took some of this risk capital and funneled it into pyramid schemes that suffered the inevitable collapse. Some of this money was not even risk capital; the banks sold some of the asset backed securities as being low risk, with the willing help of the credit rating agencies.

    The real issue is how do we deploy this capital into at least potentially productive firms and not into financial myths that the financial industry perpetually seems to have promoted.

    Turning to the United States as an example first there was the "Asian Tigers", then there was the savings and loan crisis followed by the dot com bubble. Now the industry that brought you all of this has brought the economic devastation we now see. The dilemma is how do we regulate, or at least discourage, the type of investment advice that led to this debacle? If ethics won't do it, I am not sure that the government can.

    Unfortunately, we are forced into a position where we are bailing out the very institutions responsible for this.

    There is a deep dead dull thudding anger at this breach of trust being rewarded with bailout money, but the alternative would be tantamount to allowing a Great Depression as opposed to a "merely" a very severe and prolonged recession.

  • Comment number 49.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 50.

    Peter Peston, thank you for being the ONLY person in the whole of the BBC who has used the correct word "points" to describe the interest rate change.

    Everyone (BBC News Channel, Radio 4 Today, Radio 5 Live "Wake Up To Money") have all said a "1% drop in interest rates", not a "1 point drop".

    Thank you for you accuracy.

  • Comment number 51.

    Indeed. Because of this mess - which I believe is mostly attributable the people who borrow, spend, move money about and never actually pay for anything (and the financial concerns who feed them) – my company have been making losses and now I’ve been made redundant.

    I’ve been sensible all along. I save my money to pay for things and I had a tiny amount in the bank to help me get through a situation such as the one I find myself in now. I’ve paid the price for living in a country full of borrowers and lenders and to try to keep the country going it looks I’m going to be paying even more.

    When things improve, the banks should be made accountable and a) start using their profits to secure their future and b) start putting money back into the economy by way of increased interest rates on their accounts to make up for the losses that savers will be making now.

  • Comment number 52.

    The worst part for me, as a recently graduated student, is that my student loans are linked to inflation. This means that whilst the little I have saved inches up, the amount I owe from University is rising incredibly fast.

    Add to this the government want to tax me more to give people who earn a little less than the chance to save (I can't afford to save myself anymore) and to give people who earn a little more than me the chance to keep their mortgage (I can't afford one of those either).

    It seems that prudence isn't the way to go- all you do is pay for everyone else's mistakes. Including our PM's.

  • Comment number 53.

    Number 18

    Your are spot on.

    It makes no difference which party is in power - whether it be Labour or Conservatives - neither will be able to fix the UK's problems which look set to continue for the next five years or so.

  • Comment number 54.


    Have you seen what Belgium's public debt looks like?

    It's eyewatering, and that's even with the massive advantages of having the European adventure set there.

  • Comment number 55.

    My sympathy goes to those who fixed their mortgages around 6-7% when the BoE was telling the whole world rates would rise to combat inflation.

    Professional bankers who were unable, Blanchflower aside, to predict a thumping great recession.


  • Comment number 56.

    i have been banging on for weeks that the answer is to raise not lower interest rates. Has it not dawned on GB that in order for the banks to lend they need people to save money with them.

    When will it dawn on the government/BOE that lowering interest rates will not work, just look at US which has lower interest rates.....

    I am fed up with subsidising the profligate who spent everything and now rely on my taxes to pay their mortgage.

    GB is always talking about helping "hard working" families but never a word about the hard working savers;I am surely not alone in thinking that a hike in interest rates would solve the banking problem, encourage savers, strengthen the pound, and change houses into places to live not "investments"

  • Comment number 57.

    "Part of the reason we're in such an economic mess is that, over the past few years, we (that's individuals and businesses, in this case) borrowed considerably more than we saved."

    People learn by example. Rote repetition of 'low interest rates' and 'borrowing to invest' from a man who doesn't understand what investment is, convinced many the house price escalator would never stop. They weren't borrowing to spend, they were borrowing to invest! If it's alright for Chancellor Brown it's alright for me.

    Except Chancellor Brown's vain attempts at keeping the house price bubble inflated didn't work.

    This is what you get when you have an oversupply of credit. We have an over supply of manufacturing, and oversupply of retail outlets and an oversupply of people employed in the financial and service sectors.

    The future is not bright.

  • Comment number 58.

    "Part of the reason we're in such an economic mess is that, over the past few years, we (that's individuals and businesses, in this case) borrowed considerably more than we saved."

    The vast majority of businesses borrow inorder to invest, expand and create jobs. This is not a bad thing and does not necessarily mean the borrowed money is blown on expensive holidays and waste, as your article seems to imply. Waste certainly does occur, particularly in the public sector, but i think you will find that most small to medium sized businesses account for every penny of their expensively borrowed money and generally put it to very good use.

    When banks start lending again at reasonable rates and with some degree of fairness then we will start reinvesting and recreating jobs. Until that time the current stasis will prevail.

  • Comment number 59.

    Interest rates should come down. It's not a punishment of the thrifty, just that those that 'have' are less important than those that 'have not'
    Bleating about being 'punished' is just another sign of how we got to this piont in the first place, ie a lack of any community spirit, or me me me, I'm alright jack get your hands off of my stack.
    It's all nonesense anyway, just a lot of numbers on screens that need to be shifted around again, a lot of funny money it is.
    so there.......

  • Comment number 60.

    Obviously it is utterly vital that the Bank of England continues to lend to our banking system at something close to the base rate.

    It is a very dangerous proposition that you make, suggesting that we should all start saving to replace the alleged £700 billion withdrawn from the money markets over the past year. Such an increase in saving would obviously result in a proportionate decrease in spending, recking havock to our economy.

  • Comment number 61.

    Did anyone in the last decade hold a gun to the heads of borrowers making them borrow more and more???

    If they have overstretched themselves and now need to tighten their belts they only have themselves to blame.

    Yes the economy will contract while these belts are tightened but the economic 'growth' of the last decade was never real, just an illusion created by this overborrowing.

    All Brown is desperatley trying to do is recreate a feelgood factor for the next election. He doesn't care about the longer term interests of this country - just priming the pump at any costs for 2010. His 'legacy' to this country is enormous Government and private debt that will take generations to pay back - thanks Gordon.

  • Comment number 62.

    Slashing interest rates will only help those with traker mortgages and the banks who will widen their profit margins until they have recoupped their losses. Yet again the thrifty are punished and the wreckless are helped.

  • Comment number 63.

    The public purse has protected the savers. So the savers are getting a poor rate of return on money they still have. Boo hoo.

  • Comment number 64.

    Finally Robert, a useful article which goes to the heart of the issue.

    Anyone reading the Austrian school of economists will realise that one thing is inevitable. A financial bubble will be followed by deleveraging. The main issue is whether policy makers want a long drawn out and deep recession or whether they take it quickly, less deeply and move on afterwards. Lower interest rates for the former, higher interest rates for the later. Which way is Gordon driving things, of course, is towards the former for his desperate hope that he can delay the worse until a Spring 2009 election. The pain later, does he care; by then he will have won an election and won't go down as a non-election winning PM, his only major concern.

    Anticipating this, I moved 80% of my pension fund to Euros a year ago. Luck or judgement, I'm not sure. Fortuitous, yes.

  • Comment number 65.

    #30 not bad. One year ago I moved all of my savings into Japanese Yen, it is now almost double and probably will be double after todays rate cut. Just about to move it all again though, but definately NOT back to the UK.

  • Comment number 66.

    Notwithstanding my previous comments about excessively high returns on "safe" investments discouraging risk capital, the return on "safe" savings that you identify is an issue worthy of serious discussion. It is not clear that we have found a "proper" balance.

  • Comment number 67.

    Short the pound.

  • Comment number 68.

    Perhaps someone should organize a campaign to have a day where all the savers simultaneously withdraw their money from the banks and deposit it one chosen bank. Perhaps one of the more prudent ones could be chosen as the beneficiary.

    That would show the government who's really in charge.

  • Comment number 69.

    Domestic savers have virtually never had a decent deal in the UK. This is nothing new. The difference between what you get on deposit and what you pay on borrowing is eyewatering. That is why people put money into the stock market and into property.

  • Comment number 70.


    "Although it's not quite as simple as that"

    Yes it is.

    The operation on the patient will be very complex, there are likely to be very severe side effects, and the cure will be very expensive and difficult, but the illness really IS that simple.

    Too many people borrowed too much, prompted by personal greed and government policy which encouraged this.

    They were warned that self-certified mortgages, multiples of 4 or 5 times salary, buy-to-let and all the other devices to stoke up the housing market would end up in a house price crash.

    Now the brown stuff has hit the fan, and the savers are subsidising the borrowers as it is politically and economically easier to do this than address the underlying issue.

    I confidently predict that 10-15 years in the future much the same will happen again.

  • Comment number 71.

    RBS failed to pass on the full 1.5% cut to it's customers with mortgages. (Only cut by 1%)
    So did it cut savings rates by only 1%?
    Will it do the same again with the next cut?

    If you have debt should you really be saving at the moment?

    The priority at the moment is to get money back into the Banking system. Should we not be doing this by paying off debt not saving?

    The only people saving should be those with no debt. The priority for them is not chasing the best return but making sure their investments are safe. Sit tight wait for the bottom and then move back into equity investments.

    The hardest hit will be the expats who rely on a good pound/Euro conversion rate.

  • Comment number 72.

    Its time to get that allotment from the council and keep chickens in the garden, financial and social armageddon is approaching.

  • Comment number 73.

    Well Pension Funds and their Pensioners have already been punished by the Nationalization of their Banks.

    And thus the destruction of the Shares their Pension Fund had invested in.

    So why should Depositors enjoy extra protection ?

    Their Capital is guaranteed, why should they have any further rights ?

    Remember a Pension saved for over twenty thirty years may have been decimated by the Bank Nationalizations.

    I think the Depositors are quite lucky to be keeping all their deposits.......

  • Comment number 74.


    "No the banks themsleves went out and borrowed the money from someone else to lend onto mortgage holders. Not illegal but, in that case of some of them (Northern Crock, B&B etc) bonkers as they relied on this borrowing totally."

    Thanks for that. Perhaps this borrowing should be made illegal or limited to a small risk.

    The blogs have lately been bank bashing but I thought (as a layman) a lot of the troubles are due to opaque derivitives, SIV, CDO and other unquantifiable instruments?

  • Comment number 75.

    No 15 aka himatno8

    Quite right. Sooner or later the slightest
    breath of wind will blow down the Banking House of Cards. Nationalisation wouldn't delay the inevitable for ever but it might just give time for the building of a more equitable and durable financial structure.

  • Comment number 76.

    Absolutely right Robert. The section of the community dependent on its pension/savings is simply being hammered at present. That's a growing proportion of the population and too few in the driving seat seem to recognise this or care.
    Further when is the inexorable devaluation of our currency going to cease. That has implications for our imports, the price of oil which will surely rise in due course, let alone those who, in good faith, booked what is often a much needed and deserved holiday abroad.
    When the £ gets to 1 Euro shall we join and stop the devaluation further? One wonders if there is an actual intention behind it.

  • Comment number 77.

    The dilemma here is how to get the system back in balance hurting the least number of people and getting the UK economy on a more stable footing going forward.

    There are several million people living in houses that aren’t worth what they paid for them with mortgages they cannot move elsewhere.

    There are other mortgage holders with tracker rates who are quids in paying very low amounts for their properties.

    There are savers who are being bailed out by tax payers and prudent banks for earning high returns on their savings in overseas banks which did very little for our economy.

    There are people who have done very well our of the last 10 years with big pension pots, huge bonuses often held outside the UK.

    The ‘fair thing’ to do would be for those who have done too well out of the current mess to pay more in either tax or interest so that those who have suffered due to bank greed or poor regulation get some relief to get themselves back on track.

    Savers also need to realise that with inflation expectations almost zero for the next 12 months, that they can’t still expect to earn 6% and expect their children and neighbours to pay 7%+ interest on their mortgages.

    There are a lot of lucky mortgage customers out there who will be paying 2-3% on their mortgages if the rate is cut today by 1%. So savers can’t expect to earn more than 1-2% returns otherwise the banking system breaks down or those who have no choice about moving their mortgage end up paying even more, compounding the unfairness.

  • Comment number 78.

    Of course, most pensioners won't be able to save again for their Pension.

    Unless they have a time machine and a very long life span!

    So when their savings are gone (ie the Shares are wiped out) so are they.

    State dependancy all round !

    When the economy picks up it may be possible for Savers to receive higher Interest Rates.

    Of course all of this is over shadowed by the high rate of Inflation, mine is running at ten percent at the moment.

    The best stimulus package would be to give all the Public Sector workers a ten percent pay rise.

    They would spend some of that in the shops and in businesses who in turn would spend it elsewhere, helping to give the whole economy a big push.

    The current Gov't does not seem to understand these most basic and obvious techniques for Demand management.

  • Comment number 79.

    what is the possibility that government's plans to allow deferred interest payments on mortgages might lead to a rush from the banks to get the current crop of repossessions through?

  • Comment number 80.

    Ridiculous pay restraint on the Public Sector helped to bring on this recession perhaps the Gov't wanted this to take place?

    Food for thought.

  • Comment number 81.

    I'm in the process of withdrawing the max allowed £30,000 from NS&I Premium bonds, as the effective rate of interest has changed from 'minimal', to 'insulting'.

    This was my house deposit which i saved up instead of buying a stupidly priced mortgage last year, and as a reward for my prudence, i'm seeing that although house prices are dropping, mortgages for new buyers are more expensive than ever, and savings rates are abysmal.

    All the fuss about deflation in the news is just a smokescreen to allow inflation in my opinion - with the currency dropping and the price of essentials increasing, my savings are being eroded away, along with all the debt as i suspect is intended.

  • Comment number 82.

    So what happened to fractional reserve banking then? It is quite possible to pay more interest on your capital than you charge for your lending products, in fact this is exactly what RBS / Lloyds / HBOS are already doing. They sold preference shares carrying a 12% yes TWELVE PERCENT coupon. So who did they sell the pref shares to? GB & AD that's who. Wonder what they will do with all that interest?

    Do you think they cannot or will not give a better rate to savers? If they just eat into some of those 6 figure and 7 figure salaries they could pay decent interest perhaps?

  • Comment number 83.

    Deflation? Where? Energy price deflation is not being passed on. And OPEC will move to restrict supply.

    As the pound continues to plumet imports become more expensive. And we import everything.

    Only house prices are deflating, and Broon is doing his best to restoke this bubble.

    In the meantime savings rates are 3% and will get slashed today. And inflation is 4%.

    Inflation will really take off next year and savers savings will be eroded. But so will all that debt, and that is the Labour plan.

    As a saver its all over.

  • Comment number 84.

    Can anyone explain to me why a flat base rate is applied to borrowers and savers?

    Surely it would make more sense for banks to have split rates, so a base rate cut could be applied to borrowers to help them in hard times, while a higher rate could apply to savers, because they need the help too.

    As someone who is self-employed, and whose only debt is less than £500 on my credit card, I am not really looking forward to the coming months and years.

  • Comment number 85.

    If the government became a major player in the housing market (as in Singapore) than the link between interest rates and the needs of home buyers would be less strong.

    It would give the government much more control of the housing sector without resorting to financial instruments. In good times the government could make a profit from its property dealings and use it for pensions and other large outgoings.

    This should benefit those with savings in the banks.

  • Comment number 86.

    Another problem :
    1. Bank's invest in Fixed Income products to yield a regular return in the same way interest is paid back to depositors
    2. Some fixed income products are Mortgage Backed Securities which are no longer constant and secure investments
    3. There are no proper asset classifications to distinguish MBS securities and other fixed income products, so its not possible to identify the full exposure of MBS securities.
    4. To further complicate matters fixed income product are traded in the open market like stocks.
    4. If there are a lot of people on the market trying to get a return interest is lowered

  • Comment number 87.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 88.

    Bah! Humbug!!

    So now all savers are 'thrifty' and all borrowers are 'feckless' are they?

    All these 'thrifty' people who've lent their money to the 'feckless' must have been hoping that the 'feckless' would work hard and keep the 'thrifty' in high levels of 'unearned income' (interest) for the rest of their lives.

    Well wake up thrifty people! Not all people who borrow are feckless and not all people who don't are thrifty. It's a system, and mostly it works ok; it just got overheated by the 'thrifty' lending more than they should to the 'feckless'. Doesn't mean that all savers are 'thrifty' or all borrowers 'feckless'!

    Let's hear it for the feckless - they make the world go round!! Merry Xmas, Scrooge.

  • Comment number 89.

    Yesterday I had an email from my bank to say savings rates were reduced blah blah but specifically said that overdraft rates would not reduce.

    We need to understand that banks are businesses who see too much risk in the current over borrowing of both personal and government and KNOW that this is BAD news for everyone.

    Brown needs to remember the very old 'cash is king' sentiment.

    Like a terminal company needing receivership to bring a sorry state to its end, so private borrowing needs bankruptcy or it's variations to draw a line under a bad situation since at some point, currently looking like a 2009 erection, all this negative stuff will be MUCH worse.

  • Comment number 90.

    Yes Robert, BUT, the banks are increasing their margins aren't they. So neither borrowers or savers will benefit by the full amount of reductions.

  • Comment number 91.

    I couldn't agree more with Roberts leader.
    My wife and I have been prudent all our working lives. Never borrowing more than we could readily afford, to provide for our children and our own comforts, instilling the same principles in our children, while many neighbours with everything, ended up with C.C.J.'s, or repossessions. Having both retired this year we looked forward to enjoying our investments. Having escaped a collapsing Icelandic bank by a whisker I now find our savings rate cut by two thirds in the last month, much higher than the Bank of England reduction. I am now spending more and more time searching out better rates.
    The only question now is, was it better to enjoy the good life you couldn't afford then, rather than watch the banks eating up your savings now!

  • Comment number 92.


    Most of those that “have” savings “have not” had new cars, flat screen televisions, holidays abroad etc.

    Conversely most of those that “have not” savings “have” had the new cars, flat screen televisions, holidays abroad etc.

    For the latter group to pick the pockets of the former is immoral.

  • Comment number 93.

    Maybe this Gov think there are a higher percentage of Tory voters in the 'Savers'

    Don't look for anything more complicated please, it's not there!

  • Comment number 94.

    The 'feckless borrower' and 'prudent saver' argument is common sense but it ignores the fact that we have a fractional reserve system which is not based on common sense and most money was created by people taking on debt.

    If someone invents a cure for cancer or builds an iPhone or 300M people enter the labour force in China it does not create a penny of new money - but if someone takes out a mortgage to buy a house or buys an iPhone on a credit card there is more cash in the system than there was before. If you have £100k in your bank account to fund your retirement then about £90K of it only exists because other people have borrowed. You would not have your savings if it wasn't for the borrowers.

    The only way the 'feckless' can actually pay back their debts is if the 'prudent' start spending money rather than hording it. The first step towards this is interest rates so low that the prudent need to live off their capital rather than the interest on it.

    Arguably the psychology, backed by government guarantees, that putting money in the bank or bonds is safe and good but buying stocks and shares is gambling and bad is one of the major problems with our system. It distorts the market by rewarding investment in sterile assets like property, deposit accounts and govt bonds and penalising investment in technology and manufacturing which actually increase 'wealth' by solving practical problems.

  • Comment number 95.

    Does an interest rate cut not fly in the face of market forces?

    Market forces apply to savings/borrowing too. A shortage of savers and excess of borrowers should cause market forces to push interest rates higher. The government is trying to push them lower. Surely to do this, Brown is going to have to pump billions into the system somewhere and it will all collapse anyway!?

    Personally, I think Brown fighting the natural correction of market forces like this is analogous to King Knute trying to hold back the tide.

    I think the lesson we will learn is that government cannot and should not try to artificially manipulate interest rates - the market should decide them instead.

  • Comment number 96.

    I'm not sure if I speak for a minority or a majority but the current econamic situation, for me personally, is a godsend. I and my wife have good jobs, made possible in part by getting a good education, have and an average sized mortgage and pay our credit card bill at the end of each month. We have cars but don't do a great deal of miles and have not stacked up huge debts backed up by the over-inflated valuation of our house. Interest rate cuts, cheap commodities and retailers biting my hand off for my business. There is a God!

  • Comment number 97.

    I did what I thought was right for my early retirement. I saved, which is making very little interest, invested in ISAs that lost money over 8 years, have a few shares which are worth very little.
    I blame myself to a certain extent for taking notice of the so called experts, but I blame the irresponsible borrowers, lenders and governments even more.

  • Comment number 98.


    Just to let you know we (my business)

    is currently keeping all our funds circa

    400 million out of the UK,you latest policies

    of devaluation of Sterling has earned us

    over 80 million.

    We only release funds into the UK banking

    system,on a weekly basis to fund our bill




  • Comment number 99.

    With sterling collapsing and the government printing presses busily at work, inflation is guaranteed.
    With the entire world economy sliding down the toilet, a slump, not a recession, is building.
    We therefore having the makings of stagflation, the most dreadful of all economic beasts other than Weimar-style hyperinflation.
    And today the stock market is rising.
    This is total madness.
    Anyone with the smallest amount of sense should be heading into the nearest big town to spend their savings on gold sovereigns.

  • Comment number 100.


    The symbol for the pound sterling appears as a 'blank square' £ in some bloggers' messages . Is this on your site only, RP ? Or SHOULD this become general BBC policy ?

    Do you or they know something the rest of us do not ?

    The Sterling Symbol is not only defiled by OUR Gov't but by YOUR internet space.

    How loyal are you to the BoE?

    Bring back the likes of Eddie George and send Mervyn King off to a different panto.


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