The Financial Inclusion Centre

The financial crisis, and the response to it, raises a number of important issues over and above the narrow economic impacts described in the previous blog.

Firstly, we badly need a new policy paradigm and social policy model to properly evaluate the impact of this new economic reality on different households.  Narrow economic paradigms and limited quantitative models do not help us fully understand the wider financial, economic, social, psychological, cultural, and generational effects of major crises and policy responses.

Secondly, while much of the responsibility for the financial crisis can be laid fairly and squarely at the door of financial institutions, we entered the financial crisis in an extremely vulnerable state mainly due to the level of household overindebtedness caused by massive property market overvaluation.  We have simply not come to terms with the distorting effects of the property market on our society – whether in terms of financial vulnerability, propensity to save, pension accumulation and social and cultural norms. To use the cliché, it is the elephant in the room. The obsession with property pervades much of our financial, social and cultural lives and needs to be dealt with or else we are condemned to repeat the mistakes of the past.

Thirdly, some of the groups who have suffered, and will suffer, most in the aftermath of the financial crisis seem to be relatively powerless and invisible – the groups that spring to mind are younger generations and the ‘working poor’ who are in the shadow of the now famous ‘squeezed middle’. They lack a voice in the political arena compared to other more influential groups whose cause is championed by well-resourced campaigning and representative organisations in the media and corridors of power. With this in mind, to counter this imbalance, wherever relevant we will ensure that the interests of these groups are properly reflected in our future work.

Mick McAteer

The Financial Inclusion Centre is launching its new website and will have a regular blog on important new financial issues. This is the first blog – about the response to the Bank of England’s assessment of the impact of Quantitative Easing (QE) on UK households.

The Bank of England yesterday published its analysis of the effects of QE and changes to the bank rate on different UK households.  The analysis contained no real surprises on the ‘winners’ and ‘losers’ given what we already know about the impact of the financial crisis on various households but it is good to the see an attempt to quantify these effects.  What is also no surprise, but no less dispiriting, are the attacks from commentators who seem to be arguing that interest rates should have been higher to benefit specific groups such as those with large high levels of savings.

The financial crisis has unfolded in three phases. First, we had the financial crisis in the arcane financial markets (which few commentators understood the significance of at the outset) but this rapidly and scarily transformed into an economic crisis in the form of a major recession. Now we’re in the third phase – the costs of dealing with the crisis and recession has resulted in a social crisis with ordinary households paying the price in the age of austerity for the behaviours of largely unaccountable financial institutions.

But, as the crisis unfolded, we warned of our fears that the age of austerity would be governed by the politics of envy and blame with commentators castigating policymakers for forcing ‘deserving’, ‘responsible’ savers to pay for ‘feckless’ households who borrowed too much and the weakest in society losing out in the battle for scarce resources against those influential groups in society with the loudest voices in the media and corridors of power.

Much of the focus has been on the balance between savers and borrowers. While there may be many more savers than borrowers, the reality is that most households in the UK have such low levels of savings that higher interest rates would make no real difference to their incomes. If rates were a full 2% higher, the typical UK saver would benefit by 34p a week. The real winners in the savings market would have been the comparatively small number of wealthy households with high levels of savings – but of course the impact on mortgages, jobs, and the economy could have been catastrophic.

Of course, we have every sympathy for the small number of older people who do rely on their savings to top up their incomes but their needs are best met by special targeted measures not by maintaining interest rates at higher levels which would have a devastating impact on many more households.

Looking at the fall-out from the financial crisis (even with QE and low rates) the losers are the poorest and working poor, the regions and poorest parts of London, and the younger/ middle age groups who will be saddled with a legacy of debt that will affect the rest of their lives or whose housing needs will not be met – not much chance of financial resilience and secure financial futures for them in this cold, new economic reality.

We dread to think what the impact would have been on financially vulnerable, overindebted households if rates had not been driven down so dramatically. As our series of reports called Debt and the Family points out, we have the same proportion of mortgages in difficulty as in the early 90s when the Libor rate was 4-5% higher. In certain regions of the UK, greater proportions are in difficulty compared to the 80s/90s when rates were in double figures.

Over the longer term, the winners from recent UK economic trends of past two decades and QE are generally the richest 10%, and many older households – especially in the South East.

Remember that part of reason we now need low rates is the massive overvaluation of property and associated debt accumulation which resulted in a huge transfer of wealth to older, wealthy people much of which was monetised into savings. Once they amassed their wealth, did the minority want to pull up the drawbridge by keeping rates higher than need be? We hope human nature is not so bad.

Mick McAteer