Is the Bank of England punishing the prudent?

Voltaire (1694 -1779) was a mere glint in his Father's eye when the Bank of England set base rates at 2 percent

The Bank of England has never had a lower base rate of interest. Not once, in over 300 years, has the Bank offered money more cheaply.

For an institution that predates the birth of Voltaire, the Bank’s decision to shave another 1 percent off base rates is historic. The last time interest rates were this low, Winston Churchill was still prime minister.

What does this mean for you? That depends on who you are.

If you have a tracker mortgage (that moves with the BoE’s base rate), then you’ll have more money in your paycheck at the end of the month. You’ll get additional breathing space to go with that being prepared by the government should things turn out poorly.

(That said, many tracker mortgage providers have ‘floors’ that are activated if the base rate falls through it. Which it has. For example, Nationwide’s tracker floor is at 2.75%, so many customers wont see too much of a pass on.)

If you want a new mortgage, it might take a little longer for banks to start offering money at previous levels. But a little creepiness from Mandy should sort that.

If, however, you’re one of those increasingly rare breed – known as ‘savers’ – this rate cut is most unwelcome. People who have worked hard and put money aside for this torrentially rainy day will have found their income cut by more than half over the past month.

There are questions that need answering. How does the government hope to wean us off debt culture when the central bank is ramming virtually free money into our hands? Why should people who took out mortgages they knew were too expensive profit when prudent savers are set to lose out?

The City has welcomed the Bank’s decision. The government will now position itself as the party of financial fairness by pushing banks to keep lending. And we will probably now spend slightly more over Christmas than we had planned.

Was it Voltaire who said,

Everything’s fine today, that is our illusion?

The dead cat bounce

People really are gullible. The Times has just broke the story that Labour have pulled back five points on the Tories, according to the latest Populus poll.

Brown is seen “by voters as best able to handle the recession.” Presumably they have been taken in by Brown’s self-casting as a new FDR, as a saviour of the global economy. He is not.

Labour’s proposals of tax cuts are likely to be followed by other political parties. They are a good idea; giving people back some of their hard-earned cash might encourage them to spend more or it.

But – and this is key – with Britian already carrying the greatest debt percentage of any developed country, neither the Conservatives or the Liberal Democrats propose to cut tax by increasing Government borrowing. Sound like a good idea?

Brown is playing the ‘I was there when we got into this mess, so I’ll be here to get us out’ card. It is a rather limp bluff. Brown has no experience of power during a recession, just experience of deregulating the Bank of England and, by extension, facilitating wild lending and unsustainable growth.

People will eventually see through Brown, sinister smile or not. While not the sole contributor to our financial woes, he was certainly implicit in the “age of recklessness”.

Shadow Chancellor George Osbourne, in today’s Financial Times, argues that were we increase public debt for short term tax relief, “Britain’s international credibility will be further imperiled, future generations will be burdened with even more debt and a recovery would be threatened by the prospect of large tax rises. We would be sowing the seeds of the next crisis.“

The argument of incumbency or precedent should not be an acceptable one. If it held any sway, Barack Obama would still be an unknown Illinois senator. Alistair Darling would still be in charge of our roads. And, to misquote Mr Cameron, “Gordon Brown would be Prime Minister forever.” Shiver.

Watching with interest

The Bank of England has slashed interest rates by 1.5%, the largest cut since 1981. The new rate of three percent is the lowest since Elvis Presley sang “Heartbreak Hotel”. This is unprecedented territory.

It is the kind of radical action financial experts and small business managers were calling for, but it will amount to little if banks don’t pass on the saving to their customers. Stock markets are clearly unconvinced.

“I think it’s essential that the banks do pass on the benefit of lower interest rates to people and to businesses,” said Alistair Darling, before admitting there was absolutely nothing he could do to make them.

It appears the Bank can’t win. Were it to err on the side of caution (as it has recently,) critics would be quick to point out the measure’s insufficiency. It may now have done too much, too late.

People will panic. If such drastic action cannot persuade lenders to start borrowing at sustainable rates, then what can? Banks’ reluctance shows that they see the profound gravity of the UK’s economy. And the shopper on the street soon will too.

Christmas may well plaster over the gaps in people’s bank accounts. Credit cards will be festively maxed, money woes will be put off until for a less jolly month, and  January will bite. People will then realise just how much trouble we’ve got ourselves in. By then it might be too late.

In the Brown stuff

Some of you may have noticed a change in the demeanour of our Prime Minister. Although he’s not quite started entertaining at childrens’ parties under the alter-ego Gordo the Clown – he’s still as dour as a Nairn’s oatcake – he has started to look more comfortable in himself.

He now has a purpose; a tangible situation at which he can throw himself. He has a reason for those masochistic 20-hour days. The global financial crisis has been a blessing for Brown.

Now he has the opportunity to call upon all his finance experience and City acumen. As chancellor for a decade, Brown presided over a period of almost unprecedented growth, with low interest rates and controllable inflation. It was the new jazz age in London. Many, many people got obscenely rich, facilitated by a Brown led, risk-fuelled system of lending. Many more people had their pension’s dissolved or lost. More still borrowed beyond their means.

That was the boom and – let’s be clear here – it was a boom during which Brown was at the helm. His actions led to a wild, risky and ultimately rotten financial system. Not that any of us were complaining at the time.

Now comes bust, and the prime minister is leaning on his ‘experience’ to steer us through. The problem is, Brown has no experience whatsoever of presiding over bust. In that sense, he’s as qualified to run the economy as I am to chair the City University Quantum Mechanics Club.