I have been thinking of late how I and the many thousands like me who have some savings, can earn a decent rate of interest, but also help the economy. This coalition government needs to find a way to optimise the use of all its resources: that’s us the people, our savings, our desire to work and earn a living, and our ideas. How best to put that to the best interest of our great country.
Well, I have £5000 in a savings account earning me close to 0%, and I am sure there are quite a few pensioners who have that and more earning a pittance. How about someone, a ‘bank’, make us an offer we can’t refuse. How about offering us 5% interest on our savings, tax free (there’s the government buy in to the scheme). Allow us for example one free withdrawal a month, and make it an annual contract. In this way the ‘bank’ will easily accumulate £10billion (that’s £5000 from 2million people), and it will make a substantial difference to the many pensioners dependant on the interest their money earns. According to an article there is over £750billion in pensions and savings accounts, so reaching £10billion shouldn’t be difficult.
The 5% interest rate can be achieved if the Bank lends out the money to small or medium sized UK companies at say 5.5% or 6% (the benefit to the bank is 0.5% – 1% earned). And low interest rate loans to local companies will enable them to employ more local people. Now we’re talking about using under-utilized savings to fund companies desperate for loans to hire more underutilized Brits. It’s a win-win-win, and all it will cost the government is the tax on the interest it would otherwise have received from the savings.
I had thought we would need a government bank (remember Nationwide) to manage this, but I fancy Richard Branson and his Virgin Money could run this. A new bank, looking to make a difference, what do you say Richard, how about a Virgin Bank for the people, or a People’s bank? My money is yours for the asking, at 5% tax free interest, I reckon you’ll have a queue to your door.
1st published 25 September 2012
Nice idea, however I believe it is stymied by the following obstacles:
ReplyDelete1. Banks do not require savers money to make loans.
2. Banks prefer property speculation and the stock market to lending to businesses.
3. Businesses aren't growing because there are less customers.
I will explain each in detail and conclude with possible savings alternatives, which offer 5.5% AER up to 22% AER and may include up to 50% tax breaks.
1. "Banks extend credit by simply increasing the borrowing customer’s current account… That is, banks extend credit [i.e. make loans] by creating money", Paul Tucker, Deputy Governor for Financial Stability, Bank Of England (*1a).
"The essence of the contemporary monetary system is the creation of money, out of nothing, by private banks' often foolish lending" - Martin Wolf, Chief Economics Commentator of Financial Times (*1b).
2. Bank lending can be separated into two categories: productive and non-productive lending (*2).
Productive lending, which you're arguing for, accounts for 8% of current bank lending. It's called productive because it increases the productive capacity of the economy - but doesn't necessarily guarantee that loans will be repaid. There is a much greater risk, due to the costs involved (manual risk-analysis of business plans) and lack of capital to reposes failed businesses especially in the service industry.
Non-productive lending (92%) includes lending money for mortgages (i.e. property speculation) and stock on the markets. Property lending is mostly automated and capital is available to back the loan. Property lending doesn't actually increase the number of houses we have, it just increases the cost of houses.
3. Most businesses aren't trying to borrow money to expand as they haven't got the customers, they're trying to borrow money to not go bust. This could explain the puzzling, "weak output and relatively robust employment" and "the unusually low proportion of companies going bust in the wake of recession" (*3).
Finally onto possible savings alternatives (*4): online equity investment sites and peer-to-peer lenders. I'll direct you to read the article in Positive News as it explains these solutions clearer than I could :-)
(*1a) http://www.positivemoney.org.uk/how-banks-create-money/proof-that-banks-create-money/
(*1b) http://www.ft.com/cms/s/0/93c4e11e-ec39-11df-9e11-00144feab49a.html
(*2) http://www.youtube.com/watch?v=JBZWw1DG8zU # How Money is Made / Created: Ben Dyson Explains the Debt Crisis, 8:40min into video.
(*3) http://www.ft.com/cms/s/0/c21a1e86-f370-11e1-9c6c-00144feabdc0.html
(*4) http://positivenews.org.uk/2012/economics_innovation/8721/peer-to-peer-lending-future-finance/
You said:
ReplyDelete1. Banks do not require savers money to make loans.
But, my proposal is not about the banks, it's about the unused money sitting idly in people's accounts
2. Banks prefer property speculation and the stock market to lending to businesses.
Again, it's not about the banks, they had their chance they missed this opportunity to put peoples savings to work for the benefit of the country. In fact, the banks are probably lending out 'my money' to make more profits for themselves, giving me nothing in return.
3. Businesses aren't growing because there are less customers.
You mean fewer customers, not 'less'. But that's the point, pensioners cannot spend their money (which would help businesses) they live off the interest from their capital (which is the subject of this blog). We need a way to 'recycle' their money in a safe and secure way - put the money back into the pool to do necessary works (repair roads, refurbish houses, government projects) and create jobs for locals.
I will explain each in detail and conclude with possible savings alternatives, which offer 5.5% AER up to 22% AER and may include up to 50% tax breaks.
1. "Banks extend credit by simply increasing the borrowing customer’s current account… That is, banks extend credit [i.e. make loans] by creating money", Paul Tucker, Deputy Governor for Financial Stability, Bank Of England (*1a).
"The essence of the contemporary monetary system is the creation of money, out of nothing, by private banks' often foolish lending" - Martin Wolf, Chief Economics Commentator of Financial Times (*1b).
Precisely the scheme I want to avoid, I'm not interested in using my savings in this way.
2. Bank lending can be separated into two categories: productive and non-productive lending (*2).
And I'm interested in 'productive lending' only.
Productive lending, which you're arguing for, accounts for 8% of current bank lending. It's called productive because it increases the productive capacity of the economy - but doesn't necessarily guarantee that loans will be repaid. There is a much greater risk, due to the costs involved (manual risk-analysis of business plans) and lack of capital to reposes failed businesses especially in the service industry.
My point here, is the Government is already protecting my savings up to £50k so let's use up to this amount only - my money is protected by the government, which is the only kind of investment pensioners can consider, secure investments. Use our money to drive the 8% up to 100% productive lending only.
Non-productive lending (92%) includes lending money for mortgages (i.e. property speculation) and stock on the markets. Property lending is mostly automated and capital is available to back the loan. Property lending doesn't actually increase the number of houses we have, it just increases the cost of houses.
3. Most businesses aren't trying to borrow money to expand as they haven't got the customers, they're trying to borrow money to not go bust. This could explain the puzzling, "weak output and relatively robust employment" and "the unusually low proportion of companies going bust in the wake of recession" (*3).
That may be so, so rather invest in Government works, ie work that needs to be done by the government, the upkeep of schools, roads, council properties, dams, flood protection schemes, etc.
I hope this repositions my proposal
Finally onto possible savings alternatives (*4): online equity investment sites and peer-to-peer lenders. I'll direct you to read the article in Positive News as it explains these solutions clearer than I could :-)
unfortunately these are not the type of investments I and pensioners are prepared to make, these are risky, not government protected schemes like savings (incl. cash ISAs).