So Carney didn’t have his Feynman moment, as I’d blogged a month ago (not that I expected that he would). Not only did he fail to understand that rubber loses elasticity when frozen, he announced a programme that depends on the principle of pushing string.
Those who thought yesterday’s commitment to forward guidance was pretty unconvincing (with “kickouts” where the foot is already on the ball) should reflect on just what he is saying: that savers will bear a disproportionate burden of the cost of the economic crash. Interest rates dropped from 5% in 2008 to 0.5% in 2009 and will remain there indefinitely through entirely artificial, anti-market manipulations, despite the fact that there is no evidence that these low rates are having significant direct impact on investment decisions.
Older pensioners may be able to eke out their days by spending their capital, but the axe falls hardest on those who have just retired. Compound negative real returns will reduce many to penury: and the fact that this is now widely understood will ensure that this group, whose consumption would normally play an important role in economic growth, will remain huddled in corners in search of shelter.
What has emerged in Carney’s attitude is what one journalist justly called “financial repression”: a campaign to force savers to abandon bank deposits and take on more risk. At the same time Carney is warning the banks “to connect with the real economy or risk being socially useless”. Of course they should turn back to real lending to SMEs instead of focusing entirely on interbank trading, but the social utility they have traditionally provided must not be forgotten: it is precisely to provide a safe home for savings by identifying real lending opportunities and adding a cushion of their own capital so that their shareholders, but not their depositors, are at risk. This activity requires real skill and deserves some fair level of compensation: that is what banking should be all about.
The solution to bank failures is to require banks to have more capital in relation to their assets: but this can be largely met by reducing their interbank activities, not by reducing deposits. However the return on equity targets banks have to promise to raise new equity simply cannot be achieved without some continuation of the current mispricing model, where deposits bear subordinated risk but are priced on the implicit state guarantee.
And it is difficult not to wonder whether Carney’s attitude to savers is not consistent with the Government’s view (as in clause 9 of the Banking Reform bill) that larger depositors should be forced to accept outrageous risks (beyond the control of regulators or it seems banks’ own management) for ludicrously low returns.
What isn’t going to work is to force reluctant savers to withdraw cash from the banks. Where are they to put it? Retired people should not have all their money in the stockmarket (which in the UK is increasingly unbalanced with sectors such as mining dominating the index); textbook wisdom is that those approaching retirement should progressively move out of equities and non-standard investments. Property has entered a new bubble, courtesy of George Osborne’s policies, reinforced by Mr Carney’s guidance. Gilts, with the QE mountain yet to be unwound, represent a one-way ticket to Queer Street.
Forcing people to try to do the jobs of bankers without the skills, capital resources or administrative support provided by an institution is daft. By all means let willing individuals be entrepreneurs; but to impose that role on the reluctant retired is as far removed as the intrepid explorer is from a forced march of prisoners of war through the jungle.
Does Carney know where we are going?