Bernard Ginns: Bank policy is like Cyprus raid on savers in slow motion

I met Mervyn King in a small meeting room at the top of 42 The Calls, an 18th century corn mill converted into a boutique hotel overlooking the River Aire in Leeds.

As I recall, it was a sunny day in late October with clear blue skies, but the outlook for the UK economy was anything but.

In fact, the Governor’s speech that evening to an audience of Yorkshire business people was the first time that the central bank directly acknowledged the UK was likely headed into recession.

Speaking after the Government’s £37bn bailout of the banking sector, King said with prescience that the UK faced “a long, slow haul” to restore lending to the real economy and hence normal growth. I wonder if he knew then just how long it would take.

Yesterday’s latest figures showing a contraction in net lending in the first quarter of the year highlight the challenges still facing our banking system.

Since his visit to Leeds, King, now Sir Mervyn, has presided over some unprecedented acts of monetary policy.

The Bank of England kept interest rates at a record low. It has also pumped £375bn into the economy via the quantitative easing scheme.

In those intervening years, I have asked various experts to explain the effects of this mind-boggling policy.

In November 2011, I inter-viewed David Miles, a member of the Monetary Policy Committee, at a hotel near Beverley.

The professor said: “We are buying assets off pension funds, life insurance companies, people who invest in UK government bonds.

“We buy government bonds off them and give them in exchange cash. Chances are they are going to use some of that cash in an alternative investment and that money may feed through to UK equity market.

“More likely it will feed through to the UK corporate bond market, which is going to get money back into the corporate sector.

“Some of it will flow back into the banking system and at a time when banks are facing some stresses in funding that can do some good as well.”

Prof Miles claimed that the purpose of the programme was “to try to influence the cost and availability of credit to companies and households and try and boost demand to offset this downturn which to some extent was a reflection of things happening outside the UK”.

Ros Altmann, the doughty pensions campaigner, has produced a useful paper on the winners and losers.

In spite of all the QE, she points out that the UK economy remains very weak. According to Ms Altmann, this is because banks are impaired, so they are not lending; consumers are over-indebted, so they are not spending; our population is ageing and their pensions are under pressure; the wealthiest benefit most from rising equity and bond prices; and QE damages pensions and low interest rates reduce savings income, among other reasons.

She says the winners are the Government, banks, gilt traders, the wealthiest asset owners and borrowers at risk of negative equity, especially those in the South of England.

The losers, meanwhile, are people with no debt, those buying annuities, pensioners in drawdown, defined benefit pension sponsors and savers facing negative real rates, especially those in the North.

“QE has benefited some powerful groups in the economy while the negative effects impact less vociferous and less powerful elements of the population,” says Ms Altmann.

She adds: “Monetary policy has been most beneficial to those with the most expensive homes and largest mortgages.

“Indeed, savers in the North of England have seen their incomes cut in order to prop up house prices in the South and help over-indebted borrowers who are more concentrated in the southern parts of the country.

“Thus, the Bank of England has helped homeowners in the South of the country most, while those in the North benefit least due to lower property prices and mortgage debt.”

Ms Altmann draws a comparison between QE and Cyprus, where the authorities expropriated 20 per cent of savers’ balances in one go.

“QE may take away even more, but only slowly over time, so it is less obvious,” she says.

Back in October 2008, the Governor told me that when the crisis is over and the economy has started to recover, he will look forward to a holiday.

“I would love to go for a walk above Hebden Bridge. I would love to come back and walk across the moors as I did as a small boy.”

Sir Mervyn, who retires this month, will have plenty to reflect on when he does so.