Simple banking – ignore base rates

Yesterday I spoke to someone running one of the smaller banks in the UK. He told me he lent less than he collected in deposits, for prudential reasons. He said he currently offered 2-3% on deposits, depending on size and length of time people would leave the bank with their money. He lent out at say 5-6% to reasonable prospects. They stopped following the Bank of England rates when they moved them below 2%, as they could not see how they could attract or maintain deposits if they followed the rate down.

It all made perfect sense to me. What a pity the authorities cannot understand this. I suppose they are setting their rates now with an eye on how much government stock they have to sell. In the real world depositors need a return, and banks need deposits. The UK authorities have not been in control of money markets or rates for almost two years now. Their destructive lurches in interest rates – first too low, then too high, now too low – have done damage. Today any sensible bank just ignores them.

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41 Comments

  1. alan jutson
    Posted April 30, 2009 at 6:44 am | Permalink

    Clearly this man and yourself should bid for running our Financial Services !!!!!!!.
    We may then get some commonsense back into being able to sensibly plan for the future on a personal and Business level.
    Please do tell me he runs a tight ship on staffing as well, actually knows what his costs are, what his customers want, and makes a profit to boot.
    Sounds like a simple breath of fresh air.

    • oldrightie
      Posted April 30, 2009 at 9:50 am | Permalink

      We ceratainly won’t have any common sense whilst mad Brown is running the place.

  2. APL
    Posted April 30, 2009 at 7:01 am | Permalink

    JR: “Yesterday I spoke to someone running one of the smaller banks in the UK.”

    Yes. Know your customers*, manage your risk and banking can be a very profitable business. With that model you might not be able to pay £17billion bonuses but you probably won’t go hungry either.

    *Not in the KYC manner the government think means you know your customer, not in the checkbox, ‘red flag’ mechanical manner required by the anti money laundering legislation introduced by this government. But in the organic way that every good business does automatically.

  3. Colin D.
    Posted April 30, 2009 at 7:13 am | Permalink

    Your banker friend is applying common sense rules of thumb, currently a scarce commodity.
    I am sure it would be possible to draw up a ‘top ten’ common sense financial rules to apply to this financial crisis. I would include the monthly balance of trade deficit or surplus (remember that one?). On any month we buy more than we sell (including ‘invisibles’), we presumably have made not an iota of progress in lifting the millstone of debt the government has put round the necks of us and our children.

  4. Richard
    Posted April 30, 2009 at 7:18 am | Permalink

    What do you think about a return to the gold standard? Its the existing and projected quantity of government borrowing which is at the root of this mess.

    reply: I do not favour a return to the Gold Standard. The value of our money then depends on gold mining success in a variety of countries who gain a windfall.

    • Waramess
      Posted April 30, 2009 at 8:11 am | Permalink

      This cannot be true in a market where prices are not regulated or manipulated. You will not rely on the amount of gold mined, as the price of gold in the event of a shortage will simply rise.

      Governments have now, over the past forty years, shown themselves to be so completely untrustworthy over their managment of fiat (paper) currencies that the return of the gold standard cannot be too far off

      • Freddy
        Posted May 1, 2009 at 4:41 am | Permalink

        Um, the whole point of a gold standard is that the value of money is defined as a fixed amount of gold. It is the ultimate in regulated prices.
        So, in the event of a gold shortage – or glut – the price of gold cannot rise or fall, so the value of the money linked to that gold must do so.

        In other words, our host is entirely correct. So, no great surprise there then …

        • Waramess
          Posted May 1, 2009 at 12:42 pm | Permalink

          “Um, the whole point of a gold standard is that the value of money is defined as a fixed amount of gold.”

          For fixed amount I would suggest you mean fixed quantity. If so I agree but still the value of the pound would fluctuate with the price of a scarce commodity, not given to wild fluctuations other than as a store of value, and with no other use than for jewelrey.

          Any increase in the gold price would mean an increased demand for sterling and vice versa. Nothing wrong with that when you contrast it with the mess created by politicians and their central banks.

          Inflation, which is a function of fiat money, robs from the poor who are at the end of the chain whilst governments who create the stuff are the winners. You can see from the depreciation of the pound what sort of personal wealth has been destroyed. As a boy I used to go shopping for my parents and a leg of lamb cost eight bob, now it costs twenty times that. If we had been on the gold standard and the pound was backed by a fixed amount of gold we would have had virtually no inflation.

          So no. I cannot see your point nor can I see John’s point that it might benefit a few gold producers. So what, if it gives us a stable inflation free currency.

    • Acorn
      Posted April 30, 2009 at 9:15 am | Permalink

      Richard. There is about 140,000 Tonnes of Gold above ground, only about 40,000 T are in Central Bank and private vaults. The rest is hanging on various bodily parts of humans.

      No government wants you buying Gold or basing anything on the price of Gold. That would bugger up all their fiat money schemes; they are using every trick in the book to stop the Gold price going up. They want you buying their junk bonds, not Gold.

      The US government in particular, is leasing out gold to dealers, (the Gold still appears in their reserve accounts, even though they have actually sold it). They are spending the cash they get for it.

      • Waramess
        Posted May 1, 2009 at 1:36 pm | Permalink

        You’re right and the lend lease scheme operates to the exclusive advantage of the dealers specifically because the Fed sees the fiat currency as the ultimate stealth tax raiser and a flight to gold would end it all.

        The USA in particular can issue vast amounts of paper and because the countries generating an income need to put their money somewhere the dollar benefits.

        Not for much longer I suspect. The Chinese have already waved the flag so they are now having to think very hard whether to continue to supply goods to the USA for worthless bits of paper that they then exchange for other bits of worthless paper (treasury bills).

        Once the dollar is seen for what it is, rather than a good store of value then the game is up for the currency

    • Richard
      Posted April 30, 2009 at 8:04 pm | Permalink

      Good point. But we have to find a reliable means to stop govts such as this one mortgaging the future. I hope the Conservative-proposed Office of Budget Responsibility will have real teeth. How about a new rule:-
      – If total public debt (inc pensions, PFI etc) > 60% GDP and / or
      – If the budget is in deficit
      Then a ‘state of debt emergency’ applies. Public sector wages > £50k pa are automatically frozen, wages in all public sector bodies are capped at £150k pa and no minister draws a (ministerial) salary until the end of the state of debt emergency. Might concentrate minds.

  5. Mark M
    Posted April 30, 2009 at 7:23 am | Permalink

    John,

    While I agree with the point (rates are too low to bother with savings accounts at all now), you were championing the rate cuts some months ago as being ‘the right policy but too late’.

    Do you feel we’ve now passed the point where low interest rates are vital to prevent depression and now need to start raising them to encourage savings again?

    Curiously, my view has always been that the problem wasn’t caused by interest rates being too high, so lowering them wouldn’t make much of a difference and, possibly, would make things worse as people moved their savings away from cash-strapped banks and into riskier investments in an effort to find a return.

    Reply: A year before the crash I championed a substantial cut in interest rates to stave off a deep recession. Last autumn I opposed cutting them below 2% owing to the impact on savers.

    • Mark M
      Posted April 30, 2009 at 9:28 am | Permalink

      Thankyou for the reply. Good to see someone who understands the need for interest rates to change rather than the PMs ‘low interest are good – high interest rates are bad’ mentality.

  6. Josh
    Posted April 30, 2009 at 7:52 am | Permalink

    Isn’t this a time to follow the Austrian School method and abolish central banking and let the market decide the interest rate. Then at least somebody can claim to have abolished boom and bust

    • Freddy
      Posted May 1, 2009 at 4:46 am | Permalink

      Not really. Fred the shred – or his spiritual heirs – would be liable to make just as much of a pig’s ear of it, and for the same reason: the mismatch between short-term benefit and long-term stability.

      • Josh
        Posted May 1, 2009 at 10:03 am | Permalink

        Not if they were constrained by some form of gold standard. Fiat money has been a disaster. Some will mess up, but there won’t be nobody to bail them out in future. One of the reasons for this mess has been central bank manipulation of the markets. When Brown changed the inflation measure, the BoE had to keep rates down to match the new inflation target. After all, Brown made his name on ”15% interest rates under those dastardly Tories.”

      • Josh
        Posted May 2, 2009 at 8:37 pm | Permalink

        Freddy, if you want to know about the merits of a free banking system that is not controlled by a central bank, please read this from the Mises Institute

        http://mises.org/journals/qjae/pdf/qjae10_2_3.pdf

        It’s about Sweden

  7. Paul
    Posted April 30, 2009 at 9:20 am | Permalink

    John,

    Two things, many years ago I was a young intern working in the office of that doyen of Wall Street Walt Wriston, Chairman of Citicorp. I was installing some IT equipment and he said that looks complicated, I said not as complicated as banking. His response was banking is very very simple if you follow the 3 6 3 principle. That is you pay depositors 3% charge borrowers 6% and tee off at 3 pm.

    Please tell me who your Banking friend is I’d like my business to bank with him.

    Paul

  8. Demetrius
    Posted April 30, 2009 at 9:26 am | Permalink

    At the risk of repeating myself. The Government are embarked on an uneven combination of Enronomics (remember Enron?) and Old Mother Riley economics (taking in your own washing). Presumably on the grounds that if you add a minus to a minus, and then put a spin on it, people will believe it is a plus.

    Alec Douglas Home and his matchbox represented an infinitely superior grasp of financial systems, but then he was a decent chap with a sense of humour.

  9. Henry North London
    Posted April 30, 2009 at 9:33 am | Permalink

    Which bank is it?

  10. Ian Jones
    Posted April 30, 2009 at 9:49 am | Permalink

    I guess this is why the Nationwide BS put its tracker rates up as its savings were being battered so its capital was being undermined.

    As the economy recovers and investors start to look for yield rather than safety then rates will zoom up.

  11. Acorn
    Posted April 30, 2009 at 9:50 am | Permalink

    JR, as you have often said on this site, that is, we need better regulation rather than just more regulation, can I suggest a read of the following link.

    Particularly the part “Rating Agency Madness”. I was not aware the SEC (the regulator) was the cause of the problem.

    http://globaleconomicanalysis.blogspot.com/2009/04/anti-libertarian-nonsense-from-henry.html

    BTW. I missed the “swine flu” parliamentary debate yesterday. I understand the UK has loads of “anti-viral” doses, but was there any mention of the stocks of “anti-biotic”? Apparently once you get this flu, it proceeds to wreck your lungs defence mechanisms and you get a “bacterial” attack on your lungs, for which you need an anti-biotic.

  12. Lola
    Posted April 30, 2009 at 10:41 am | Permalink

    In other words, markets work. And state money monopolies, especially when run by lefties, don’t. Money is just another commodity with a price. The market will sort out the price, as your story makes clear. Unfortunately state inspired money and credit expansion has destroyed most state controlled money, throughout history. In other words money is far to important a commodity to be subject to political and bureaucratic manipulation. I would not stop at just re-privatising the banks, I would privatise money.

    • Freddy
      Posted May 1, 2009 at 4:49 am | Permalink

      Money is not just another commodity, it is part of the infrastructure of a sensible economy.

      • Lola
        Posted May 1, 2009 at 9:03 am | Permalink

        Nope, it’s a commodity.

  13. figurewizard
    Posted April 30, 2009 at 11:58 am | Permalink

    If such a dislocation between interest rates in the real world and those supposedly set by the Bank of England were to become the norm, neither the Bank nor the Government would be in a position to regulate the economy. This function would largely become the preserve of the money markets. Given Gordon Brown’s record on running the economy that might not be such a bad thing.

  14. Janet Child
    Posted April 30, 2009 at 12:12 pm | Permalink

    The other factor to be considered with this level-headed approach to banking is the international perspective which in today’s global economy we must always bear in mind ie that foreign investors will also invest in UK plc if they can get a reasonable return as opposed to withdrawing their funds.

    I think the current undeclared strategy is to keep rates low then to let them rise rapidly and inflate our way out of the huge debts we have at present. As a saver this would be great and would also attract inward investment but it would be disastrous for my childrens’ generation who are hard-pressed to meet their mortgage payments and other obligations as it is without working all the hours God sends with the disastrous consequences this often has on family life.

  15. David Burch
    Posted April 30, 2009 at 12:21 pm | Permalink

    One assumes the Governor of the Bank of England is not going to stand up to say that and has to continue in the fantasy land that lowe interest rates will work.

    Maybe it would have been better to stop at 2% and provide “quantitative easing” then or betterstill allow some of the banks to go into receivership so the bankers learn what is meant by a “poor business decision”.

    • Freddy
      Posted May 1, 2009 at 4:59 am | Permalink

      I think that lesson would be learned by the depositors.

  16. Steve Cox
    Posted April 30, 2009 at 12:32 pm | Permalink

    It’s ironic that the only “real” banker running the UK’s big clearing banks before the crisis was John Varley at Barclays. Apart from HSBC (Hong Kong & Shanghai Bank), which is not really a British bank (although it’s quoted for convenience on the LSE, and British by dint of its takeover of the minnow Midland Bank way back when), Barclays is the only British major that remains free of the dead hand of Whitehall ownership. It’s very sad, though, that Barclays have cut deposit rates as savagely, or even more so, than its competitors. Guess which bank I am with? Ouch! Time to move bank, I think. Mr. Varley, please take note, and start giving us depositors a decent rate once more, instead of using our confiscated interest to provide more excessive bonuses and salaries to Bob Diamond and your other mates.

  17. Adrian Peirson
    Posted April 30, 2009 at 3:52 pm | Permalink

    What I also find curious is that we compare relative values if fiat currencies, if all these currencies were falling off a cliff, by comparing their value to each other it may look like they are Ok but compared to something of real value like Gold.
    There’s that word again, Gold, could it be that gold is the Base rate we should always have stuck to.

    • Mark M
      Posted April 30, 2009 at 10:32 pm | Permalink

      How exactly does gold have a real value? As with any form of currency, fiat or otherwise, gold is only worth what someone agrees for it. The big weakness is that you cannot quantative ease gold, and so depressions cannot be inflated away. I’d rather stick with my fiat currency as, even though high inflation is bad, it’s nothing like a deep depression.

      • Lola
        Posted May 1, 2009 at 1:26 pm | Permalink

        Doesn’t work like that. Depressions are a result of bad fiat money. Here, in the UK, the inflation has already happened. Brown has expanded the money supply by about 65% corrected for GDP since 2000. In other words the £ today is worth 35% of what it was worth in 2000. Inflation is the excess supply of the commodity we call money. Combine that with its underpricing, and – bang – you’ve got a credit bubble, a consequential boom, then a bust. The history of boom and bust is the history of bad fiat money run by bad politicians (usually, but not always, of the left). This exposes Brown’s mendaciousness that the current crisis is a banking crisis. It isn’t. It’s a crisis of unsound fiat money (and catastrophic and related banking supervision errors) that has lead to a banking crisis.

        There are good arguments for returning to the gold standard, and unlike Mr Redwood I am not concerned that that would create windfall profits for gold miners and countries with gold fields.

        In lots of ways fiat money is like Faith. If we believe in it it will be. And money is power. Not the possession of it, but the control of it. This is the same as Faith. Faiths once sought to control knowledge, for reasons of power. Now secular governments seek to control money for the same reason.

        Personally, as I ultimately totally distrust all politicians as eventually they are all corrupted by power (no, that’s unfair – enough are corrupted by power to overwhelm the good ones), I want the control of money taken away from them. And as I also don’t believe in ‘experts’ aka the ‘clever man in Whitehall’ I would rather rest my faith on the wisdom of crowds, that is ‘The Market’. Which is where Gold, its admirable qualities as money and its price comes in.

        • Adrian Peirson
          Posted May 1, 2009 at 5:21 pm | Permalink

          It’s good to see that others can see what is going on behind the scenes.
          Everything going on is about control of the masses by the Elites, control of the supply and value of ‘money’
          Ultimately leading to a completely ficticious money supply called electronic money where we will work for the elites for Credits.
          Step out of line and your Credits will be switched off, this is why they want a cashless society, if you walk around with gold coins in your pocket, they cannot stop you buying your groceries.
          this is why we are increasingly prohibited from hunting, this is why the foot and mouth outbreak was eventually ttaced back to a Govt Lab, they want to destroy the Little Farmer who has independance ( didn’t the soviet’s also kill off all their small independant farmers )
          2000 Dairy Farmers have gone under in the Past 4 yrs.
          Now with this Overhyped Swine flu, are they goingt to start killing of Pig farming too.
          I note despite the fact that they have put us on level 5, the Borders are WIDE open still.
          They want this disease to spread.
          This is why they have destroyed our fishing, the globalists intention is to have us entrapped, so we must buy from Tesco, this is why new houses are built with no working fireplaces, the Globalists do not want you to be able to burn Wood on your fire.
          this is why they are cuting off rural bus services, they want us Herded into cities so we can be Farmed and fleeced.

          This is why in order to fish, you now need a Rod Licence, why we are increasingly prohited from Hunting.
          It is all about control, Control of access to Food, fuel and the ‘Money’ to be able to buy those commodoties in order to survive.
          CONTROL CONTROL CONTROL.
          This is why the govt and the Bankers like fiat and electronic money and NOT Gold.

          I wont post the link Because it’s a long vid and Mr Redwood will not have time to review it all but I can recommend Endgame by Alex Jones
          or the Obama Decepetion again by Alex Jones,
          or the Creature from Jekyl Island ( the Creature being the PRIVATE Federal reserve Created by the Equally PRIVATE Bank of england on Jekyl Island in Secret in 1913.

          All available on Google video.

  18. Matt
    Posted April 30, 2009 at 6:39 pm | Permalink

    Ok so explain this one to me. One small bank can ignore the national interest rates and carry on making money. Many big banks continually followed the national interest rates and lost billions upon billions. And according to you this is the governments fault.

    My view is that the banking system was doing everything it could to take advantage for enormous financial gain to be shared by a very small number of people – and sod the consequences. I think it’s called capitalism. The sad thing is that all the main political parties are promoting getting that same system back on its feet and starting the ball rolling again.

    • Paul
      Posted May 2, 2009 at 10:13 am | Permalink

      Matt,

      It really is very very simple. In a free capitalist system the rates are set by the market ( ie the customers ) on a supply and demand basis.

      In our current system our rates are set by political interference to artificially make the economy grow. Yes a lot of greedy bankers took advantage of the access to “cheap money” as did you if you have a mortgage or other loans. For those that go on about more financial regulation you only have to implement the existing rules. The RBS take over of ABN Ambro is a case in point. This broke virtually every rule in the book but it was allowed to go ahead by the Secretary of State for Business ( a politician remember).

      When Clinton ( a liberal politician ) repealled the Glass-Stegal act in 1999, that was the signal for Wall St. to go overboard on cheap money.

      Stop blaming capitalism for all ills until we actually have a capitalist system and can see if it works or not.

  19. TomTom
    Posted May 1, 2009 at 2:18 am | Permalink

    Deposit interest rates sink towards 0% and Credit interest rates move towards 30%…..no doubt the economy will stagnate in a Liquidity Trap before long

  20. Waramess
    Posted May 1, 2009 at 8:08 am | Permalink

    Common sense left the banks and many of the buiding societies when they became marketing companies, and they became marketing companies run by marketing people as a result of the massive credit expansion during the years of Nulabour.

    Banks’ leverage metamorphasised with the active connivance of the Bank of England to Disneyland levels

    Nobody gives pause to wonder why banks had been successful organisations for many hundreds of years and then made such a horlicks of it over the last ten years.

    The banks are not children and of course they must take some responsibility but the original sin was committed by this government and the Bank of England. Let us not be misled over the cause by this wreched leader of ours.

    • Lola
      Posted May 1, 2009 at 1:29 pm | Permalink

      Seconded. And, from the current experiences of my business (financial services) and its clients, I can also categorically state that the banks are increasingly out of control, especially the nationalised ones, LloydsHBOS and RBS.

  21. Bazman
    Posted May 1, 2009 at 9:14 pm | Permalink

    Credit card companies lending money at 30% plus interest rates and talking it up, with base rates the lowest ever. Says it all.

  22. adam
    Posted May 2, 2009 at 8:51 am | Permalink

    I agree with the general desire to make some changes to the financial system.
    We cannot have a situation where every time there is a recession the government has to put huge sums of money at risk to stop the worlds banking system collapsing in a chain reaction.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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