Larry Elliott had an article in the Guardian yesterday that addressed themes familiar to readers of this blog. He said:
There is nothing stopping the government finding £1.3bn for a new supercomputer and AI research, just as it is perfectly feasible to abolish the two-child benefit limit and to raise the social care cap. It could even do so without changing the fiscal rules provided it is prepared to stop paying banks interest in full on the balances they hold at the Bank of England.
As he noted:
Here's what going on. Since 2006, the Bank of England has paid interest on the reserve balances of commercial banks as a way of setting interest rates for the whole economy. The idea is that the banks won't be inclined to lend to their customers at a lower rate of interest than they get from the Bank of England.
As he then notes:
Initially, this had little impact because the reserve balances of the commercial banks were small. But the balances ballooned as a result of two big waves of bond-buying by the Bank of England, firstly during the global financial crisis of 2008-09 and again in response to the Covid-19 pandemic in 2020.
For more than a decade, the potential costs of remunerating reserves were hidden by low interest rates. Official borrowing costs were reduced to 0.5% in early 2009 and stayed pretty much at that level for the next 12 years. For a £2.5tn economy, paying £4bn-5bn a year interest on the commercial banks reserves was chicken feed.
But then rates went through the roof. As Larry notes:
Threadneedle Street is now paying 5% interest on £700bn of bank reserves at cost to the exchequer of £35bn a year.
Larry then agrees with me on this issue, saying:
Interest rates could still be controlled by remunerating a fraction of the reserves of the commercial banks.
For example, if Reeves decided to pay interest on only one-third of the reserves it would save her just over £22bn a year and fill the “black hole” in the government's finances without the need for spending cuts or tax rises. She could also reduce the national debt by about £400bn at a stroke.
As I argue, other central banks – including the European Central Bank and the Bank of Japan – operate a system of tiered rates so it is perfectly feasible for the Bank of England to do the same.
But as he then notes, Labour is so frightened of the City of London that they will still pay. But as he concluded:
If the choice is between paying the banks 5% interest on their Bank of England current accounts or investing in the future it really should be no contest.
Somehow it is, though. Children and pensioners suffer. Banks profit, enormously. How often does this have to be pointed out?
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Given that my basic savings accounts with my bank only pay about 2% that seems like an excellent idea.
It would be interesting to be a fly on the wall if gov/Reeves decided to stop the payments & then met with the banks affected. The special pleading etc would be amusing.
The open question remains, how much influence do those that benefit from free money and interest payments on same have over a recently elected gov (with apparently an astro-physics backgorund) that claims to have discovered new black holes in the UK – of all places (joke/irony). It also begs the question when (if ever) will the MSM start asking the same to ministers? (likely response?: “oooh it’s above my pay grade luv” etc).
If it’s not astro-physics, or failure to understand double-entry accounting, that’s behind the “amazing” discovery of economic “blackholes” by Scammer & Co then it has to be “Principia Mathematica” which in turn justifies being anti-democratic:-
https://www.matchesinthedark.uk/new-keynesians-mathematics-and-democracy/
What’s the matter with this country with so many people living in a “dark age” of failure to think clearly about democracy and economics?
Might more accurate and prominent information about, and assertive regulation of, political donations and loans make our present questionable form of democracy less vulnerable to financial influence/control and so more equitable and efficient?
You and now Larry are right to raise this, it makes my blood boil.
When you think about how much money has been lost to councils and the NHS.
When you think that the private banks have been given an expanded line of state funded credit to play with so that they don’t blow the world economy up again AND that they benefit from a very quaint and outdated way of passing on interests rates to the market………well, its a win/win for the money masturbators once again!!!!!
Surely a different method of passing on interest rates can be created that means that the banks don’ t profit?
The way private banking works, you’d think the pound was THEIRS!!!!
That post you wrote recently Richard about a state ran bank?
Yes please.
“Surely a different method method of passing on interest….”
Yes, there is.
Instead of working on the rate paid by the BoE one could approach from the other direction. Every pound a bank holds at the BoE is borrowed from a depositor. In theory, competition should drive banks to pay interest at a rate close to what they receive from the BoE…. but in practice they don’t.
Analogous to the energy price cap, one could require banks to pay interest on deposits at (say) “base minus 1%” minimum. That would stop the banks trousering the money. The money could be recovered by tax measure like Richard’s investment surtax.
Neat
Fair to say the banks run the place, I’d say. To my way of thinking the Dutch bankers who ponied for the Glorious Revolution did so with exactly this in mind. While I agree money’s a great idea and very useful, we really shouldn’t be depending on banks to supply it, central or otherwise. They just rip all the other sectors off. What else could we do? Difficult for us to say, our having been conditioned from an early age to accept how we live as being normal. To gain a more informed perspective I believe we’d have to reach for the psychedelics, which is why despite their obvious beneficial clinical applications, they remain outlawed.
I don’t understand why neo-liberal economics took over from Keynesian economics. Were there good reasons in economics and its effects, or was it a movement led by conspiracy, or by fashion? Please Richard could you do a post on this?
Conspiracy
There had been very longstanding residual bitterness from the 19thC Tory ‘laissez faire” clique’ and through them pushback by corporate capital, which was certainly conspiratorial, but I think the egos of the competing economists, so firmly wedded to their own belief systems, and especially the intense personal desires of Milton Friedman to put one over on Keynes ideologically, even if post mortem, had a lot to do with it.
…,For example, if Reeves decided to pay interest on only one-third of the reserves it would save her just over £22bn a year and fill the “black hole” in the government’s finances without the need for spending cuts or tax rises. She could also reduce the national debt by about £400bn at a stroke…
Ok but…
How will the banks react?
How will the markets react?
Does the Bank of England force the commercial banks to deposit?
I assume if they withdraw their money what happens
You always go on about double entry book keeping where does the other side of these transactions that may result get posted
Eric
I have answered all these questions many times on this blog. I am not writing them again for you.
Can you send me a link if you believe you have already addressed my questions
You have written a lot, over an extended period of time and I do not understand what is the impact of what Larry proposes it sounds like money got nothing
You can search for the links as well as I can
Start with “tax research central bank reserve accounts” as the query
Clearly, banks will try and reduce Reserve balances in favour of interest bearing assets. But one simply has to require minimum balances on a bank by bank basis.
Now, the details are a bit tricky as any algorithm to decide what each bank must hold in unremunerated reserves may have unintended consequences for the real economy. So the answer is to go gently.