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Can I Borrow Some Money Please?

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The Funding for Lending Scheme (FLS), or Whose Money Is It Anyway?

We in the UK currently have a coalition government, dominated by the Conservative party. A party supposedly dedicated to the capitalist ideal of free enterprise and of people taking responsibility, by providing for themselves. Is this still so? I am beginning to wonder, At least one current policy; the Funding for Lending Scheme (FLS), is giving me cause to doubt.

Launched by the Chancellor of the Exchequer, George Osborne, in July 2012, the FLS gave banks access to cheap public (not government as so often, inaccurately, stated) money. The intention is that this money be lent out as business loans and mortgages, to help start the economy growing again. In a week where it has been back in the news again, little appears to have been lent out by the banks; their reserves have grown.

One of the biggest impacts of the FLS seems to be an unintended consequence on a fair number of the population, who have tried to do exactly what the Conservative party encourages; provide for themselves in retirement. This scheme is making that much harder.

Before the FLS was started interest rates were already at an historic low, the Bank of England base rate (at the time of writing) is still only 0.5%. With this injection of public money into the banks, they do not currently need savers’ money as they normally would, and so are not offering a reasonable rate of return, the interest rate, to attract money in from investors. Even on medium to long term accounts, it is hard to find anything paying better than 3%, before tax. This means that older savers, who have prudently saved throughout their lives, to provide for their retirement now get hardly any interest on their savings; interest which they rely on to provide income in retirement. This low income is not, unfortunately, the end of their woes.

With such low rates, some savers will have to draw down on their hard saved capital to top up income. This, of course, just makes matters worse because as the capital depletes the little income from interest drops even further. Once the capital depletes significantly, even in the future when interest rates, hopefully, rise again, income will not rise because the reduced capital generates less interest. The government’s policy is taking away incentive to save and for people to try to make provision for themselves, apparently a contradictory position.

So who are winners under FLS?  News media seems to suggest that not much has been lent out from the FLS by the banks so far, so appearance might suggest the only winners are the banks, bankers and shareholders.

  • The public loses, because the money sits in bank coffers, doing nothing useful.
  • Home-buyers lose, at least the majority of them, because they still can’t get a mortgage.
  • Lending to business does not appear to have increased. 
  • Savers lose because interest rates are derisory.

And the banks:

  • Reserves are improved.
  • They don’t need to pay interest to savers.
  • Profits do not seem to have suffered.
  • Bankers all still seem to get bonuses greater than most peoples annual salary.
  • Banks’ shareholders still seem to get dividends.

And all of this for the financial institutions who, at least in part according to news reports, created the problem. Yet again it seems like the only winners are … the banks.

Or perhaps you think differently?

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