Incompetent And Reckless Bankers

"An apology is due for the incompetent and reckless Board strategy; merely apologising for having failed to plan for an unforeseeable event is not much of an apology."

The Parliamentary Commission on Banking Standards has given the HBOS Three a richly deserved public roasting:

"In the view of this Commission, it is right and proper that the primary responsibility for the downfall of HBOS should rest with Sir James Crosby, architect of the strategy that set the course for disaster, with Andy Hornby, who proved unable or unwilling to change course, and Lord Stevenson, who presided over the bank’s board from its birth to its death. Lord Stevenson, in particular, has shown himself incapable of facing the realities of what placed the bank in jeopardy from that time until now."

The Commission reckons none of the three are fit and proper persons to work in the UK financial sector, and given the disaster they've visited on us, they should rightly be broken to the ranks. We trusted them with our savings and they gave us financial Armageddon.

But of course, when it comes to incompetent and reckless bank strategies, the HBOS Three were hardly alone. It's now clear that during the bubble years large swathes of the banking sector were following a similar course. And even worse, it didn't end with the Crash.

Take Britain's most important bank. For the last four years it's been pursuing a strategy which by all previous tenets of sound banking practice has been reckless in the extreme. It's pumped up its balance sheet with assets of dubious long-term value, repeatedly glossed over its failure to achieve its key performance objective, and has just replaced its failed CEO with an outsider who, far from calling a halt, seems set on behaving even more recklessly.

Yes, the Bank of England now owns one-third of HMG's dodgy National Debt (purchased at the top of the market and denominated in a rapidly devaluing currency), has spectacularly failed to keep inflation down to 2%, and has headhunted a new Governor who's ready to let rip.

Our savings are being incinerated at an alarming rate. Since the Bank cranked up its QE printing press four years ago, the interest rate on High Street savings accounts has averaged under one-quarter of one percent. Over the same period the Bank has delivered an inflation rate well in excess of 3%, even higher than its official target of 2%. As a result the real value of your savings account has plunged by nearly 14%:

Just like HBOS, we trusted them with our savings, and they've repaid us with incompetence and recklessness.

What's that? They intended all this? They intended to crank up inflation and to whack savers? You mean... they've behaved even worse than Stevenson, Crosby and Hornby?

You know, now I come to think about it, you could be right. Here we are with a deeply indebted government, busted banks stacked high with dodgy assets, and millions of households who have borrowed more than they can ever afford to repay. A good dose of inflation would help them all, clearing their debts, and getting them back into the spending mood. Savers suffer of course, but hey, if savers won't spend their money, then they only have themselves to blame if they lose it to those who will.

The reality is that if you're sitting on a UK savings account today, you are a mug. All around the world central banks are intent on stoking inflation higher. The Fed and the Bank of England have been doing it for a while, and this week the Bank of Japan joined them: in the words of the FT, they have "opened the floodgates".

And it's not difficult to see why. The Japanese have had two decades of very sluggish growth, and the western economies now seem to be facing the same thing. The idea of a global savings glut has taken hold, with Chinese households now reportedly saving 50% of their incomes rather than recycling their soaring earnings back into consumption. China exports far more to the west than we export to them, which has the effect of sucking spending power out of our economies. The Chinese refuse to let their currency rise to its correct level, so they run a huge balance of payments surplus. The money comes out of the pockets of western consumers, into the hands of the Chinese central bank, and is then parked in US Treasury bonds and other financial assets back in the west. Rather than spending it, the Chinese just sit on it.

In the circs, nobody wants to see western savers also sitting on their cash - their patriotic duty is to spend it, and if they won't spend it, then they should not complain if it gets confiscated via inflation.

Of course, as world inflation cranks up, those Chinese savers will also lose. The real value of China's overseas assets will be eroded, and because of their fixed exchange rate, higher inflation outside China will spill over into China itself. Sooner or later the Chinese authorities will be forced to let the currency float up to its correct level - which is almost certainly part of the western agenda here.

But none of that is going to help UK savers. Ever higher inflation is on its way, and they cannot expect High Street interest rates to keep pace. Not for the first time, savers are being sacrificed to The Greater Good.

PS What would I do? Very tricky, but you need to get that cash into assets that have at least a chance of  protecting you against inflation: index-linked, equities, gold, and property. The problem is that prices are already pretty high across all those areas, and that old standby of Index-Linked National Savings Certs is no longer available (I wonder why).

PPS Long-time Labour insider Dennis Stevenson was of course the man Blair put in charge of choosing the People's Peers (see this blog). He brought his customary arrogance to that role, and not much seems to have changed. Once, long ago in a previous life, I attended a business lunch with him. He was keen that we understood he had the ear of the then PM, and he came across as... well, arrogant.