Well, at least you have to give the mandarins at the Bank of England points for honesty. They’ve actually admitted they don’t give a rat’s ass for the welfare of old people who had prudently hoped to live off income from their investments. Admittedly, the retirees might have been kidding themselves a wee bit, since the pre-bust interest rates had an modest inflation component built into their nominal yield, which served to compensate for gradual erosion of principal. But savers are now suffering because we’ve had not just a reduction in yields due to lower inflation but an even bigger fall due to central banks going into ZIRP-land, with the result that savers get paltry yields that are clearly in negative real interest rate territory.
This is the Bank of England’s version of the Charlie Munger “banks get theirs first, the rest of you suck it up and cope” message, courtesy the Telegraph:
Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.
They should “not expect” to live off interest, he added, admitting that low returns were part of a strategy.
His remarks are likely to infuriate savers, who are among the biggest victims of the recession. About five million retired people are thought to rely on the interest earned by their nest-eggs. But almost all savings accounts now pay less than inflation.
The typical savings rate has fallen from more than 2.8 per cent before the financial crisis to 0.23 per cent last month.
Mr Bean said he “fully sympathised”. But he continued: “Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”
He added: “Very often older households have actually benefited from the fact that they’ve seen capital gains on their houses.”
Yves here. So how exactly do old people “benefit” from capital gains in their houses? This is the sort of “house as a financial asset” walking dead idea that needs a silver stake plunged in its heart. In the old days, housing was a vehicle for forced savings and shelter. You took a 20 to 30 year mortgage when you were young, which coincided nicely with a normal time in the workforce, and then you retired mortgage-free, paying only more modest real estate taxes and upkeep. More job mobility and overly cheap housing finance encouraged people to refi and move a lot more often than was good for anyone outside the banking and real estate industries.
So the Bank of England is basically saying old people need to monetize their houses, which is probably NOT going to be in the form of putting on a home equity line. It means selling their house and moving into a smaller house or a rental. Do you know how hard that is for old people?
Now this is clearly the way the world is going. There is no denying that many people are continuing to make unpleasant adjustments to the post financial crisis world. But what is offensive is the cavalierness of these remarks. The Bank also gives happy talk that savers can expect high rates again, which given the continued fragility of the banking system, I wouldn’t bet on any time soon.
Funny, I knew there was a reason I ran a video of now 114 year old Walter Breuning over the weekend. One of his bits of advice was to keep working as long as you can, you might need some extra money.