Saturday, January 17, 2009

Storing Up Solvency

Will savers save the banks? I've posed the question before - BCC: before the credit crunch. The latest Quarterly Economic Commentary from the ESRI is projecting the level of personal savings will more than double from €3.6 billion in 2007 to €8.3 billion in 2009. I suspect it will go higher, not least because of the 'precautionary motive' now driving consumer attitudes towards spending and saving. Interest rates are academic: preservation of capital and access to an emergency fund in the event of a job loss are the dominant drivers of savings behaviour at present.

This means that the banks will experience a massive inflow of resources over the coming months and years. Inflows that will likely dwarf any injections by the Government as part of any (more) bailouts. The same is happening in the United States, by the way, leading some commentators to suggest that the uptick in US savings is bad news for China and others enjoying trading surpluses with America.

Should the Government go further and set out to deliberately stimulate savings? I'm not sure: I'm no Keynesian but it is fairly obvious that if you encourage consumers not to spend then you end up with a sharper contraction in aggregate demand than is inevitable or desirable (the key point in a fascinating interview with Steve Fazzari over at Econtalk). On the other hand, it certainly could be a relatively painful way to help the banks get out of their current mess and to restore their tier 1 capital ratios and balance sheets.

I have some sympathy with the Irish Congress of Trade Union's call for a National Recovery Bond, a revamped form of the SSIA (something I suggested before myself). And I certainly would like to see an end to the 'corporate welfare' that they highlight. Needless to say I disagree fundamentally with their thoughts on raising income taxes.

But taxation could play a part: I'd like to see the Government suspend DIRT - deposit interest retention tax - for a period of 3 years, if only to provide some support for those people (usually pensioners) who rely on interest from savings as a critical part of their income. Something they're not getting a lot off right now - nor are likely to for the foreseeable future.

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