Savers are benefiting from the recession

Contrary to popular opinion, many savers are actually getting a better return at the moment than they were two years ago.

Hundreds of millions of people in the largest developed economies borrowed ridiculous amounts of money from the banks, which in turn lent them money that didn't exist, and then re-sold the debts to each other in complex packages they didn't understand.

Then, in the second half of 2007, banks stopped trusting one another, which put a stop to all inter-bank lending, and this, still today, seriously caps the credit available to businesses and consumers. That's how the credit crunch turned into a global recession.

One of the biggest effects has been a huge slump in interest rates, for which savers aren't happy. I'm going to explain why many of them should be more delighted with their savings rates of 2.75% than they were with their rate of 6.5% two years ago, and that they should be giving credit to whoever caused this, not castigating them.

Who caused low interest rates?

In the majority of reader feedback, most savers blame borrowers for their falling savings rates. It is borrowing that was the starting point of these troubles, after all. Borrowers in turn blame banks, because banks are supposed to be the professionals who know better than to lend to people who can't afford it.

My view is that it is unquestionably the fault of governments, banks and regulators, and that borrowers should take none of the blame.

The first reason is that you cannot expect the average borrower to understand the effect that millions of people borrowing too much money has on the economy and on interest rates.

The second reason is that you can't blame borrowers for failing to manage their finances successfully. You can't expect everyone to be good with their money in the same way you can't expect everyone to be good at cooking.

It's like a lawyer complaining that his doctor can't sew; the doctor complaining that her accountant can't navigate; the accountant complaining that his mechanic can't use the internet properly; the mechanic complaining that his vet can't put up shelves; the vet complaining that her plumber can't handle other people's psychological problems; and the plumber complaining that his lawyer can't drive.

Sewing, navigating, computing, driving: these are all useful skills, but we can't all be good at all of them. That's people. Personal finance is the same. We shouldn't expect everyone to be good with money. Indeed we should expect millions not to be. Millions don't know how to give first aid either, but all of us will have times in our lives when such knowledge will be useful to us and to people around us.

Over-borrowing comes from lack of regulation to stop irresponsible lending; from government policies that encourage borrowing beyond our means; and from a financial-education black hole in secondary schools. (Poor curriculum is why many of us don't know first aid and can't cook, too.)

Savers with mortgages are now better off

Regardless of who you think is responsible, many savers should be rejoicing, not angry. Despite lower interest rates, a lot of you are better off. Take a look at this table, in particular at the last column:

Savings interest versus inflation

Data from the Bank of England, National Statistics, and lovemoney.com. The savings rate used is the best easy-access account rate available at the time, excluding accounts with nasty catches.

The last column shows that since just before the credit crunch (Jul 07) till April this year, savings rates have increased when compared to RPI.

RPI is the Retail Prices Index, which is a measure of inflation (rising prices). The last column in my table is saying that, although the savings interest rate has fallen, the interest you earn is growing even faster than prices are rising.

The Retail Prices Index is the most comprehensive measure of inflation which includes mortgage interest payments. This means that its people with mortgages who are better off.

Before the crunch, back in July 2007, savers with mortgages were being paid 6.5% interest, which means they were receiving 2.5 percentage points more than the inflation at that time. After tax, everyone was breaking even or making 1.2 percentage points above inflation.

Now, the best instant access savings rate is 2.75% from ING Direct. (I'm using easy-access rates for consistency.) This is almost 4 percentage points lower than the best savings rate in July 2007.

And yet after tax, we're all now earning at least 2.4 percentage points above inflation - because inflation has plummeted. Hence, in real terms, savers are actually getting richer faster now than two years ago.

Savers without mortgages are worse off

On the flipside, savers without mortgages will have been getting gradually worse off since last summer.

The other measure of inflation in my table is CPI - the Consumer Prices Index. This excludes mortgage interest payments, so it's the best measure of inflation for non-mortgage payers.

Pre-crunch, you were making 4.4 percentage points more than inflation (which, depending on your income tax band, is 1.9 to 3.1 percentage points after tax).

Now, you're making just 0.45 percentage points. (A loss after tax: -0.1 to -0.7 percentage points.) Your savings are now growing more slowly than inflation. Hence, you're losing money.

Of course, these are all averages. Using these figures we can say that most savers with mortgages should be better off, and most savers without mortgages worse off, but it depends exactly what you spend your money on.

Some things have changed in price more than others, and some things have even risen in price.

Will it last?

It may be that the problems caused by too much debt will eventually catch up with savers who have mortgages, and maybe it'll get even worse for non-mortgage holders. For now, though, savers with mortgages should be giving whoever they think is responsible a pat on the back.

> Compare savings accounts through lovemoney.com