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Silver lining in the cloud of the PPI mis-selling scandal Silver lining in the cloud of the PPI mis-selling scandal
(about 1 hour later)
Every cloud has a silver lining and PPI may be no exception. Every cloud has a silver lining and PPI may be no exception. There's been talk in recent weeks about the case for the government organising "helicopter drops of money" as a way of preventing a sluggish economy drifting into outright deflation. Put simply, the idea would involve Sir Mervyn King printing money so that George Osborne can write us all nice fat cheques to finance a Christmas spending spree.
There's been talk in recent weeks about the case for the government organising "helicopter drops of money" as a way of preventing a sluggish economy drifting into outright deflation. Put simply, the idea would involve Sir Mervyn King printing money so that George Osborne can write us all nice fat cheques to finance a Christmas spending spree. Using the full force of his office, the governor last week thundered his disapproval for any plan that would involve handing large dollops of non-recoverable cash to consumers. It would, he argued, be dangerously inflationary and expose the Bank to the risk of going bust. King can sleep easy in his bed. At the moment, there is no need for the Bank and the Treasury to consider helicopter drops because they are happening anyway, courtesy the high-street banks who fleeced their customers with Payment Protection Insurance and are now having to put billions into compensation pots.
Using the full force of his office, the governor last week thundered out his disapproval for any plan that would involve handing large dollops of non-recoverable cash to consumers. It would, he argued, be dangerously inflationary and expose the Bank to the risk of going bust. The FSA says £6.5bn has been paid out since the start of 2011. Lloyds Banking Group alone has handed out £3.7bn. Total provisioning for PPI claims already stands at more than £12bn but is likely to go higher, to at least £15bn. Assuming that two-thirds of the money set aside by the banks is eventually paid out to customers, that would represent a £10bn potential demand boost.
King can sleep easy in his bed. At the moment, there is no need for the Bank and the Treasury to consider helicopter drops because they are happening anyway, courtesy of the high street banks who fleeced their customers with Payment Protection Insurance and are now having to put aside billions into compensation pots. Put another way, PPI compensation is the equivalent of George Osborne standing up on budget day and announcing that for one year only the basic rate of income tax is being cut by two pence in the pound. In the context of a £1.5tn economy, £10bn in PPI compensation is modest – but big enough to explain why consumer spending has been stronger than expected in recent months.
The Financial Services Authority says £6.5bn has been paid out since the start of 2011. Lloyds Banking Group alone has handed out £3.7bn. Total provisioning for PPI claims already stands at £13bn but is likely to go higher, to at least £15bn. Assuming that two-thirds of the money set aside by the banks is eventually paid out to customers, that would represent a £10bn potential demand boost. The average PPI payout is £2,000-£3,000, a tidy windfall following years when living standards have been under severe downward pressure. Big-ticket items such as sales of new and second hand cars are benefiting as consumers decide they have had enough of belt-tightening and give themselves a treat financed with a PPI payout.
Put another way, PPI compensation is the equivalent of George Osborne standing up on Budget Day and announcing that for one year only the basic rate of income tax is being cut by two pence in the pound. In the context of a £1.5tn economy, £10bn in PPI compensation is modest – but big enough to explain why consumer spending has been stronger than expected in recent months.
The average PPI payout is £2-3,000, a tidy windfall following years when living standards have been under severe downward pressure. Big ticket items such as sales of new and second hand cars are benefiting as consumers decide they have had enough of belt-tightening and give themselves a treat financed with a PPI payout.