It takes a special style of incompetence of the sort that only a Governor of the Bank of England with no experience of the real world can have to talk about reselling QE assets back into the market at this stage in the current economic cycle, but that's what Bank of England Governor Andrew Bailey did yesterday. As Bloomberg reported:
Bank of England Governor Andrew Bailey signaled a major shift in the central bank's strategy for removing emergency stimulus, stressing the need to reduce the institution's balance sheet before hiking interest rates.
Writing for Bloomberg Opinion, Bailey said such a plan would give officials more firepower in future crises. The BOE's balance sheet has swelled to almost 700 billion pounds ($864 billion) because of its extraordinary measures during the coronavirus pandemic, and is set to grow much larger because of the central bank's bond-buying programme.
While the governor didn't say whether he favors paring back that program or its lending facilities first, asset purchases make up the bulk of the BOE's balance sheet.
And for asset purchases, read gilts (government debt) bought under the QE programme.
In case the reason why this is inept is not clear, let me explain.
The supposed purpose of QE is to inject money into the economy to encourage riskier investment and so stimulate growth, spending and more jobs. It has deeply unfortunate side effects (and a Mythbuster on this is, I know, overdue but give me time) but whatever its faults it has most definitely helped keep the economy liquid when little else has.
And what Bailey is doing is talking about selling some of these debts back into the financial markets. There are a number of consequences.
First, this takes the Bank of England out of play as a funder of the government: from then on spending has to be financed by tax or borrowing from the markets. And at the same time that the cost-free option of the Bank funding the government is removed the government will have to compete with its own Bank for funds, because it will be seeking to sell pre-existing debt back into the market.
That then means, secondly, that the Bank of England will be working against economic recovery - which most economists think is many years away as yet - by withdrawing funds from the economy in exactly the same way as a a tax charge does, and will double the impact of that by refusing to fund the government at the same time.
Whilst, thirdly, this is presumably a plan to increase interest rates to keep the banking sector happy - which will add yet more pressure to the barely managing households of the millions of people who may well be unemployed this autumn and who will be forced to stay in that state by a policy such as this.
So what does a policy plan such as this represent? It's possibly incompetence. And remember Bailey said only a few months ago that the Bank would not fund the government and within days was forced to do so.
Or it's callousness, because of the indifference it reveals about people in the real economy.
But what it also shows is that he has no clue about the realities of the balance sheet he is supposedly managing. His balance sheet is too big if there is inflation. But there is no chance of that right now. And it is too small if there is unemployment, of which there is a racing certainty. So he is offering exactly the wrong policy prescription for this moment.
Heaven help us with such incompetence in charge at our supposedly independent Bank of England.
If I seek a bright side it is that he makes a good case for removing that independent, but that's struggling to find an upside to dire situation.
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When I saw the report in the Guardian last night I gasped and thought I wonder what Richard will have to say about this. Do we really gave to watch this disaster unfold? Is there no one at hand to offer advice? I was always dubious that the pandemic would change anything. Now I know it will only get worse.
What makes this even more laughable is that Bailey is acting as if we had the Euro here and the ECB was our central bank, because as I understand it, those idiots make States sell their bonds into the private sector, and denude sovereign States of the ability to ‘auto-finance’ and control the cost of their borrowing.
BREXIT indeed! Boris crows about taking back our country but is content to follow the ECB’s own practices when it suits his funders in the City.
Doing things the Bailey way risks the cost of the borrowing going up doesn’t it, because the private wanking bankers could trade the bonds and bid up the price?
My personal belief is that Bailey and his mates (including Boris and his cabinet) know exactly what they are doing.
This is disaster capitalism writ large to me. It’s simply about destroying things and redistributing the outcomes upwards.
PSR, re your final two paras, I expect you may well be right with an added soups of imbecility. When I read it, I thought, oh no, here we go again. What I don’t I understand is how the rich think they can protect themselves after they have destroyed everything else. It seems self-destructive to me.
I saw the story that Bailey had said the country ‘nearly went bust’ just before I turned off my laptop yesterday evening, and I said to myself, Richard will be all over this story by tomorrow morning.
I too couldn’t believe the absolute nonsence of what this man was saying. Then again, Private Eye has been commenting on how useless he is for some while. But what matters is he’s an ‘insider’ – steeped in doing exactly what his mates in the banking and finance sector want. And he’s also a man with no spine, which is exactly the type of person Johnson likes to surround himself with. In short, he’s suitably qualified to be Govenor of the BoE at this point in our history. Indeed, he makes his predecessor, Carney, look like a paragon of virtue and a great thinker, neither of which he was, but at least he was largely up to the job of Govenor, even if I didn’t think much of many of his decisions.
Making Carney look good is some achievement – but he most certainly does that
Shockingly ignorant.
An article in the Guardian yesterday about an interview on Sky News is headlined “Britain nearly went bust in March says Bank of England”….. what is he thinking?
It’s staggering – see the tweets…
Andrew Bailey – Bank of England Governor, 35 years’ experience working within the Bank of England.
Richard Murphy – Blogger, 35 years’ experience of telling other people they are wrong.
Which do you think is ‘real world’ experience?
You have my CV very wrong..
It doesn’t help your case
In fact, it shatters it
Sorry Richard, how many years do you have in telling other people they are wrong. Is it less than 35?
As far as I know I actually always put forward solutions
You clearly don’t
Now go and be obnoxious elsewhere
I think James what you meant to say was:
‘Andrew Bailey — Bank of England Governor, 35 years’ experience undermining the legitimacy of the Bank of England’.
For goodness sake Benjamin what a silly comment most people thought the sun orbited the Earth at one stage! Do you actually have anything useful to say by way of argument why Andrew Bailey is technically right and Richard Murphy wrong?
I think it can be safely assumed he has not
I thought of you, Richard, when I saw the Guardian article.
According to the Guardian, the BoE plan is the roll back QE rather than raise interest rates. Austerity BoE style. This effectively shifts the debt from the BoE books to the private sector. As we know that always works out well!
I wonder if anyone would bet on interest rate reaching 5% by 2050?
I wouldn’t….
[…] have already noted the incompetence of the Governor of the Bank of England once this morning, Let me do so again. As […]
“If I seek a bright side it is that he makes a good case for removing that independen[ce]”.
Ah, well. I saw something slightly different.
“In March, disorderly conditions reached the core financial markets, posing a very real threat to the stability of the financial system – by far the most serious threat since the global financial crisis. Underlying this disorder in markets was an economic downturn almost unprecedented in both its scale and pace.
The response has included a major program of asset purchases and lending by central banks, with a corresponding growth of balance sheets. This has been the right thing to do to reduce borrowing costs, boost cash flows and more broadly support economies, and it has shown how essential it is to have truly independent central bankers.
…..
Effective economic policy requires well-defined and strong institutions, which are transparent and accountable. Independent central banks are an important part of this institutional structure. Far from calling into question or suspending that independence, this episode has called for a response from central banks that’s only possible because their independence gives them the freedom to operate. As a result, they’ve made big decisions and implemented them rapidly in the face of an unparalleled crisis, coordinating with governments to maximize policy effectiveness. This capacity to act must be reinforced and not mistakenly called into question.”
I confess I was a little surprised by the immodesty displayed by the Governor. The word ‘government’ is only used twice, and not in a decisive context; the undisguised institutional at least, self promotion fascinated me. In Westminster ideology will now confront its innate and insatiable vanity. I thought he was claiming that it was the BofE that rescued the country in the heart of the crisis moment, with QE. He seemed to me, at least by implication to be saying, the Government was absent without leave in a crisis; presumably hiding out at the nearest grace and favour country house. There was no Gordon Brown at the helm this time with (okay, give the sanctimonious old bore his due), a steady nerve in a national crisis. Easy target this time; it is after all only Boris Johnson in Downing Street.
Conclusion I would draw from this hypothesis? Maybe he should be watching his back.
The bizarre fact is that QE is always Treasury approved. It is nit actually a BoE decision at all when it comes down to it
He’s actually just playing the pompous little man role
A Captain Mainwaring if ever there was one
Richard,
I believe you are being far too generous in suggesting incompetence.
In my humble opinion, this is the government getting their ducks in a row and starting the propaganda campaign to set us up for another bout of austerity.
Referring to an earlier post of yours this week, this is why Sir Keir, the Labour Party and all progressive parties need to get their act together and propose a different vision as soon as possible. Competent managerialism will not be enough.
I entirely accept the possibility
But from the outset it has to be made clear that this us incompetent
I think when we see Keir Starmer taking on Andrew Bailey and explaining why technically Bailey is wrong in his monetary system understanding then we’ll know which side Starmer’s on! Frankly I don’t believe this will ever happen and will confirm my belief the UK should currently be seen as a “Clown Democracy” where the level of understanding by many politicians and voters on so many aspects of human life but particularly economics and monetary system workings is at an all time low.
It’s like a dirty little secret he must keep to himself and those around him; that the Bank of England is …a bank , the government’s bank, and when the government needs more money to be created, it’s bank goes right ahead and creates it . If the increase in the number ( approx 3000 ) of views of our little film ( Money for Nothing ) over the last three months is anything to go by some ordinary folk are wondering how it is that the government can suddenly be paying the wages of furloughed workers and supporting businesses with interest free loans just like that.
Keep going …
I propose Richard for the next Governor of the Bank of England! *wink!*
I didn’t see the actual interview but I did see the papers review on the BBC late last night and the pundits were aghast and said that he was “stunningly ignorant”. So it didn’t go unnoticed at least.
https://www.bankofengland.co.uk/news/2020/april/hmt-and-boe-announce-temporary-extension-to-ways-and-means-facility
why don’t they use this more often rather than gilts?
I think Bailey would rather resign…
I read the article in the Guardian after reading this. It read like someone with a saviour complex (“the government would have struggled to finance the running of the country without support from the central bank”). Overall, the article seems to be: BoE good, Govt bad, as though the BoE was the saviour of the govt and by proxy the people. Phew, we narrowly missed insolvency.
And then there are curious slips, like “the government would have struggled to fund itself in the short run.” Letting the cat out of the bag that the govt funds itself, and that the problem would only be short-term. And also the comment “the country would still have had options available to avoid effective insolvency”. So, the UK avoided an insolvency that would actually have only been a “short-run [struggle]” and that wouldn’t have happened anyway as there were other “options available”. This is actually a self-glorifying non-story, which in summary is: “BoE Governor says he stopped something happening that wasn’t going to happen anyway.” In the MSM, journalism is gasping its last breath. I’ve heard this described as “he said, she said” journalism, reporting the words, but not investigating the truth claims. It’s also called PR or propaganda. How article writers can’t see framing and read into what’s said and how, and miss internal contradictions that give the lie is staggering. They also ignore context – what has the BoE governor been saying about financing government?
The government can always fund itself – because it owns the BoE
As you say, his saviour complex denies this reality and that he did what he was told
It’s nit just he’s wrong
His attitude in saying it is also repugnant
I think I am right in saying that of the £700 billion on the Bank of England’s balance sheet, around £500 billion was a consequence of the quantitative easing around the 2008 financial crisis. Since then that £500 billion has been on the balance sheet and, lo and behold, the sky has not fallen in. Can the Governor explain this remarkable situation?
Good angle
‘the sky not falling in’ is one I have used at our office – along with ‘since when have we ever reduced the national debt’.
These small pithy statements do have quite an effect on people, and, given that most people do not want to really think; the one liners are incredibly useful.
I like both
Is that 500bn figure right though? A BBC News item of 18/6 “What is quantitive easing and how will it affect you” has a bar chart of the use of QE since 2009 showing only 200bn for the 2007 crash, but from 2012 onwards, 175bn for the Eurozone debt crisis, 70bn for the Brexit referendum and 300bn for the current crisis. Is this version accurate?
The total is now technically £745 billion of which £10bn is corporate debt
Some data is here https://www.taxresearch.org.uk/Blog/2020/06/02/mythbsuter-the-uk-national-debt-is-heading-for-100-of-gdp/
I think that Andrew Bailey knows exactly what he’s doing.
The thing about tories (of which he is obviously is one), is they want inequality to increase. They want the rich to get more, and the poor to get less. For many Tories with lots of money in the bank, the last several years has been depressingly unfruitful. They don’t want to risk their money, they just want it put in a high interest account, and live of the earnings.
If you want a bit more money for nothing, one way to do this is:
1 – flood the market with gilts, pushing down the value, and hence increasing the return.
2 – the rich will surge to buy them with funds that are in risky investments, with a downturn well underway.
3 – profit!
So, this is what he’s doing. Providing a way for the rich to get out of this risky market.
The less well off? pfff… since when did the Tories give a damn about the bigger picture.
Also, the article in the Guardian yesterday where Andrew Bailey talks about how the UK almost went bankrupt in March. Well, this is nothing but pure propaganda – the government wants to sell off public land, they need to give the public a reason why they have no choice.
Hanlons razor says “Never attribute to malice that which is adequately explained by stupidity”. I don’t think he’s stupid at all. This is all pure malice.
Horrible.
I am not sure your economic logic quite stacks Without some clarification – technically they are forcing gilts back into the market – but the political one does
Yes, they would be forcing gilts back into the market.
Which will lower the price of gilts since more supply.
Accepted
Mr Weston,
I am not sure you are right in this particular case, but I tip my hat to your impeccable logic.
Never assume stupidity, of that which is better explained by malice.
I believe this is the interview in question https://news.sky.com/story/coronavirus-governor-says-bank-of-england-saved-britain-from-effective-insolvency-12012369
It’s conducted largely by Javid, oddly enough. Someone who ought to know and be pointing out straight away that Bailey’s talking rubbish yet isn’t, along with Sky’s Ed Conway, who similarly ought to understand the absolute nonsense of what’s being communicated here. This for me confirms the suspicion this is indeed simple propaganda for the masses and is setting the stage for endless austerity. According to Conway it contains gems like this “Mr Bailey, who started as governor as the crisis began, talked extensively about the early days of the economic crisis, when markets were in freefall and for a period it looked as if the government would not be able to sell its debt to private investors, something unheard of.” He’s never heard of how the the UK’s entry into the 1st World War was funded then. It’s a must-watch. It’s deliberate, all of it, I’m sure. Our nation of bellowing low-browed doormats and idiots are being handed the excuses they seem to want to bury themselves with. Hurry up Irish passport!
Meanwhile, here reported as if unelected advisors making the law were the most natural thing in the world, Cummings promises an end to austerity and to take an axe to planning laws. So, Javid and Bailey in one camp then, and Sunak/Cummings in the other. Time to order more popcorn while I’m waiting for that passport… 🙂
https://www.thetimes.co.uk/article/ill-take-axe-to-planning-laws-says-cummings-bwn5j3b88
Did Cummings say this while he was tickling BoJo’s belly?
Well said Bill. The whole thing was BS . Javid had a look on his face that said ‘ Really , is that how it works, I know I wasn’t Chancellor for long, but no-one told me ‘ and Bailey looked like he was the headmaster with two sixth-formers giving them a tutorial about a subject other than the one they thought they were studying. Like I said in a previous comment on this post the dirty little secret that is money creation must never be allowed to seep into the public’s consciousness.
Because if they work that out, they’ll soon be asking, why are we paying interest on money creation? And that will be the end of so-called western civilisation. Sooncome, one hopes 🙂
[…] My thoughts on Twitter this morning all relate to my concern that the government is getting yet another aspect of this crisis very wrong. It's talking about reopening, and the Governor of the Bank of England is even talking about returning to what he sees as normality. […]