I have posted this thread on Twitter this morning:
There is a story doing the news rounds this morning that Sunak has cost the government £11 billion by failing to manage government interest rates properly. But the real story is much worse than that. This is about banks winning at cost to us all, yet again...a thread to explain.
The claim being made is a relatively simple one, but technically it's a bit complex. I'll try to make this as clear as I can. It all revolves around quantitative easing, or QE.
QE has been used twice in UK history. The first time was after the financial crash in 2008. Between 2009 and 2013 just under £400 billion of QE was done. Another small chunk of QE was gone in 2016 because of the risks created by Brexit, bringing the total to that date to £445bn.
This form of QE had one real purpose, although the government never admitted it at the time. The intention was to put a lot more cash on the balance sheets of UK banks to prevent them going bust, as Lloyds, Royal Bank of Scotland, Northern Rock and others had done in 2008.
To do this the government did QE, which is a ridiculous process where the government issues new bonds (which are fixed term, fixed interest rate savings products by any other name, but which are quoted on stock exchanges so they can be bought and sold). It then buys them back.
The government issues these bonds to supposedly fund its deficits when it spends more than it gets in through taxes, although (like so much about the government) finances this claim is a lie.
The government need never borrow money to fund its spending because it has its own bank - the Bank of England - that can always lend the government the money it needs instead.
And if you wonder where the Bank of England might get the money from to fund this the answer is that it simply creates it. All it has to do is type two numbers into a computer.
One increases the government's loan account with it by, say £10 billion. The other increases its current account with the Bank of England by the same amount. And that's it. That's how it makes new money.
There is nothing odd about this, by the way. That is literally how every single penny of new bank lending in the UK is funded. You never borrow someone else's money when you tap your credit card on a card machine. New money is created by you and the bank every time you do that.
This is because all money is just debt, and all banks do is record the debts they owe to and from their customers. There is no money in a bank as such. There's just a giant set of accounts that records money owing.
The twist is that they charge you for the privilege of owing them money you did as much to create as they did.
To get back to QE. Before 2008 banks trusted each other to pay the money they owed each at the end of each day as they settled up the accounts between themselves as they paid out or received money for the customers of other banks.
And then after 2008 the banks realised how terrible they all were, and how untrustworthy they'd become and stopped trusting each other and basically demanded that there was more cash in the inter-bank payment system.
The inter-bank payment system is called the central bank reserve accounts that each UK bank and some other regulated financial services companies are required to keep at the Bank of England. In 2008 there was only around £40 billion in these accounts. It was not enough.
The government was desperate to prevent any more banks failing. So it had to boost the amount on the central bank reserve accounts. It did that using QE. It bought back the government bonds I have already mentioned. It did it by using new money created by the Bank of England.
The Bank of England then put that money in the central bank reserve accounts of the commercial banks. As a result those banks then paid the people who previously owned those bonds that had been sold back to the government.
Importantly though remember there is nothing physical about money. It's just debt. So, the banks paid out to their customers because the Bank of England promised to pay them, but that payment was not with the money the Bank of England provided.
Instead the commercial banks noted that the Bank of England (which is the only bank that can never fail, because ultimately it creates all money) had promised to pay them and so, in turn, they paid their customers.
But they don't pay their customer the Bank of England's money (or debt, which is what it is). Instead, the payment they make is actually a new record of debt from them to their customer, which they will make because they trust the promise from the Bank of England to pay them.
This is a long way around saying that the new money created by the Bank of England on the commercial bank's central bank reserve accounts stayed in those accounts. Pretty much they went up by about the same amount as the amount of QE debt repurchases.
The commercial banks were saved with money the government gave them and on which it paid interest at the Bank of England base rate, which has always been 1% or less since 2009, and until recently was 0.1%. The cost was pretty small. No one worried about it.
Then came Covid. And so did QE, again. But this time the deal was quite different. The Bank of England created new money that was spent by the government to simply keep the economy going. £450 billion or so of it.
This was paid out through the commercial banks and the central bank reserve accounts went up again, by near enough this amount, to reach near enough £900 billion.
To pretend that this was not happening i.e., to provide cover for the fact that the Bank of England was really giving the government all the money it needed and no Covid spending was coming from tax or borrowing the government and Bank of England pretended to do more QE.
This whole QE operation in 2020/21 is best described as a sham, or a lie. Each week after the government pumped money into the economy the Treasury issued new debt to pretend borrowing was paying for these costs. And within days the Bank of England then bought this new debt back.
So, the commercial banks or their customers were asked every week to buy debt, but they always knew that they would get their money back in days. That was the sham. This QE was put in place to pretend the national debt increased, but it did not.
From April 2020 to July 2021 99.5% of all new government debt was repurchased by the Bank of England to pretend new government debt was created when in reality none was.
Instead the Bank of England funded the Covid crisis. But the money it provided to the government had to get into the commercial banking system and that meant it was paid to those banks through their central bank reserve accounts, which grew as a result, to near enough £900 billion.
Remember what these central bank reserve accounts really are. They are in effect bank deposit accounts that the commercial banks hold with the Bank of England. They are nothing more complicated than that.
Critically though, the money in them was not the savings of the commercial banks. It was simply gifted to them by the government. Nothing more or less than that. The commercial banks were given this £900 billion by the government.
And the government paid interest on the gift as well. That was no problem when the interest rate was 0.1%. The cost was under £1 billion a year. But now it's 1%, and rising. So each year the government is now paying out £9 billion to the commercial banks.
The commercial banks have not earned this money. They are just being gifted it. And that cost is going to rise. Some bankers are demanding Bank of England interest rates rise to 4% or more. The annual gift to the banks might rise to more than £40 billion in that case.
So, at a time of austerity and because the government is letting the Bank of England raise interest rates (which is a wholly mistaken policy because that will just crush the economy when we're already heading for recession) and the UK's banks are cashing in, massively.
In effect, as people in this country go into deep poverty and debt the banks will have never made so much and all because the government literally gifted them £900 billion, much if to stop them going bust after 2008 and Brexit, and the rest because of Covid.
Money is not going to trickle up to those who deserve it least. It is going to flood in their direction. And although I've been saying this for some time, now people are beginning to notice. But, they have the wrong response.
They're making technical arguments, saying that Sunak should have issued than commercial banks with long term, fixed-rate debts last year so limiting the amount of interest the banks could earn. Well, maybe, yes he should have done. But he didn't, and hindsight is wonderful .
So what should he do now? There several things that could be done.
First, he could tell the Bank of England to cut interest rates. He needs to do so. These interest rate rises are going to cause recession in any case and will do nothing to stop inflation. But the Bank and conventional economists will yell and squeal and so he won't do that.
Second, he could tell the Bank to only pay bank base rate on, say, £100 billion of the central bank reserve accounts and the rest he could say should still be paid at 0.1%. This is possible. After all, the commercial banks pay almost nothing on the deposit accounts they provide.
Or, he could do a windfall tax on the banks. This could be at 90% on the money they are paid on their central bank reserve account balances (or even 100%, as they never earned these sums). That would solve the problem.
Any of those three options solve this problem and would stop banks from profiting as most in this country face a financial crisis. Will he do any of them? That is the ultimate test for Sunak. The people, or the banks? That is his choice to make.
Time will tell, but I fear he will favour the banks. He will say he can't do a windfall tax at those rates. And he will say he can't overrule the Bank of England, who he will claim are independent, which is another complete sham as they aren't.
And he will say we need interest rate rises because people have to be punished with a recession for the inflation they did not cause and which he is doing nothing to resolve.
But it need not be this way, and now you know why. Sunak can destroy the country by favouring the banks. But he need not do so. Please shout about that. ENDS.
POST SCRIPT:POST SCRIPT: It's been suggested to me that Rishi Sunak can't overrule the Bank of England. He can. Section 19 of the Bank of England Act 1998 lets him do so at any time.
UPDATE: After just three hours this has gone a bit ballistic on Twitter:
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Excellent set of tweets, Richard. Bang on target. Just one unfortunate typo in your second to last para: ‘published’ instead of ‘punished’.
Damn
Can’t be changed on Twitter
Can be here
“about the same amount as the amount of QE dent repurchases”. What does ‘dent’ mean?
Debt
Sorry – a typo
I wrote 1,900 words before breakfast
Great summing up Richard, but I doubt MSM will cover much of it. They are already parroting the huge borrowing we need to cut back line.
Why the charade? Why not just come clean and be transparent?
Because neoliberalism demands independent central banks and requires that the threat of debt to public spending be kept intact
Remove either and the neoliberal world begins to fall apart
Thanks, Richard. I ought to have known that, but for some reason … .
I’m glad you have posted this, Richard, because the whole thing has been puzzling me ever since I saw the news about it this morning.
I’d be happy to shout about it but it is fiendishly difficult to put into simple terms to people who still think that taxation funds spending and that the ‘deficit’ is all money borrowed from a person or persons unknown. I note that it’s taken you quite a long series of tweets to explain it…
I note that the FT story doesn’t explain it at all well, confusing/conflating commercial bank customers’ deposits with reserves.
What baffles me is why the government has to maintain this QE ‘borrowing’ fiction when it could just order the BoE to make direct payments to its creditors.
As I nite in another answer – if it was known that the g09vernmment could just spend they could not threaten austerity and then the whole neoliberal myth would be blown apart
So they lie
TRhey can sue me for saying so
“And the government paid interest on the gift as well.”
Is this because they pay interest on reserves? What determines the interest rate on reserves?
The BoE official rate right now
But Sunak can overrule
And the reserves could be split
Base Rate is what the BoE charges for loans to the banks. There is no law that says they have to pay any interest on current accounts (i.e. the commercial bank’s reserve accounts), and choosing to pay Base Rate on those deposits is simply their choice. Paying a ridiculously high rate on these deposits will generate a loss for the BoE which they will recover from the owner, i.e. HM Treasury. What normal share owner of a company would allow the Directors to lose their money through a voluntary and silly policy?
Notice that the explanation:
1) Expresses the ‘hierarchy of money’. Money is debt, but the hierarchy of money establishes a money and credit system based on relativism. It depends where you are on the hierarchy whether you have debt or – ultimately – money. What looks and acts like money at one level in the hierarchy (commercial banks for example), is clearly only debt, when observed from a higher level in the hierarchy. How do you know the difference? Only the Central Bank, as the agent of Sovereign Government (which alone can demand tax), deals in debt that is always money, because Sovereign Government alone both issues money and alone can guarantee to pay the bearer of its money. The hierarchy of money is never usually noticed, or much matters in everyday life, so commercial bank debt looks and acts like money. Only a crisis – financial crisis, pandemic or whatever – provides the overwhelming conditions that reveal the structural nature of the underlying, hidden hierarchy, and the rush to ‘pure’ guaranteed money – which is only issued by the BofE.
2) The failure of QE, shoring up the commercial banks, and serving their interests was in Government and BofE failing to ensure that the commercial banks used the resources and support they received to pass on the benefits of QE to the general public. The banks instead used QE exclusively to create asset bubbles from which the could profit. This was inevitable. Notice also that so low is the credibility of commercial banks with the public, so little do they do for the public, that even post-QE the Government has to further underwrite the commercial banks with an £85,000 personal guarantee to anyone who deposits money with them.
QED.
I read this story in the Guardian earlier. That article states that the BoE “had to” pay the official interest rate on these reserve accounts. But do they really? Is there a pre-existing rule that obliges them to do so, or was it actually a choice? What could the commercial banks actually do if the Government told the BoE that they shouldn’t pay any interest at all?
It is convention
As I suggest, the balances could be split with most being paid much less E.g. 0.1%
Note the Guardian article has no option for readers to comment. This is the case with most of the nationals now where economics are concerned and has been since commentaters with a grasp of real-world economics starting pointing out obvious flaws, although that could (hah!) simply be coincidence. Neoliberalism simply can’t survive in the face of informed criticism, it seems, an encouraging thought in these dark days.
When the Guardian publishes a story that is contestable, then there is never scope for readers’ comments. It’s interesting to observe that, seen through this particular lens, some of the paper’s most senior writers spend a lot of time writing highly contestable copy, making them out of step with a majority of the paper’s readers.
And they regularly fail my plug-in nonsense detector and solar-powered unbelievablometer !!
Thanks again Richard
Still a difficult subject QE to fully understand for me
Just one point of clarification please
when you say money is just debt
are you talking shorthand -& the full explaNATION IS THAT MONEY IS botH DEBT & CREDIT
ie double -entry principles
or am i missing out a step or two ?
Money is always debt
The double entry records who it is owed to or from
Do not confuse debts with debits – not the same thing although related
Excellent essay, spoiled by the 15th word in the penultimate paragraph – surely “published” should “punished”? Damn those auto-checkers on the computer.
Changed here now
Not on Twitter unfortunately
But I did write 1,900 words before breakfast. One mistake is not bad
Whoops. Left the computer for a couple of hours and didn’t refresh the page. Still, it shows I read it.
Thanks for the very clear explanation.
Your idea of a windfall tax is a very neat solution, with a very recent precedent.
Not unreasonable for a government that has pumped billions into the banking system to keep it ticking to seek to limit exposure and prevent billions more.
I guess bankers are in for another bumper bonus year!
So much rhetoric, inaccuracy and emotive language. Not really what you’d expected from a ‘professor’.
If only more were like me then, the world would be a better place
If only. There was some Professor from LSE I think- previously worked for the Bank of England on Today this morning saying the BoE needed to increase interest rates ASAP to stop inflation !
Dear God- he is teaching students this rubbish, AND being given a platform on BBC.
We are doomed
Banks were not ‘given’ money through QE, they exchanged government bonds for cash. That’s quite different, and so your claims are very misleading.
Secondly, interest is paid on debt, that’s entirely normal, not sure why you think that somehow people should lend money without being recompensed?
Further, if interest rates increase in the future, that won’t affect the income received by any banks on government bonds they already own – indeed the market value of those bonds will actually fall.
Your post is therefore highly misleading in how is it portraying the situation – presumably as a former professor of Political Economy you should know how this stuff works, so that does suggest you are deliberately trying to present a false narrative?
Sorry – that is wrong
As I note, the bond swap is just a sham – but you are obsessing on it, as too many in MMT do
The spent comes first. That created the inflated CBRAs. Nothing else did. So the BoE did effectively give the money to the commercial banks on their CBRAs.
And we are not discussing interest rates on binds here but on CBRAs, something very different. You have literally all of this wrong.
No, this is wrong. When QE was implemented the Bank of England bought governments bonds from banks (and other institutional investors, including insurance companies and pension funds) in exchange for cash. How that cash came about is irrelevant, as is what happened to that cash.
Banks exchanged £Xm of assets (government bonds) for £xm of cash. In doing so the yields on government bonds were reduced, encouraging investors to move down the risk curve.
Not sure why you’d dispute any of the above?
If I bought a second hand car with cash for £1,000, no-one in the right might would claim I’d ‘given’ £1,000 to the seller, I simply exchanged an asset worth £1,000 (cash) for a different asset worth £1,000 (a car).
The fact that that some of that cash on the banks balance sheet was deposited back with the Bank of England is irrelevant.
Before QE banks had bond assets of £x and cash of £y and after QE they had bond assets of £x-z and cash assets of £y+z. Total assets were unchanged. Banks were not ‘given’ money as you are claiming.
With respect, you entirely miss the point, which is exactly about how and why the balances on the central bank reserve accounts were created, who by and with what consequence
You do it by repeating the official, false, explanation for QE.
In the process you completely ignore the issue, the problem and the need for a solution.
You could not have got this more wrong
This is what the BBC is reporting, from three hours ago:
‘NIESR’s Prof Jagjit Chadha, told the Financial Times that Mr Sunak’s failure to act had left the country with “an enormous bill and heavy continuing exposure to interest rate risk”.
The Bank of England created £895bn of money through quantitative easing. Most of this was used to buy government bonds from pension funds and other investors.
When those investors put the proceeds in commercial bank deposits at the Bank, it had to pay interest at its official interest rate.
Last year, when the official rate was still 0.1%, NIESR said the government should have insured the cost of servicing this debt against the risk of rising interest rates.
It said interest payments have “now become much more expensive” and it estimates the loss over the past year at around £11bn.’
I am trying to work out what Mr Bryant’s reference to: “How that cash came about is irrelevant, as is what happened to that cash” means. Could you clarify precisely to whom or what it is “irrelevant”; as you state the commercial banks were depositing cash with the central bank? Such monetary operations between central and commercial bank are not generally a matter solely of contingent happenstance, but rather are typically an essential and integral part of the central banking operation. Similarly, from my memory of the framework of QE there appeared to be at least an assumption or expectation in Government and central bank (whether well founded or not), that the benefit of QE would pass through the commercial banks, and eventully reach the general public’s daily economic activity, as some form of stimulus. It didn’t; it stimulated an asset bubble instead, presided over by – and almost exclusively in the interests of – the privileged elite of banks, dealers and financial institutions (and their clients), with special access to the central bank’s monetary operation.
At the same time, from the Government/BofE perspective, the interest rate risk was presumably measurable, and manageable for all the parties involved in QE.
Those investors can never put their proceeds in a central bank reserve account – it is literally impossible
That is how weak the understanding of this issue might – maybe by the NIESR as well
At best the critics explication of the precise monetary book-keeping (the metaphysics of money) here, seems to me to be shrouded in an impenetrable, woolly fog. Accident, confusion, or deliberate? I have no idea. Could the critics please present the T-accounts for QE, as they see them?
Agreed
Mr Bryant,
On money and debt; remember that there is a ‘hierarchy of money’. Read Mehrling.
Sorry Bill, we are talking about Base Money M0 here. It is either on deposit in the Gilt or in a BoE Reserve Account. You can never take it out of the BoE, except in lorry loads of BoE notes. So nothing like switching £1000 into a car. If the Treasury repay a Gilt the proceeds will always be credited to the Reserve Account of whoever you bank with ‘for onward credit to Bill Bryant’. If you buy a Gilt the opposite happens – your bank has their Reserves debited.
You are right Tim
Surely the point is: £xm of assets are exchanged for £xm of cash, The Bank of England has not simply ‘given’ £xm to the bank, as Richard is trying to claim.
Wrong
The original spend did place money in the central bank reserve accounts
You can’t ignore that and pretend some thing else is happening
“Secondly, interest is paid on debt, that’s entirely normal, not sure why you think that somehow people should lend money without being recompensed?”
Which people are lending money? Who are they?
My immediate thought on hearing from John Warren on the NIESR’s contribution is wonder who funds them and why.
I think this will be used to justify further austerity under the guise of ‘the debt burden is choking the economy so we have to tighten our belts to repay it and help Brexit Britain flourish’. They will be aided by their mates in the media with big, scary headlines designed to con and frighten people.
Craig
Exactly that and as I say there won’t be any option for informed readers to point out what nonsense it all is.
So how did Northern Rock go bust? Everything in the media then and since claimed it was because they ran out of money. How can that happen if they could just create their own money?
A bank, except the BoE cannot produce money to save itself. It can only do so by lending to others.
NR lent at too high a ratio. Then it sold the debts. This was to keep it within regulatory limits. But when it was realised that its mortgages were risky it could not sell any more – and at that point it failed because other banks would no longer trust it
To whom does the money extracted by/through the interest rate go?
The commercial banks as profit
Time to buy shares in Natwest, Lloyds etc! If Base Rate reaches 4% then they would share out £38 billion a year between them. It is all extra profit as there is no cost incurred by them. Would probably double the annual profits of the UK commercial banks.
Please explain your maths?
If interest rates go up, the market value of existing bond assets will fall and banks will incur higher borrowing costs. Income on existing bond assets will not be affected
We are talking money in bank accounts here – not bonds
Nailed it. The systemic abuse of money creation.
It is all about keeping the serfs oppressed.
And it makes London the UK’s inflation (internal) generator,
because London is where the money get created and the overpaid bankers work.
As long as house prices (asset) go up the toryZ politicians are happy.
It is why London generate most taxes. A symptom.
Nationlise banks. Script them away. UBI to create money outside of the grasp
of our predatory banking system. It is democratic.
It is exploitation by design.
Cheers.
People should at least have the option of banking with a local bank where profits go back to the community which made them.
Yes, and it explains the wave of building society conversions and elimination of the likes of the Trustee Savings Bank under Thatcher in the 1980s.
They were a local competitive threat to the major banks, who wanted to corner the market in mortgages and loans, with the concomitant tie up of other financial products under the Tory project to financialise the UK economy.
We live with the consequences.
“The government was desperate to prevent any more banks failing. So it had to boost the amount on the central bank reserve accounts. It did that using QE. It bought back the government bonds I have already mentioned. It did it by using new money created by the Bank of England.”
Yes, the Bank of England gave cash to the banks in exchange for the same value of government bonds, using new money.
“The Bank of England then put that money in the central bank reserve accounts of the commercial banks. As a result those banks then paid the people who previously owned those bonds that had been sold back to the government.”
No, the Bank of England did no such thing. It was the banks who previously owned those bonds. They sold them to the Bank of England. The Bank of England therefore no longer has the newly created money. The banks might have chosen to put some or all of that money into their central bank reserve accounts, but that’s entirely different.
The Bank of England did NOT give £900bn to banks, that is a blatant lie.
So tell me then, how was the £450 billion used to fund Covid deficits paid for?
Lay it out for me – all the double-entry, from beginning to end
I’ve explained mine. If you’re so sure I am wrong show me yours (or shut up, because you won’t be able to do so)
No-one is disputing that money has been created, it’s your insistence that money was just given to the banks (and thereby increased the value of assets they hold).
Why not answer my question?
You have one last chance and then – because your behaviour makes this look very likely already – you’ll be blocked as a troll
No Richard,
Is it you that clearly does not understand, and who has no evidence to question the ‘official’ explanation.
It’s very simple.
1. Money was created by the Back of England
2. That money was used to buy government bonds from banks and other institutions. Banks (and other institutions) simply exchanged one form of asset on their balance sheets (government bonds) for another (cash).
3. Banks chose to deposit much of this cash into their central bank reserve accounts
Banks simply were not ‘given’ cash. That’s a lie.
In the same way that money was created via QE, money will be destroyed by the unwinding of QE (although you said that would never happen). Thus is also happening in the US.
I am sorry Bill, but you clearly have not the slightest idea of what a central bank reserve account is.
Try this, by me:
• Central bank reserve accounts and base money. ‘Base money’ is sometimes called ‘central bank money’. It comprises the currency issued by central banks in the form of notes and coins and what are called the central bank reserve account balances or central bank reserve accounts. These balances are the sums owed by the central bank to the commercial banks who hold accounts with that central bank as a requirement of banking regulation.
The central bank reserve accounts serve two purposes. Firstly, they provide the means for settlement of liabilities both from and to the central government to the rest of the economy via the commercial banks. Secondly, they are the mechanism used by commercial banks to make settlement to each other of the liabilities that they owe each other when fulfilling the obligations that their customers request be settled with customers of another bank.
The central bank requires that the commercial banks hold funds in their central bank reserve accounts. As a result, these accounts are always liabilities of the central bank and assets of the commercial banks. Whilst the sum each bank might hold in their central bank reserve account will vary as inter-bank settlement takes place the quantum of funds in the overall central bank reserve accounts is always under government control and is determined by its decisions on the amount it spends (which creates new central bank reserve account balances), the amount it taxes (which removes money from these accounts), and the amount it issues in bonds (which also reduces the central bank reserve account balances since those buying bonds then have a different liability owing to them by the government). As such the overall central bank reserve account balances and so the quantity of base money is under central bank control.
Let me see if I have understood this. Presumably someone will correct me if not.
If the government wants to buy something, a new Royal Yacht, for example, it sells bonds to cover the cost and then buys the yacht.
If we were on the gold standard this is all it could do, it would, in effect have borrowed gold and used it to pay for the yacht and there would be none of the borrowed gold left. To pay that debt back it would have to find some more gold somewhere.
However we are not on the gold standard so the BoE can create new money to buy the bonds back. If it does so then, in effect, the government has paid out sufficient money to buy the yacht twice – once for the yacht itself and once to buy back the bonds – and has received an equivalent amount of money once, when it sold the bonds. The net result is that the BoE has created the money to buy the yacht.
So the selling and buying of bonds is an unnecessary and costly diversion as it would be much simpler for the BoE to simply create the money to buy the yacht in the first place.
It’s hard to believe that the Treasury and the BoE don’t know what’s going on so I can only assume that this arcane process is used to befuddle people and to hide what is actually happening.
No!!!
If the government wants to but something it does it. Ut simply spends the money from the consolidated fund account at the Bank of England.
We’re not on the gold standard so any discussion of it is irrelevant
The spend always comes before anything else – without exception. Tax and borrowing never come first
If the consolidated fund is overdrawn at the end of the day the Treasury Debt Management Office can sell bonds to clear the account, but it need not do so. It can just run an overdraft at the BoE, but it chooses not to
The bond funds nothing – it just reclaims money spent into the economy, as tax does
QE cancels that reclaim to leave the money out there for use, but that’s it.
QE is simply a pretence that the BoE is not lending to the government, in summary
If we were on a Gold Standard that does not mean the State spends gold to buy the Royal Yacht. All it does mean is that the commercial banks could, if they wished, ask for their Reserve Account balances to be paid out to them in gold. That means the BoE (or the Treasury) could go bust when in the present fiat money regime they can’t. So for example we have £952 billion as of May 31st in the Reserve Accounts but only £18 billion of gold, so the BoE would be fine until even a small bank asked for their balance to be paid out in gold. I don’t think it was ever the case that the BoE held 100% gold against the sterling in existence, since they did not need to. As with any bank they only needed sufficient gold for the normal worst case withdrawal. Any time there was a huge rush to withdraw (e.g. July 1914) the gold standard was immediately suspended.
Thanks, again
Thanks for your and Richard’s clarifications. I have a lot to learn!
Nothing expresses how the rich and powerful interests in the country have everything tied up to their benefit than this Twitter post.
Money – a utility designed to be widely distributed and for everyone to have enough – is able to be monopolised by a minority interest group – it’s as simple as that for me when you boil it down. Not only has the political process been captured by the rich, so has the money creation process.
There is nothing democratic, moral or ethical about that at all.
‘Reform’?
The word simply does not express the scale of change and desire that is needed to put a stop to this.
I’m pleased that the post is popular – well done and thank you.
Over 1 million impressions now and 80,000 engagements
Yesterday’s video has been watched more than 200,000 times
PSR, what I am currently struggling to understand is why Labour, always vulnerable electorally to the accusation that they will “tax and spend”, do not shoot this down at every opportunity since the gold standard disappeared. Surely they must understand the traction that the Tories gain from this misapprehansion by the electorate puts them at a disadvantage.
I can only conclude that, ultimately, they too work for the same interests and now only exist to provide an illusion of choice where, if elected, will not rock the neo-liberal boat.
Given the sort of sums that Richard has mentioned, I’d think that persuading politicians where their interest lies is chump change. The only difference now between Labour and Conservative is that the Tories don’t pretend to represent the working man (read, or woman – basically anyone employed) any more than your average CEO cares that s/he earns 250 times more than their employees.
All neo-liberalism has done is enable a new class of spivs and rentiers to fill their boots whilst the existing
ones continue to thrive, just as they always have. Of course they are going to support it!
Was listening today to R4 where someone was pointing out that rents are so high that it is impossible to save for a deposit to buy a house, despite repaying a mortgage being less money.
Well, just fancy that. Who, possibly, might benefit from such a state of affairs?
I am working in a big essay on this issue – due soonish
Grum
I have no idea what is going through’s Labour’s tiny little minds. I don’t vote for them anymore and I’ve stopped listening to them.
There are two possible answers in my view:
1) Labour are as Neo-liberal or as conservative as the Conservatives are but just want appear more humane which is the only way they can appear different since they are actually the same. They have caved into Thatcherite doctrine and appear to want to placate and enable capital rather than manage it.
2 ) They are badly trained about the reality of sovereign money production or just thick like a lot of modern politicians. We basically entrust the management of the country to a bunch of laymen anyway. That’s all they are. All of them. Well, nearly all.
Labour suffer from the ‘crisis’ that was the bale out by the IMF and 1974-1979 etc – they are scarred by it because they have failed to understand what actually happened as Dennis Healy reflected before his passing. And not realised that times have changed too.
They don’t seem to have realised that it is Thatcher’s chickens coming home to roost – at least since 2008 – and in actual fact we have come full circle already. Markets and wealth are ripping up the world again.
It is time in my view for them to rediscover Clement Attlee.
But that takes courage.
And the Labour party has none.
Money isn’t designed to be widely distributed and for everyone to have enough, any more than, erm… sunlight is designed to be widely distributed and for everybody to have enough. Money is a medium of exchange, no more, no less. Because it is a medium of exchange it becomes a store of value because you can defer exchanging it today to exchange it in the future.
I really do think you need to update your understanding of money
Ivor
Money is many things – debt, wealth, a means of exchange, a promise to pay.
But it is also a social utility and meant to be used widely.
It is the unequal distribution of money in circulation (not savings….but then again!) that causes the problems.
And if you think that the way money is distributed now is fair, when working people are going to food banks and have to have more than one job…………well, you need your head examining is all I can say.
Richard’s post has pointed out how the creation of money by the Government has been hijacked by the financial sector and its rich patrons, when other people have endured austerity and effective wage and pension cuts.
I don’t mind if rich people want to blow their cash on super yachts.
But I do mind when people in the same society can’t afford to eat or heat their homes and they are working (or for some reason they are unable to). They are being denied the use of the promise to pay aspect of money on basic things that the rich can use to buy luxuries.
That’s not on. It might not mean anything to you – but it does to me. The mal-distribution of money is our society today is a complete failure of the capitalist system. It’s no longer working.
It was already explained to you Richard:
“The fact that that some of that cash on the banks balance sheet was deposited back with the Bank of England is irrelevant.
Before QE banks had bond assets of £x and cash of £y and after QE they had bond assets of £x-z and cash assets of £y+z. Total assets were unchanged. Banks were not ‘given’ money as you are claiming.”
If net assets at banks had increased by £900bn as you claim, then the market values of those banks would have increased by a similar amount, which clearly did not happen.
Another email and url combination
You have no idea what you are talking about and are trolling
Goodbye
Something missing (?) in para 6.
I don’t think so
Para 6 : I’ve got it now. The close bracket should include the word “finances”.
Sorry Richard but Bill Bryant is 100% correct.
Banks were not “given” any money. You can actually test this by looking at their balance sheets and accounts. Banks weren’t suddenly worth £895bn more thanks to QE.
Bill is also totally correct in his description of what happened during QE.
Banks were holding Gilts as regulatory capital assets.
These were then exchanged for newly created cash with the BoE.
The net change to the bank balance sheet and net assets in such transactions is zero.
The banks now have cash on their balance sheets instead of bonds, some of which may be placed back with the BoE on reserve accounts (though by no means all of it typically).
This does not change the amount of net assets commercial banks have, and the cash placed at the BoE is still the property of said commercial banks – in place of the bonds they sold.
The effect was to reduce the supply of Gilts, thus reducing their yields, which lowers long term interest rates. Hence it being called QE.
I am amazed and slightly concerned that someone claiming to be an expert in finance and economics doesn’t seem to understand this and further is falsely claiming that commercial banks were given money (increasing their net assets) directly thanks to QE. This is simply untrue.
I also think you do not understand much of how bank lending and credit creation works. You seem to claim that banks can create money out of this air and do not need deposits to lend.
This again is categorically untrue.
Firstly, banks need a certain amount of regulatory capital held in reserve before they can make a loan. This can take various forms, but the most common are deposits and highly liquid, highly rated assets such as government bonds. There is also a regulatory limit to how leveraged a bank can be.
Moreover, when a bank makes a loan, it must actually find the money to do so from somewhere. In practice this means borrowing the money from somewhere else – typically the money markets. What cannot happen is that a bank simply floats loans out as you are suggesting – unless you think that balance sheets don’t have to balance.
Again, I am surprised a Professor of Economics (which you claim to be) doesn’t know these basic facts of modern finance. From what you have said I can surmise you have little to no practical experience of finance.
You claim banks do not lend newly created money, amongst many other false claims
The Bank of England categorically disagrees with you. Read the April 2014 Bank of England Quarterly Review
Sorry, but you are taking complete nonsense
I will not be posting further nonsense like this
“The Bank of England categorically disagrees with you. Read the April 2014 Bank of England Quarterly Review”
that is not an answer
Respectfully, it really is
“You claim banks do not lend newly created money, amongst many other false claims”
1. I never said anything about banks lending newly created money. I did say banks need a certain amount of regulatory capital before they can lend, and that they cannot create money out of thin air as you seem to claim.
Given that Gilts and cash are both Tier 1 assets, banks can lend either or both. That is not the point I was making though.
2. What are the “many other false claims” I have made?
“Sorry, but you are taking complete nonsense ”
As opposed to someone who has claimed the banks were given free money because of QE? Or that they can create money out of thin air? Or who doesn’t understand that QE is an asset swap?
I take your inability to actual answer any of my points as a sign that you have been caught, and that you know that you are wrong but are unable to admit it. I suggest that before you once again start talking about things you have no understanding, experience or knowledge of, you think twice, as all you have done here is make yourself look incredibly foolish – made worse by pretending to be an expert and a Professor in the subject, when as far as I can tell you are a retired accountant with no practical experience in the field of banking, economics or finance.
See other replies here now
Nothing you are claiming is consistent with what the BoE says
You are referring to what they describe as outdated thinking
That thinking is wrong
March! 🙂 https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
Bank of England Quarterly Bulletin, 2014 – Q1 (Monetary analysis Directorate): from the Overview (p.14), in short, to summarise.
“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the description found in some economics textbooks:
Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
In normal times, the central bank does not fix thea mount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.
Monetary policy acts as the ultimate limit on money creation.”
See also Bank of England Quarterly Bulletin, 2011 – Q3 (Macro Finanincial Analysis Division): (p.200): on QE –
“The policy of expanding the central bank’s balance sheet through asset purchases, financed by central bank money is widely referred to as quantitativeeasing (QE). The Bank of England’s asset purchases were overwhelmingly focused on purchasing a large amount of UK government bonds (gilts). Between March 2009 and January 2010, the Bank purchased £200 billion of assets, mostly medium and long-dated gilts. These asset purchases represented nearly 30% of the amount of outstanding gilts held by the private sector at the time and around 14% of annual nominal GDP. Combined with earlier liquidity support measures to the banking sector,(4) these purchases increased the size of the Bank’s balance sheet relative to GDP threefold compared with the pre-crisis period.”
Notice that this is not uniquely the repurchase of commercial bank gilts, but of “private sector” gilts. This was wide-scale purchases of public and private sector assets using public money. This was in the expectation of a number of effects: liquidity premia effects, confidence boosting effects, and bank lending effects: on the last (p.202):
“When assets are purchased from non-banks (either directly or indirectly via intermediate transactions), the banking sector gains both new reserves at the Bank of England and a corresponding increase in customer deposits. A higher level of liquid assets could then encourage banks to extend more new loans than they otherwise would have done. But, given the strains in the financial system at the time and the resultant pressures on banks to reduce the size of their balance sheets, the MPC expected little impact through this channel”.
Frankly, Oliver I am struggling to discern your description as adequately representing the BofE’s own explanations.
Many thanks
I was running out of patience after a long day / week
Incidentally, Oliver it is a little rich using an ‘ad hominem’ assault on Richard, when you are not prepared even to offer your full name. It is gratuitous and crass.
You can, of course fix this. You can show the detailed T-accounts that support your thesis.
Who says the banks just plain make up money from thin air, ex nihilo? Well, apart from Richard and the BofE, there’s Professor Werner in his Lost Century paper, the Norges Bank, the ECB, the Bundesbank, the BNP Paribas, the Bank of Canada and the IMF. Details @ https://www.economania.co.uk/various-authors/where-money-comes-from.htm
You left out Ben Bernanke who told a congresscritter when asked where money comes from that it came ‘out of thin air’.
Richard, it really says something that you have stimulated this volume of comment – but it has left me a little more confused than I started.
I get your idea that the government (or BoE on its behalf) created money in banks’ reserve accounts to create stability after the banking crisis – but (as a non-accountant) I can’t see why the correspondent above is wrong in saying this should have been reflected in balance sheets as an increase in assets. Why wasn’t it?
If it was a purchase of government bonds they already held in their accounts, then I see it swaps one asset for another. But do banks hold such large sums in bonds? I had thought gilts were for things like pension funds which need to reduce risk in their future asset value by keeping bonds to the redemption date. And if banks had owned that volume of bonds they could have sold them on the open market to stop financial collapse.
But to be fair, this is those of us trying to understand your MMT viewpoint looking at details – I do see your main message is that banks’ reserve accounts with the BoE (which they are obliged to have) don’t need to attract high interest rates. After all for most of us our current accounts ,which again we can’t do without for day to day transactions, attract little if any interest despite interest being available on savings accounts.
The increase in central bank reserve accounts dopes increase assets – and did
I will publish the data
The increase was matched by new commercial bank liabilities – to customers who were paid
But I stress that this is what the government spending created
QE was a sideshow: after the spending, the government issued bonds. Their purchase by bank customers (not much by the banks) reduced the central bank reserve accounts. QE then inflated them again, back to the level that the government spending created
So, the bank’s role in QE was as a conduit, but it massively inflated their balance sheets and resilience and now the government is having to pay for that. Why is that appropriate, is my question?
That is the exact right question behind this original post.
We all know that QE was seen as the ‘Wall Street bail out’ for the banks – the same banks who caused the crash BTW – but people were still left asking about the ‘Main Street bail out’ for everyone else in society who suffered from banking greed in the 2008 crash. And then we had discussions about ‘helicopter money’ and weird ideas like that. We also had discussions about reviving national banks as well to get around the rampant greed in the private banking system did we not? Still worth pursuing in my view.
The liquidity pumped into banks quite simply did not help as many people as it should have done because the Banks warehoused it and used for other activities. They abused and continue to abuse their position in money creating systems.
The perception is that once it has been through the private banks, there is very little money left for everyone else after.
The technical details aside, perhaps the real intent of this post is to ask simply ‘Who benefits’ or ‘Who should’ from money creation?
It seems that there have been too many ‘upstream’ benefits in the private banking money distribution system before it reaches the rest of society. It seems that no one gets anything until the financial sector has been allowed to dip its snout into the trough first. And once they’ve had their fill, and the dynamics of the money change and the economy changes as a result, the intentions of the money issuance dissipate.
That is why it is worth going back to the technical detail as Richard and John (and others) have done so well because to not do so negates the legal and policy intentions of a sovereign government and lazily accepts that new money is just there for the taking – especially if you are first in line to receive it even for distributional reasons (there is no Government high street bank is there for what is essentially THEIR money?).
So, the banks did get free money from the Treasury/Government and then maximised the interest rates for themselves. And that’s why QE ends up swelling the coffers of the already rich.
But that was also seen in the Eurozone bond issuance wasn’t it? Under the deeply flawed Maastricht Treaty, the ECB makes sovereign states sell their bonds to the private banks who then set about creating a speculative bubble and causing all sorts of problems for countries like Spain and Ireland. These countries were forbidden to issue these bonds to their own central banks and the greedy private banks having been given what was free money cashed in on yields.
Again – to echo Richard – is that/this an appropriate way to manage money creation in societies that are showing very clearly huge disparities in wealth and associated problems or are in crises?
I don’t think it is. But even worse to my mind, it is once more a Neo-liberal negation of State power to help ALL of its citizens – it denies the sovereign power of the State. That is why nailing the truth about money creation matters.
It amazes me how facts don’t seem to matter in the West any more. ‘Seeking truth through facts’ as the Communist party of China have advocated in their market reforms is a lost art in the West it seems.
Firstly, keep up the good work Richard.
The reason that I found your blog was that I was completely unsatisfied by the many and varied explanations of QE provided by the government and even worse the media. You would almost think that some people did not want the British public to ever find out what QE really was.
Going back to the time of the Financial crash one thing that did ring true was that no bank would lend to any other bank because they no longer trusted them to be solvent, a fundamental show-stopping financial system problem.
So it then puzzled me that private companies that everybody suspected of being insolvent were then able to buy government bonds. Isn’t trading while insolvent illegal? Or doesn’t it apply to bankers.
Banks are effectively guaranteed not to fail by the government
Explicitly by the £85,000 deposit guarantee scheme that provides them with off balance sheet capital
“It was simply gifted to them by the government. Nothing more or less than that. The commercial banks were given this £900 billion by the government.”
So you’re saying that all the banks’ profits, plus maybe a little more besides, have in the last 14 years or so come from a direct government subsidy via the QE program?
No
I did not say they were given income
I said they were given bank deposits
They then used the to pay people on government instruction
But they are now charging for having been given those funds
And I am saying that without those deposits the UK banking system may not have survived
Is something like this happening:
If I sell £10,000 to the BoE then I would expect £10,000 to appear in my bank account with MyBank – i.e. I expect MyBank to promise to pay me £10,000.
The reason MyBank makes this promise is that the BoE has instructed them to do this and simultaneously increased MyBank’s central bank deposit by £10,000 – i.e. The BoE has promised to pay MyBank £10,000.
So there is one promise to pay backed up by another promise to pay. This has no effect on MyBank’s balance sheet, however interest is paid on the central bank deposit, which has increased, and it is this that does not seem justified.
Since central bank deposits are used to pay other banks, the £10,000 effectively remains in the central bank of some bank for ever. Presumably such things as withdrawing or depositing cash do change the central bank deposit account but these would be relatively minor effects.
You get it
I think I get it too. I agree with the last two comments (Richard at 6.30am and Bernard at 9.26 am)
However these hardly correspond to the tone of the OP. We can all only come to a valid judgement on the wisdom of the QE program if we correctly understand its nature. Saying the government “gifted” £900 bn was misleading.
I disagree: the commercial banks are being paid interest ion money created by the BoE and paid to them
Parsonally, I would not use the term “gift”, but I think the hysteria it produced as a kind of deflection from critical issues. If we look at context, QE was only one part of a suite of measures the BofE used in desperation (remember the policy failure at the centre was catastrophic – and they chose methods, ill designed perhaps but what they understood in a crisis), in order to save the banks from collapse. It worked. QE was one feature, but preceeded by “earlier liquidity support measures to the banking sector”, which led to the BofE’s “balance sheet relative to GDP threefold compared with the pre-crisis period.” QE counteracted the shrinkage to balance sheets and the collapse of economic activity; by relying on the BofE balance sheet as the Bank/lender of last resort. In the US the Fed became the dealer of last resort (but I do not know whether that applied in the UK, it is in any case, inevitable).
Gift? Well, the suite of measures in the round saved the Banks from armageddon, and both allowed and assisted their full recovery. They deserved the extinction they faced, but were saved from themselves by the BofE balance sheet and liquidity support. It was all worth much more to the banks and its executives than a mere “gift”. The Government and BofE effectively admitted they had become “too big” to allow them “to fail”.
A large financial gift in the real world by anyone else carries for the giver and receiver serious tax implications, in most probable cases and without long term tax planning. Here, absolutely free; help yourselves to the largesse. Their bacon saved at virtually no cost, save embarrassment (some fines for ‘mis-selling’, the littlescamps!), and a blush or hurt reputation that is soon passed over and ignored. That is the kind of gift I would like if I made “mistakes” (!) on that scale.
Why a gift?
Because the commercial banks had a massive asset (money) put in their balance sheets which dramatically increased their resilience and boosted their commercial activity
Did they ask fir it? No. So it must have been gifted
Is it an asset? Yes, unambiguously
Did it boost their businesses? Yes
And now they are being paid for accepting it
IF that is not gifting to the banks I really do not know what is
Oh, I should add the banks were given a gold A+++ off-balance sheet advantage over the whole private or public sector, purely to save their deservedly ruined post-crash reputation with the public; an £85,000 personal guarantee given by the Government to anyone depositing their funds with them.
Free gift? You tell me. What does it cost them? Would someone care to quantify the market advantage it gives the banks over other forms of private sector debt available? Or quantify the cost and outrage if it was withdrawn, because then we would find out what people really think, and remember?
The gifts just keep flowing…
But how much are they being paid?
I wouldn’t begrudge anyone, even the banks, receiving some tiny amount of interest when inflation is threatening to rise, as a percentage, into double figures. If we consider, as a society, that wealth should be less concentrated than it is, isn’t the correct course of action is to reduce it by taxation rather than inflation?
Bank base rate
But why do they need it?
@ Richard,
“But why do they need it?”
You’ll have to ask them but I’m sure the banks won’t be short of an answer. If it were up to me I’d have nationalised the lot of them when their share price was at its lowest after the GFC. It is true that they nearly all deserved to fail but it would have been cutting off our noses etc to allow them to do that. Nationalisation would have been just another asset swap of cash for shares so wouldn’t have cost anything. Even so it would still have been a rescue by government when there was no responsible alternative.
It’s fair enough to want the system replaced by something better but not to let it fail completely with nothing ready to put in its place.
Thank you for the contributions but what sort of gift is a gift that enables the Government to turn around and say it is too addled by debt to deliver effective public services and it’s other promise to provide?
A debt burden it has chosen to put upon itself!?
The interest rate gift is also a gift to dogma of the worst kind – that nothing can be done.
An awful, awful lie foisted upon society.
Let’s hope the penny drops.
We’re all entitled to enough money for God’s sake.
A neoliberal one
Banks pay a levy that covers the £85k guarantee.
A token gesture that does not reflect the cost of capital
Please show your workings – how much have banks paid to date for this guarantee and how much has been claimed?
Or is this yet another claim that you will make with no evidence to support it?
I think you need to note the reply from John Warren
I have been out for the afternoon
Richard,
How much do banks pay, and according to your calculations, how much should the charge be?
See the answer from John Warren
It is notional, at best
The Bank of England has a Memorandum of Understanding with the FSCS. The FSCS has responsibility to the PRA through “determining and collecting levies to cover management expenses and the costs of delivering depositor and policyholder protection eg payout or continuity” (Clause 10). Thus we have the BofE, PRA and FSCS all working together, just ensure the public’s bank deposits are adequately protected, and the public can have confidence in the system. That it doesn’t come entirely free is scarcely an endorsement of the public’s independent confidence in the Banks. The public only has confidence in this scheme because the BofE and sovereign Government implicitly stand behind it as guarantor of last resort. I am still struggling to see what point you are making, or the substance of your argument.
This is, as a whole, a quite dreadful indictment of the principle of neoliberal free market ideology in banking.
Spot on John
https://twitter.com/markIng89626932/status/1535639140628561921?s=20&t=tnwTZoOaRS_tAI8eN5HCgg
I wonder if this graphic of QE helps? It may be a bit ‘classical’, but if QE is seen as a ‘process’ (yes, the ‘seed’ may be buying pre-existing debt, but the ‘crop’ results from QE repetition) then this shows the ‘bookkeeping’ in diagrammatic form?
Sorry – but that gets the CBRAs wrong, implying they are a bank choice
They are not
To the best of my understanding from my perusal of the BoE website during the GFC:
The BoE reserve accounts are used as part of the mechanism whereby the BoE’s wishes on interest rates are signalled to the commercial banks. How a central bank performs that signalling is a matter for it to decide and can very from central bank to central bank and from era to era.
With the introduction of QE, the BoE recognised that it had a problem; that signalling would become very expensive as the balances in the reserve accounts rose.
Previously, and loosely speaking banks were rewarded a little for positive balances and punished more heavily for balances that fell below a floor or threshold, calculates at the EOD.
So the game was to try and lend excesses to other commercial banks and borrow likewise to get back up to the threshold by EOD.
It encouraged the banks lent to each other and at rates guided by the BoE. The BoE simply altered the two rates and the banks fell into step.
After QE, I understood that the BoE cunningly got the banks to select their preferred floor for EOD (which due to QE was an amount in the billions) and they were judged, rewarded or punished, according to how they stood relative to their own best guess as to their EOD reserve account balances.
This encouraged the banks lent to each other and at rates guided by the BoE. The BoE simply altered the two rates and the banks fell into step.
For all I know, the BoE may have changed the signalling method many times since then but whatever the case they can change it again.
It is their game and they make the rules and can and do change them as suits.
If any of you think this is nonsense merely because you are ignorant of such mechanisms, please consult the BoE, it was in one of their published policy documents retrieved from their archives, i.e. not a webpage. Similarly I am only offering a taste, the gist if you will, as the detailed mechanism was a good deal richer than this.
This is all to the best of my memories from a decade and some ago.
Best Wishes
Alexander Harvey
Sure – they use bank base rate as a signal I know that
See a reply coming to Clive Parry, who really knows this stuff
So, you designate £100bn as CBRAs and the rest as QE reserves at 0.1% or even less
Problem solved
I think a significant think tank will be saying something like that next week
So the story has suddenly changed, now the claim is not that the banks were given £900bn as you were insinuating yesterday, instead it is that the banks might have gained some interest on some of this money?
We know that most of the QE money that was previously held in government bonds by finances, institutions was then redirected down the credit curve into corporate bonds and less liquid credit assets. Just as QE intended.
Bill
Do you have no clue what the difference between stocks and flows might be? It seems not
I really think you need to do some serious studying
Richard
I’m curious as to what this interest is, who it’s payable to, by who and how it can be “unexpected”.
In the great QE scam, the government issues gilts to the market, these are for a fixed term and rate. Presumably these are purchased by organisations using reserves which they either already have or borrow and pay interest on.
The Bank of England creates new reserves and buys the gilts from the market. The market has its reserves back, with a markup which is known and settled there and then by the boe. The ownership of the gilts by the Boe means that at the end of the fixed term, the fixed amount is paid to the boe by the government (the Boe eventually transfers those receipts back to the treasury).
The reserves owned by the market, slightly higher than their original reserves, earn interest, which are more reserves paid by the Boe (not the government), more made up money.
The interest rate is BoE bae rate
No one expected it to be used by the BoE as incoherently as it is now – to tackle inflation it can never address
The unexpectedness is their incompetence
And that if the likes of Adam Posen demanding they do more
I expected that it would be Boe interest, but what does interest paid by the Boe on reserves have to do with the government? Surely that’s just more new reserves created by the boe?
I can’t imagine that the Boe uses a government reserve account as the source of interest payments to another reserve account which has nothing to do with the government?
Whatever the BoE says, the government approves this
And remember, the Treasury guarantees the BoE against most risks
So this is essentially government policy
Note that the total cost of the bank guarantee is roughly 0.035% of the cost of providing the final salary pensions PER ANNUM for the USS scheme.
Which is all the evidence we need of how grossly subsidised banks are
And that you are a troll
You will not appear again
Mr Bryant,
Unfortunately your over-riding pusuit of a futile desire to score personal points over Richard has led you astray. The cost of the guarantee to the banks really isn’t the issue. It never was the issue; it was a sideshow. You pursuit does not speak well of your mastery of your brief, or the real, salient issues. The real issue is the need for commercial banks to require the guarantee, in order that the public can have sufficient confidence to leave their money on deposit with the banks. What a fall was there. Do you realise what an indictment that guarantee provides, of commercial banks in Britain? Held together in public respect, solely by the sticking plaster of a BofE, PRA and FSCS Memorandum of Understanding, underpinned by the BofE’s presence. Without it – where would they now be, as Retail Banks?
The cost of the depositor guarantee to the banks (I note you do not give a source for your cost figure – a poor but typical illustration of your casual method), frankly is neither here nor there. Here is why.
First, the BofE initially gave a guarantee to depositors early in the Crash, then later reduced the amount, and now the banks cover the costs. They can do no less. First, if their reputations deserved better, they wouldn’t have required the guarantee. A guarantee has not not always been available to depositors (pre-Crash); and there is the retail market’s real and effective indictment of the Banks. They now need a guarantee to take deposits. Having thoroughly trashed their own reputations, the banks deserve to pay the cost. Without a guarantee, and on the evidence of recent history and experience, why should or would anyone otherwise trust them?
Second, suppose the banks are paying heavily for the guarantee? I do not know the terms of the arrangement, I am not aware whether it is in the public domain; I can say it certainly isn’t readily discovered. Be that as it may, if the cost is high, presumably that is because the hedge is considered a poor risk by the provider of risk insurance underwriting the guarantee (free markets, eh?). Alternatively, suppose the cost to the banks is low? That may only be because the BofE stands in the background of the guarantee. In any case, if there is a low cost, then there is no ground for complaint by the Banks: especially as the guarantee provides the banks with a higher ‘safe asset’ level of security than other private sector competitors for deposits. Third, the guarunatee gives the commercial banks a higher ranking in the hierarchy of money than they would otherwise have, given their reputation. In summary, the Banks have no grounds for complaint on the cost to them of the guarantee.
Whichever way you look at it, the cost of the guarantee is the least of its problems. Indeed, from a depositor’s perspective, it is the best offer they have. Markets, eh?
John
Many thanks for your patient demolition
Your argument is compelling
Richard
“But they don’t pay their customer the Bank of England’s money (or debt, which is what it is). Instead, the payment they make is actually a new record of debt from them to their customer”
I’m just trying to understand the accounting of this. What happens in the bond owner’s account when they sell it back to the government? Their bank account just goes up by the value of the bond? Can a commercial bank create money like this?
Yes
But they do so because their central bank reserve accounts has increased
[…] published in Tax Research UK on 10 June […]