I recorded this for Byline Times yesterday, and it went out last night:
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Once again you are peddling the myth – which is an outright lie – than Banks were “given” the money from QE, and are somehow earning extra interest from it.
Being an accountant I would hope you could follow the basic process of QE, but clearly you are unable.
Banks owned Gilts. They sold said Gilts to the BoE. The net assets of the banks did not increase because of this transaction.
I would hope you know that Gilts pay interest as well, and yields are typically higher that the BoE base rate. So in pure interest terms, banks were typically earning less through the actions of QE, not more as you are claiming in the video above.
I find it particularly disturbing that you do not have this basic understanding of QE, and are willing to put out video and commentary making what are totally false statements presented as fact.
You do this while having no experience in the field of economics and finance, no qualifications and clearly little understanding, though present yourself as an expert – even as a Professor in the subject – which you are not.
Wrong
First, the government spent money into the economy. It does so every day. It created a deficit. This inceased the central bank reserve accounts.
It wanted to cover the deficit with bonds. It issued them. That reduced the central bank reserve accounts. The banks did not buy most of them from the government: they do not hold that many. Their central bank reserve accounts simply acted as a conduit.
Then the government decided they did not want financial institutions to hold bonds. It repurchased them. The banks did not sell most of them: they do not own enough of them. Their central bank reserve accounts acted as conduits.
The central bank reserve accounts went up.
If the bond sales = the bond purchases as they did (near enough in 2020/21 then the central bank reserve accounts were unaffected by boind sales, of which there were not net sales or purchases
But the CBRAs rose by £450 billion. The government spending did that. The government’s deficit spending enriched the banks.
Now how was that not the government giving the banks money? They did nothing to earn it, but they ended up with substantially enlarged balance sheets
Alright, they had customer liabilities to match, but they did have vastly more money as a result.
I am, to be blunt, right.
And you are not, bit resort to the age-old abuse that I have no qualifications. It’s an odd world where a person with my qualifications has no right to speak on a subject they know about. But such is the fascist agenda – and yes, your abuse of expertise is pure fascism.
Don’t call again
“Banks owned Gilts. They sold said Gilts to the BoE.”
That’s largely not what happened. The vast majority of gilts in 2009 were not owned by banks and initially the BOE said they were not going to purchase from banks but ‘other financial institutions.’ They reason they gave was
” If the Bank of England purchases an asset from a non-bank company, it pays for the asset via the seller’s bank. It credits the reserve account of the seller’s bank with the funds, and the bank credits the account of the seller with a deposit. … This means that while asset purchases from banks increase the monetary base (or ‘narrow money’),
purchases from non-banks increase the monetary base and broad money at the same time.”
As time went on some Gilts were in fact purchased from banks but since banks only held 4% of Gilts in issue at the beginning of 2009 that could not have been very significant.
Of course the money did end up in the banks of the institutions that sold the gilts and the story from that point was exactly as Richard tells it.
Thanks
I also made clear the flow through
I watched Concussion again yesterday. Great film. Interesting how the Doctor who discovered the damage done to American football players brains, was attacked by others for being unqualified. Such a shame this is the argument of people who have lost the argument.
As a very “lay” person in this debate, I am loath to intervene, but….I think I just had my own “aha!” moment. Is the contention arising because “Oliver” is assuming it is the banks themselves who buy/own/sell most of the bonds, whereas Richard is saying here that it is other entities with accounts at those banks who buy/own/sell them. In which case it looks to me as if it is the “other entities” who are engaging in an asset swap, but the banks, as Richard says, get the extra reserves without swapping anything or doing anything of their own accord?
NOTE TO RICHARD – if you dont think this helps to clarify the debate , no need to post this !
You are right
Oliver is wrong
And now rather abusive
“You are right. Oliver is wrong”.
Phew!.
Stick with it Richard. Thanks.
Oliver has a vested interest in the way the system works now.
The process by which banks create money is so simple that the mind is repelled. John Kenneth Galbraith
You probably know ithe quote already.
Thanks for posting this explanation. I’ve listened to this and read the other explanations you’ve posted about this previously and today on this blog, and I think I understand most of it, but there are a few steps I’m still struggling to visualize to help me understand the double entry bookkeeping of the whole process, which I hope you can help me out with.
Basically, the part I don’t quite understand is, if each commercial bank has its own CBRA, how does the Bank of England allocate the bonds it issues, and therefore the money it creates to repurchase those bonds, to each commercial bank when doing QE? Would this allocation decision be driven by those “other entities” that Jeff mentions above that buy/sell/own bonds and have accounts with the commercial banks? And just to clarify, who would these other entities be?
My original line of thinking on how the bonds and money is allocated, before reading your reply to Jeff, was that as the government spends money, that money goes into the bank accounts of the people and companies that are in receipt of government spending. But then, as it is paid into our bank accounts, that money the government spent becomes a debt that the commercial bank owes to the bank account holders, i.e. us. So in order to balance the books at the commercial banks, the CBRA of the commercial bank has to increase by the same amount of debt that the bank now owes to us bank account holders. The Bank of England would therefore have to allocate the issued bonds to those banks in such a way so that, when the bonds are repurchased, the new money created goes straight into those banks, balancing out their books.
Is the above correct, or am I missing a few more steps in the process (like the role of those other entities that Jeff mentioned)?
And if the above is correct, then would it theoretically be possible for one commercial bank to be the sole beneficiary of a round of QE? E.g. if the money spent by the government just so happens to go into bank accounts held at a single commercial bank?
The Bank does not allocate bonds to banks – unless they choose to buy them. Rather it allocates bonds to customers and the money flows through the CBRA oil that customer’s bank. The customer chooses which CBRA gets the boost. The same in reverse on QE.
What you are missing is all the ogtehjr flows every da7 through the CBRAs, whether tax, government spending etc
Richard,
In further support of your case, the Government/BoE did not pay any interest on reserves prior to the 2008 crash when it was brought in as yet another bank support mechanism, or further subsidy to the banking sector.
This arrangement can thus be simply unarranged, or at least limited.
They were tiny, remember, back then
£20 bn or so in 2007
Actually on rechecking the interest on reserves started in 2001. A flat rate started in 2009 after the crisis.
But it points to he fact that this policy is not set in stone and is arbitrary. Is is not a God given right for banks to receive it. As you say £36bn a year extra to the banks is obscene given what is a about to hit the less well off.
Precisely
Might you share a link?
I found this paper.
https://www.federalreserve.gov/pubs/ifdp/2010/996/ifdp996.pdf
There is a section on the BoE policy on page 11,
Also a good chart( Exhibit 4a), which shows when the payments started.
There was a bit of fiddling about with it in 2006 to reduce overnight lending volatility , but the crisis saw changed that to the current flat rate far as I can see.
https://www.federalreserve.gov/pubs/ifdp/2010/996/ifdp996.pdf
Thanks
Can I ask an innocent question?
What is the method of interest rate extraction for the Government by the banks?
How can they leverage an interest rate charge on their benefactor?
I am doing my best to keep up on the detail – the philosophy behind it I totally get but this is a grey area for me.
When you can BTW – I’m not demanding an immediate answer – it is the weekend after all.
They don’t leverage the charge
The Bank of England volunteers it
That is the free gift…..paid without reason
Well, if that is the case then that is a ‘fuck me ‘ moment !
So there we go!
Who is Government for?
Well, it’s for the rich obviously because the ex financiers/bankers and the like are in Government.
So, what do the rest of us propose to do about that?
Thanks for taking the time to answer.
If you imagine a small country with only one bank, the central bank, where everyone had an account with that bank, then the problem would not arise.
However, in the real world, the commercial banks act as middle men, the only cost to them will be changing a few numbers stored in their computer system, which will be running anyway. In effect the commercial banks are being paid vast amounts for a service that costs them next to nothing to provide.
True
The Guardian article on this says “The National Institute of Economic and Social Research (NIESR) said the losses were the result of the chancellor’s failure to insure against interest rate rises on £900bn of reserves created through the quantitative easing (QE) programme.”
How could the Chancellor insure against something whose outcome is entirely within his control?
He could not
I think the NIESR comment was absurd
They too do not understand CBRAs
I have mentioned this before, but not only Islam but in the past Christianity had a ban on usury.
What we now have is a situation where banks and the financial sector are making huge profits for themselves from money that the state created for nothing.
Should we not be revisiting that ancient ban again?
I don’t think that possible
But there are other issues to think about, coming soon