I tweeted this thread this morning and as I write it on Twitter this is the way I will share it here:
I then added this:
What is clear is that no one is in charge, and those that think they are appear to be completely clueless, but power mad. Apart from that, all is just fine in the world this morning.
Of course, they may not be power mad: they may just be clueless. In that case, there is no coup, just mayhem instead. But I can't explain Baliey's actions with that option, because he chose to intervene as irresponsibly as he did and he must have had a reason, even if it has not been stated.
Likewise, the Bank must have a reason for overnight saying they may provide continuing support for markets even though he suggested yesterday that it will end on Friday. In other words, they may have begun a counter-coup whilst he is in New York at the IMF. I think that is plausible.
Whatever the case, I think the best explanation is a power struggle. But whoever wins, I doubt we will. And that is the nightmare scenario to come.
Today has the making for being a disaster, but who knows? It is apparent that those in charge do not.
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I thought that when the Bank was buying the gilts, the Bank was saving the pension funds from insolvency due to Kwarteng.
This letter from the BoE to a Parliamentary committee explains clearly that the BoE gilt-buying is to save the banks, not the pension funds. The chaos in the long-term gilt market caused by pension fund LDI investments failing threatened to carry over to the banks as the counterparties in the LDI trades, so the BoE stabilised the gilt market to save the banks. Pension funds maybe got saved (until Friday) as a side-effect. Interesting that he says most LDI funds are based outside the UK (presumably in secrecy-jurisdictions). https://committees.parliament.uk/publications/30136/documents/174584/default/
Sorry – but that is the direct result. The indirect one is that pension funds are saved
Whom the gods would destroy…
Odd how true that remains.
So, power struggles at the BoE and in the UK government. Both currently seem determined to wreak the economy.
What a mess. There is a fight between the BoE and the Government and we, the public, are the “collateral damage”.
I have some (but not much) sympathy for the BoE. Government is blaming the BoE for high inflation with suggestions that rates should have gone up more quickly and earlier. If you turn up the heat on the BoE over inflation and they only have two tools in the toolkit (QT and higher rates) then we should not be surprised that they use them.
With regard to the gilt market intervention, the BoE has been clear – it is all about maintaining an orderly market that will allow pension funds some breathing space to sort out their act. They do not want to get into another round of QE or push gilt yields to a level that runs counter to what they are doing with policy rates. Besides, gilt buying that goes beyond market stabilisation would require a mandate from HMT that just is not there.
If the Government wants the BoE to pursue a different course then they need to say so; right now it is being set up to fail so that Truss/KK have someone to blame when the wheels come off.
I don’t see the Bailey comment as a challenge to democratic control of economic levers….. rather it is a call from a ship’s helmsman to the captain – “I am following course and speed you requested… but we are headed to the rocks. I have eased back on speed temporarily but I really need you to set a new course”.
Currently the government is saying “there are no rocks – keep going. Oh, and by the way if we hit anything it is your fault”.
The solution is simple; reverse the tax cuts, target the Energy Support more efficiently and use the fiscal headroom to support public services.
Clive
We agree on much but not what Bailey is seeing – which the Bank appears to be reneging on this morning
Signalling is appropriate, but not in that way, in public
Richard
I agree, such public disagreement/confusion is very damaging. Presumably, Bailey “going public” is a result of failures to get a response in private.
As you know, I am no fan of BoE/HMT monetary orthodoxy….. but given that orthodoxy I am not sure what the BoE is supposed to do in the face of such wilful incompetence in Government.
Maybe…..
Prompted by your excellent post, I checked whether the Remembrancer (City of London Corporation’s agent within the House of Commons) may have had a part in this debacle. Wikipedia has a bland ‘not me Guv’ explanation about Parliament’s Remembrancer… but also notes that George Monbiot and Caroline Lucas have in the past raised questions about the role. My understanding is that, since 1571, the Rembrancer has kept a low profile… giving few if any interviews. Can anybody shed light into my darkness?
I can’t
Nick Shaxson might
Hadn’t read all this into it Richard. It did seem weird for Bailey to come out with this in the way he did, but just thought it was his way of putting the ball back in Kwarteng’s court saying – ‘you have to withdraw the budget and start again this week, and bring your Oct 31 date forward to the next few days.’
Maybe none of them really believe or understand QE – but they have used it, and seem to have no alternative , as you say.
This is not a game, this will affect people’s lives – their ability to pay for food, accommodation, their ability to live. And yet we have these morons d***-waving, massaging their egos and being prima donnas.
This should consign the likes of Daggers (Truss), Queasy (Kwarteng) and their ilk forever to the dustbin but I’m not confident it will.
Unbe-bleeping-lievable!!!!
Craig
Of the many utterly remarkable actions taken by the govt and BoE over just a few weeks (hard to remember it was just weeks not months ago it kicked off) is the complete lack of interest apparent in how ordinary people are affected and are going to be affected by this. The households energy price cap still delivers literally millions to poverty. The business relief scheme leaves tens of thousands of SMEs facing bills three times or more what they were paying. And the effects on pensions – words almost fail me. But it’s as though it’s just a game for them – a rivalry between different factions in the govt, Tory Party, Treasury, Bank, City and so on. You expect this from hedge funds; there was a time when you wouldn’t expect it from everyone else in power. And yet you could model the effects of the lack of discetionary spending on the already-hit SME sector, and the same in reverse – it’s not difficult, and it’s only a part of what is happening. And the speed of this – no, it’s not remarkable, I take that back: it’s shocking.
Richard
Its as if you and D Blanchflower knew this would happen and almost predicted it. Now the debacle is all being played out right before our eyes.
Hence why you guys called for a completely brave new world and way of thinking when it comes to the BoE’s role, governance, independence, structure, decision-making process, powers etc etc.
So what kind of support have you received on bringing about this change (that is so urgently and obviously needed)? Is there any kind of momentum gathering with others joining your call for urgent and swift action?
If not, then I really worry that much more suffering, damage, misery, hardship is on its way which is all deliberate and created by those in power and they will make sure and push very hard that all the agony and anguish falls directly on those that are worse off and least able to deal with it.
PS – pls keep the next 2/3 weeks and especially Mon 31 Oct free – I think you will need a clear mind, diary and schedule to deal with all the s*it that will be flying around.
Not much advance on that, I am afraid
I agree with Richard that it is unconscionable for the Bank to put a pistol to the Government’s head. But there is a theory abroad that it is not just the pension companies threatened by higher bond yields – it is the retail banks which don’t have the collateral to meet their counterparty commitments on the bets the pension companies have made. So the Bank bought bonds from the distressed pension funds to ease the pressure on the banks. That was really what Bailey was up to. His ultimatum was indeed addressed to the Chancellor but the mischief he was dealing with was with the banks. The mini-budget was so clumsy it actually threatened the continued existence of retail banks. Bailey thought there was no way the Government wouldn’t change course. So he was pointing the pistol with good motives, although pointing the pistol is not a good look. But it might be better than the alternative.
Noted
Yes, this “theory” is in fact what the BoE says in this letter I posted earlier: https://committees.parliament.uk/publications/30136/documents/174584/default/
So, the real people in the world are caught here between a standoff between then Bank of England and the Government. They’re now playing a game of chicken – who will blink first.
The real clue to the ineptness of it all is that in reality, the Government can call the BoE in for chat and lay down the letter of law.
I would. I’d have no problem issuing Bailey with an ultimatum – putting him in his place and send him on his way if he refused to do as he was instructed.
But it seems to me that Truss & Kwarteng don’t even know what they can do. They obviously did not like the bank when they came to power, and I think that they under-estimated Bailey’s intransigence.
You cannot play high politics with such low intelligence.
I’ve never seen anything like it.
None of us have
Well, well, well………………….I couldn’t believe my ears when I heard Gillan Tett say this in answer to Rees-Mogg’s assertion about the crisis:
https://twitter.com/Haggis_UK/status/1580281080380211200
I think I was stunned!!
It was quite amusing
It was a good thing I wasn’t drinking my morning cuppa at the time I watched it.
I wished I had seen it live. That was brilliant.
Craig
Were the subtitles auto-censored 😀 – Bollocks or bullocks, JRM was still talking codswallop.
I was watching too. Gillian Tett is a highly respected commentator and her books are well worth reading. She knows what she is talking about.
It certainly made me laugh. This lot would be a complete laughing stock if it was not so serious.
Richard, you and Bill Mitchell are both very knowledgeable and experienced commenters from the MMT perspective. You seem to disagree about the BoE position regarding support for the pension funds. Yesterday Bill said in his blog “The reality is that the pension funds need to be reined in and forced to withdraw from their ‘greed’ positions and to get back to ensuring they have sufficient assets and commensurate returns to cover their liabilities”, and suggested that the govt. would step in to prevent the collapse of the pension schemes if it became necessary. What is your take on that?
I agree with him
The pension fund investment policy has been reckless and irresponsible
But that that does not mean they should not be saved
Uninvited Guest:
I might have got this wrong, but my understanding of Richard’s twitter thread was not that he was against BoE’s support for the pension funds but against his subsequent announcement (which he had just made) that it would end on Friday 14th. But this was not made explicit in his thread and I was initially confused by it. Maybe Richard could confirm.
You are right
Wrong way round I think. My query was that Richard believes the bond purchasing should continue for now to avoid collapse of the pension funds, but Bill Mitchell thinks it should stop as it just feeds the greed of those gambling on the market.
That’s Bill being as about as rational as he was on Brexit
He does not always connect very well with the real world
I do believe Bailey knows the benefit of QE for the people but the goes against neoliberal ideology. His actions are driving us towards IMF borrowing an action whch could be interpritated as out of the theories of Milton Friedman. If true we are going into one hell of a roller coaster.
I am sure it is complicated but with this blog as a stand out exception, underlying principles, often seem to get ignored. Help me here I have more questions than answers.
Is this not a predictable outcome, the end point in the idea that the economy is merely a technical management issue? Did making the BOE independent ignore the fact that what we have actually is a political economy? Surely the only surprise here is that the BOE is at odds with a Tory government rather than a more radical one (and note the irony that it was Labour who brought this separation into being about the time it took a pension fund windfall).
I read about pension funds hedging using derivatives. I have always understood derivatives to be high risk. I have a drawdown pension and my FA makes me do an annual risk assessment. “Normal” pension funds don’t do this. So is there a governance problem with traditional pensions? What do the trustees know? Do these (and other) funds incentivise managers with short term (paper) gains and pay them (real liquid) bonuses. Do they encourage churn (trades earn fees). Did they actually act in good faith to meet shortfalls that really needed to be made up by increased contributions (or smaller benefits) and not speculation?
Aside; pension funds have cash shortfalls but I also remember pensions holidays and they are not always short of money when they are abolished. When Glaxo killed its defined contribution scheme it was fully funded but “not in keeping with the times” which is shocking in my view. And firms can still raid them for investment as I understand it, despite Maxwell. When Kodak was killed by digital photos its pension funds also went.
So back to the questions.
Isn’t the biggest problem in the high finance side of the economy simply the moral hazard caused by taking risks with other peoples money. Could that be the start of an alternative narrative. Get back control of our money?
Shouldn’t we be looking to start with simple changes like:
(1) An annual risk assessment for your deposit account this might pull people up short and increase understanding
(or we could just separate retail and investment banking as came about after 1929 but not it seems 2008)
(2) Make investment bonuses (liquidising a paper gain) only payable when the itself gain is made liquid by some one make in an actual withdrawal? The row about bankers bonuses misses the point that when limited they were gamed by increasing salaries.
(3) Make fund managers consult members on decisions that they make on boards – by analogy if TU bosses have to consult because the block vote wasn’t OK then isn’t the voting power of fund managers just a form of block vote?
(4) if employment is changed a lot why not one pension scheme the follows the person that the employer has to sign up to – why have lots all front loading their start up fees on the initial investment?
(5) change corporate governance – do the thought experiment – what funds and businesses do effects us so we should be on their boards asking questions and being difficult – 180 degrees different to inviting them into government and having them design the legislation…quid pro quo for plc status.
I understand a 5 year term is short so I look for small steps that could have big consequences. Are the ones I suggest starters? I don’t see much thinking like this manifestos and policy think tanks (am i reading the right stuff). Is this because the justification fir this type of change would need a different narrative? Or is it because, or even though small, this type of change would be met with a tidal wave of opposition by (off shore) financial power? Or what?
And the biggie question that is really frightening; is this the beginning of the end – the collapse of the whole fiat money process. The implosion of the ponzi scheme. If so we may well end up like Argentina and no one is safe – Enough is Enough?
Thanks
Is it time to do away with pension fund trustees who, certainly from the employee side, are well meaning individuals with no idea or proper training about their role? Pension funda are multi million pound organisations that need professional and regulatory control
So how do we make sure employees are protected?
How do we make sure employees are protected?
Regulation that is properly enforced. Employee-elected trustees are a smokescreen. They rarely have the training or the ability to ensure proper financial management of a pension fund.
But how can we achieve that?
Thank you everyone for such an enlightening, well argued, and well mannered contribution to the understanding of those of us wrestling with the ‘politics of Finance’ from the ‘social and political’ end. And thank you Richard for orchestrating all this and getting it out there in so lucid a narrative. Onwards and upwards all!
I don’t understand why there is much talk of Kwartengs “unfunded” budget. What does “unfunded” mean here? I am not aware that he intends to use direct monetary financing ie the BoE buys bonds directly from the treasury. Indeed I have read that Kwartengs writings show him to be very against the concept of fiat money. Is it just that he has not yet spelled out what combination of orthodox “funding” he has in mind?
That is it