I posted this thread on Twitter this morning, summarising this post in a more accessible way:
The government is going to pay our commercial banks £136 billion of excess interest over the next five years on money the government gifted to them using the QE process. That's £27bn a year that could be used in the NHS and education. This is outrageous. A thread….
The key issue to understand here is that when the government made almost £900 billion of new money using the QE process that got spent into the economy via our commercial banks, like Lloyds, Barclays and Santander.
What happened as a result was that these banks ended up with over £900 billion supposedly on deposit account with the Bank of England. They are being paid Bank of England base interest rate on these deposits.
In 2021 that bank base rate was 0.1%. Even in March this year it was expected to peak at around 2% and then fall to 1.25%. Now the Office for Budget Responsibility forecasts a peak of 5% and then only a slight decline to 4.25% by 2027.
I used this new interest rate forecast plus forecast falls in these deposit account balances because of (unlikely to happen) plans to reverse QE to forecast how much extra interest the banks will be paid over 5 years as a result of the increase in official interest rates.
The answer is £155 billion of extra interest due over five years.
Now, in practice I accept some might need to be paid for technical reasons. So I adjusted for that. The excess payment then became to £136 billion over five years.
That is £27 billion a year on average for the next five years that the government will be paying to the commercial banks on money they never earned but were instead given because of the QE process.
Let me put this in context. £27 billion a year also happens to be the amount of increased tax a year imposed yesterday. All of that is going to our banks. They are the only people gaining from it under Hunt's plans.
Alternatively, £27 billion was the total cuts a year imposed yesterday. And what I am suggesting is that all of those cuts were made to ensure we can pay the banks what they are not owed, but which the government wants to pay them.
This is absurd. This interest need not be paid. There is no law requiring it. Pre-2008 nothing at all was paid on these balances. I reckon 0.1% on total balances over £100bn would be more than enough to fulfil the policy goal for making payments. And that would save £136 billion.
In other words we could, by simply denying the banks their unearned gains, provide enough to protect and reinvest in the NHS and to protect and invest in education.
The government has made a choice. They have decided banks should gain. As a result they have decided people will die and children will not get the future they deserve. And they have done that so that bankers can have massive bonuses on ill-gotten income.
I think this is wrong. I think it should be put right. I call on all politicians to stop these absurd and unnecessary payments to banks and to use the money for essential public services instead.
And for those who want the detail, my workings are here. https://www.taxresearch.org.uk/Blog/2022/11/18/spending-cuts-will-be-27-billion-next-year-which-is-the-additional-unnecessary-sum-the-government-is-planning-to-pay-in-interest-to-the-uks-banks-next-year/ Please complain. Please do so now. Tell your MP to change this, now.
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Richard, I’m curious on something that I’ve not heard anyone mention. As the NHS and education sector’s have massive staff shortages and staff are doing extra hours for free, there must be a massive amount of money being saved from wages budgets. Where is it? And if vacancies were actually filed, would there be any money to pay for it?
Presumably there would be no money to pay those wages….the NHS survives on understaffing now
Thanks
I am no expert on NHS, but I think they are paying vast fortunes to Agency (temporary) staff, at wage rates far above the earnings of NHS nurses. This is not going to assist the morale of an exhausted, overworked workforce. Hence staff are leaving before retirement; ans very experienced physicians and surgeons are leaving because of what appear to be counter-productivity pension regulations.
Staff encouraged to leave to the agencies and work only when they feel like it. Brilliant
Posted on Facebook. I know there’s a group that my MP reads, a group of people that the MP has banned from reading or commenting on his facebook page, but he reads ours and is welcome to do so.
Thanks
It is worth pointing out that from 1694 to May 2006 the Bank of England apparently never paid interest on current accounts, which is what the commercial bank reserve accounts are. For reasons that are entirely obscure to me (and I did read the paper from May 2006 where they announced this change) they suddenly decided they would pay Base Rate on these accounts. Previously Base Rate was the rate at which the BoE granted emergency or other short-term loans to the commercial banks (and still is). Charging the same rate on loans as you pay on demand deposits (current accounts) seems very odd for a bank, even if the BoE is not a normal bank. Maybe Clive can have another go as I do not understand how the interest rate paid on reserve accounts ‘transmits’ to anything. The Base Money can’t be removed from the BoE, so it can only move to a different BoE account. The only interesting thing is that the sole alternative for the commercial banks is that they could use their Reserve Account funds to buy a new issue UK gilt (which would debit their reserve account and credit the Consolidated Fund). If the government put the rate back to 0.1% on the Reserve Accounts, then there is suddenly almost £900 billion that I suspect the banks would be very keen to lend to the Treasury by buying new gilt issues. Shorter term gilts are treated as eligible reserves by the regulators, so moving the money into gilts instead of cash would not affect their reserve requirements. This would completely solve any funding ‘problem’ the Treasury might think exists, since the ‘market’ would suddenly have a huge demand for new gilts. That, of course, might well drive down the interest rate on gilts, so perhaps there is a reason for paying all that interest on the reserve accounts? Might it be to make the banks keep it as cash and thus suppress the demand for gilts and thus keeping the interest rate on those gilts artificially high? Another anti-democratic effort by the BoE to deny funds to the Treasury and keep borrowing costs inflated in that case.
Staggering how they had monetary policy without doing this to then and niw can’t do without this largesse
This is not monetary policy. It is a money giveaway
… another thought.
You could also mandate an “interest rate floor” on all accounts held at UK clearing banks. If you compelled banks to pay (say) base rate less 1% on deposits then that 27bn a year would go to depositors, not banks.
Now, that transfer from borrowers to depositors might not be a transfer that you want…. but it would achieve the objective of reducing the windfall to banks.
That would be amusing…..
Two things to remember. First, the BoE wants everyone to pay higher rates – we can question the wisdom of this but that is what they want. Second, the BoE does not dictate to banks what rates they charge and to whom they lend – they “guide” markets via open market operations (borrowing/lending cash (against gilts as collateral)).
So, ask yourself – “when the BoE Monetary Policy Committee ‘raises rates’ why do rates actually go up?”. Currently, this is through open market operations that drive rates to where the bank wants them.
As Tim observes, the BoE didn’t pay interest on reserves for centuries but the world changed in 2008. Until that point the UK monetary system was typically short of reserves – the economy was growing so there was increasing demand for reserve money to “oil the wheels” of commerce. So, without addition of reserves (via open market operations or government deficit spending) interest rates would rise to levels that damaged the real economy. Interest was never paid on reserves because there was always “something better to do with the money”. The “string” (that famously can’ be pushed on) was always in tension of varying degrees.
That changed in 2008; the BoE flooded the system with reserves (via massive gilt purchases (QE)) in order to push market rates to very low levels in the (vain?) hope of generating economic activity.
14 years on, the BoE now wants higher rates. If they do not pay interest on reserves then banks will buy gilts (if they offer substantially more than zero); if they buy gilts then gilt yields will decline; lower gilt yields will mean lower rates for non-government borrowers…. which is exactly what the BoE does NOT want.
To stop this flow of cash into the gilt market that would depress yields the BoE pays interest on reserves…. and the £27bn (a year) question is “can we do it differently?”. The answer is “yes” and give/take some technical issues they revolve about compelling banks to hold more reserves… and not paying interest on those reserves.
Agreed
First let me say thanks Richard/Clive for explaining this so well.
I do have one point of confusion which I hope one of you could clear up for me.
Clive says that if the BoE does not pay interest on the reserves then the banks will buy gilts. The implication (I think!) is that the reserves will be used to buy the gilts. My understanding (probably incorrect!) is that the reserve accounts can be used for only two things. 1) interbank sttlement and 2) purchase from the BoE of currency to stock the ATM’s and branch counters to cover cash withdrawls.
Clive, are you saying the reserves can be used to purchase gilts? If so by what mechanism? Just the same as purchasing notes? Is my understanding of reserve accounts incorrect?
Richard, thanks again for your tireless work explaining some very complex issues to me. I’ve learnt so much following your blog since 2018
Regards
Dave
Hi
First, read this https://www.taxresearch.org.uk/Blog/2022/06/17/how-are-the-central-bank-reserve-accounts-created/
THen you should see reserves are really created byu govern,meant spending more into the economy than they tax back, or sell gilts for
So, selling gilts requires the private sector to pay the government and that reduces reserves
It really is that simple
Richard
In reply to Dave Raughter…..
Reserve money can be used to buy anything you like. But if you are transacting with anyone other than the government then the level of reserves is unchanged… the reserves are merely shuffled from one account to the other.
Only if you transact with the government does the level of reserves change. They rise if the government spends money or buys gilts, they decline if the government collects tax or sells gilts.
Thank you
I forgot to make that clear
Richard,
The financial black hole is a government work of fiction.
Any economic rules quoted by the Chancellor are works of fiction.
To rub salt into the economic pain the Tory government has removed the cap on bank bonuses, reduced the tax banks pay and will be paying billions in interest to the banks which as you say is utterly unnecessary.
Austerity 2 , is not needed and will cause massive long term damage to the country and our fellow citizens. I note the government is saying that in 2024 it will return local government funding back to 2010 levels.
The media, except for notable sceptics, parrot that this is “economic normality” which will save the country from itself.
I see that the BBC is still giving the Tufton Street mafia the opportunity to quote.
It is incredible that the Labour Party is locked into this orthodoxy.
Unless Labour wakes up and offers a decent alternative there is no guarantee that in 2024 it will form a new government.
Will the Labour party and the Lib Dems ever raise this huge issue, or will they be intimidated into silence by their involvement in it?
The Labour party who initiated QE and the Lib-Dems who also gave it their blessing as part of the Tory coalition.
It is painful to see such huge sums of money that could have been used for addressing the Climate and Energy crisis, providing decent public services and paying a fair wage for a fair day’s work, instead providing an unjustifiable bonanza for the sort of people that are working so hard to make sure that none of these things happen.
Thank you Richard. I have written to my MP (Con) about this and await his response with interest.
Thanks
Here is the comprehensive and reassuring response from my MP: “I certainly appreciate your concerns about high interest rates and unfortunately there is now a general consensus that we are no longer in an era of cheap money. I will note your comments and consider them in my conversations with my ministerial colleagues and in my work in Parliament”.
Hopeless
uninvited guest- I also wrote to my (Cons) MP a couple of weeks ago asking for an official comment on this. She is usually very good a replying, but hasn’t done so yet.
Interesting debate, but not sure I understand fully.
When you say deposits, are you referring to reserves rather than deposits? My understanding of QE, and correct me if I am wrong, is that QE involved a purchase of bonds and a payment in the form of reserves (which cannot be lent out) to banks.
If we are talking about the same thing (?) then isn’t the only/main reason why the BoE pays interests on reserves because this enables them to control the rate of interest that banks charge each other. It’s an instrument of policy. Without it, they would lose control of the pricing of ST loans between banks and ultimately only the rate of interest charged on mortgage and consumer credit. That is something that you are seeking to avoid, isn’t it.
Thanks in advance for clearing this up!!
CBRAs are deposits. And I address the policy issue in the post.
Thank you, but still confused.
If we are agreed that deposits = reserves, then the BoE’s choice here is simply a matter of the effectiveness of monetary policy. Plus there is an unintended consequence here in that the removal of interest payments is more likely to result in higher costs of borrowing which I thought was something that we were trying to avoid?
Thanks anyway. It’s a matter that is raising quite some debate at least in the macroeconomics community, if not mainstream media.
I do not follow your logic
For context, I had read this last week
https://www.kent.ac.uk/economics/news/4546/breaking-the-bank-why-removing-interest-on-reserves-would-tie-one-hand-behind-the-back-of-the-bank-of-england
…and found the argument compelling.
Interesting topic to debate.
Do you really think we need to spend £27 billion a year to impose interest rate policy when this has never happened before in history?
Why?
Thanks for comment, I am not sure I accept the premise of that question. But thanks, it’s a very interesting debate for sure. I am still working on it…
“You are extrapolating from nowhere to come to a conclusion that is false”
Perhaps but I’m also being correctly apolitical and reading both sides of the argument including
https://www.niesr.ac.uk/blog/dont-stop-paying-interest-banks-reserve-balances
I have just been on a long walk with the Head of Treasury for a U.K. bank who agrees with alternative view and the fact that your proposal could ultimate lead to higher cost of borrowing for those that you seek to protect.
That article is utter nonsense
I will fisk it tomorrow if I have time – they should be ashamed of it. The assumptions are absurd
And, no one is apolitical, but I am non party political
Not sure I understand your thinking, or that I can help, but for what its worth my understanding is the BofE looked at QE as establishing the lower bound of interest rates.
Correct
Appreciate we re not going to agree in this but the more I read about this issue the more you realise
1. It’s unusual NOT to pay interest on reserves
2. Following on from (1), most central banks do this
3. They do it for mainly monetary policy effectiveness reasons.
One thing we can agree is this is not a Tory government or even a U.K. specific issue, therefore. Still interesting debate, so thanks for raising it.
They have done this since 2008
And never with significant interest rates
There is nothing normal at all about what is happening now
You are extrapolating from nowhere to come to a conclusion that is false
You are right, it is not just a UK issue…. but it is in the UK and the US where it is felt most acutely. Japan is still pursuing a low rate/QE policy; Eurozone and Swiss rates are still pretty low and after an extended period of negative rates which cost banks a lot of money there is still some sense of the benefit of higher rates being “owed” to banks.
In the US the same debate as we are having here IS happening.
Paying interest on reserves IS common now… but it has been a relatively new thing and reflects a massive shift from the pre 2008 economies where trend growth was still reasonable and reserves were typically in short supply. Prior to 2008 if you wanted higher rates you just stopped adding reserves and rates went up. It is different now, if you want rates to go up you must either
(1) pay interest on reserves an let that percolate through the interest rate markets. This is the “standard” approach being followed now.
(2) sell gilts…. which will drain reserves and deliver higher rates. The BoE would like to do it but the Kwarteng.Truss car crash stopped them.
(3) something else
(1) and (2), if carried out as they are at present, deliver a massive windfall to banks because the rate banks pay to depositors lags way behind rates paid by the BoE on reserves.
What might (3) look like. well, I see two possibilities. Either (a) force banks to pay Base Rate -1% on all deposits to restrict their Net Interest Margin to 1% on this side of their business. (b) force banks to hold higher levels of unremunerated reserves so that monetary policy transmission can be achieved by paying interest on a smaller chunk of reserves.
There are technical issues related to these routes that need fleshing out…. but it is a reasonable way to go.
The alternative is to allow bank share holders to trouser the money for doing nothing productive.
Precisely
This will be Hunt’s retirement fund, I imagine, to be split with grateful bankers and disguised, for his part, as consultancy fees, non-exec boardroom positions etc etc. I’d call it looting myself.
https://www.dailymail.co.uk/debate/article-11445479/The-week-Rishi-Sunak-Jeremy-Hunt-killed-dream-Brexit-dividend-stone-dead.html
Reading a bit of Andrew Neil here just for some devil’s advocacy.
He lives in a paradox. He wants to be Ireland and Luxembourg but somehow thinks that we need to be outside the EU in order to achieve that. I could understand if his complaint was high migration but it’s really brain dead.
He insults the social democratic model of Denmark, complaining of the burden on the middle class but its precisely because we cannot tax the ultra rich and multinationals properly that we have this situation.
We need a better Denmark. One where we can use central bank monetisation. It should be targeted to maximise productivity and minimise any change in risk behaviour in the economy. Ideally counter cyclical and inflation minimising too where possible.
Scotland has the chance to do this
England has the City
Dear Richard, I read your blog’s every day. I know absolutely nothing about economics but you explain the subject so very well for folk like me. Your explanation for austerity mark 2 is making me very angry. It also makes me very angry that none of the main stream media will explain this to the population, that they are being lied to again and again. None of the other political parties will call out the Tory policy either. It really verges on criminal, considering how many people will suffer. I do hope Scotland takes a different path once we are independent. Thank you for all your great work.
Thanks
Another proof that Tory governments are not about fiscal prudence or helping the poorest.
I will send this to as many people as I can.
Once upon a time there was only barter. However even way back then there were ‘chancers’ who didn’t like the idea of actually doing something productive in order to take part in the ‘process’. Coins were then produced in various metals which had ‘values’ attached to them, which of course varied according to differing circumstances.
Fast forward and the metals involved had reduced to silver and gold. The chancers then hit upon the (to them) brilliant idea of using paper instead of ‘precious’ metals.
Fast forward again and the chancers really surpassed even the scam of paper money and created it electronically using electrons which is where we are today.
So those who actually ‘work’ producing products or socially nec. services have their worth dictated by electrons which can be deactivated by a handful of chancers – laugh or cry, it’s your only real choice.
I think you should read David Graeber
Barter economies are unlikely to have ever existed. Money and taxation enable governments to get work done and obtain stuff. See: https://www.theatlantic.com/business/archive/2016/02/barter-society-myth/471051/
Paying interest on reserves was only brought in around 2006 to help the interbank lending market. It was then expanded after that market froze in 2009 after the financial crisis. No one at that time could have foreseen £900 bn of added reserves would be created. This new money now sits in UK bank deposits, the banks do nothing whatsoever to earn a penny of interest, they certainly received nothing for those reserves before 2006 when there was far less of it, so it makes no sense at all to now pay full base rate on all of it. It can be changed and it should be changed.
Agreed
From a (very) brief look at the comments following Coppola’s post, it appears that she thinks the interest should be paid for technical reasons… but says this could be recouped through a windfall tax. Which seems a bit pointless overall, but I suppose you have to have the fiction of central bank independence in the current climate.
I don’t think we can afford fictions that cost £27 billion a year
Someone seems to disagree.
https://twitter.com/Frances_Coppola/status/1593892402498076673
I will be honest, if she disagrees I am encouraged. If anyone ever gets most things wrong she dies
Just what I needed to know
I don’t have the detailed knowledge that you have but I never found anything of yours that turns out to be wrong in principle. David Blanchflower being a friend of yours futher gives me confidence in what you say.
Thanks
Here’s a 2 minute video & a petition if anyone wants to sign it. It was produced by Positive Money & echoes what Richard Murphy is saying……..https://positivemoney.org/stop-hunt-handing-bankers-billions-now-video-share/?link_id=1&can_id=271555d3f49df62a1a19c3a1f1d807c3&source=email-watch-the-video-the-bankers-handout&email_referrer=email_1736920&email_subject=watch-the-video-the-bankers-handout
Some of the contributions to this post leave me standing in terms of my understanding about the behind-the-scenes shenanigans – they’re really opening my eyes. Thanks.
When it comes down to it however, I go back to my previous point about the CBRA – it shows starkly how Government money creation mechanics have been captured by the rich, banking and the funding apparatus of political parties leaving the public sector in a mess. I was reminded of this today by an incident only this morning………….
This morning – on my way to get some worming tablets for our cat and totally minding my own business – I was ‘accosted’ by a huge brown Staffordshire Bull Terrier bitch – one of my favourite breeds of dog – we’ve had them and each one has been a lovely pet. The Staffie lunged at me whilst on a harness (plus what I would call ‘dog-fighting bling’ like a spiked metal collar which looked like it had come from the set of the movie ‘Gladiator’) being held by her owner whom I will call ‘Tattoo Man’ because of the spider’s web tattoo he had on the top side of his face. Tattoo Man was accompanied by two tiny kids and a small woman and other dogs – I took this to be a family unit.
The Staffie lunged and pulled Tattoo Man in her wake and made contact with my right knee. There was pain and surprise and I called out in exclamation and remonstrated with the ‘owner’. His response was ‘She hasn’t bit yer’ and ‘You were too close’ (!!!).
Further discussion with Tattoo Man – a ‘man’ of slight build – just the sort to use a burly dog to bump up his masculinity rating – was useless and led to scoffs and threats – it was my fault apparently.
Being concerned now more about the behaviour of the owner than the dog (and his tiny kids), I looked for help. Zilch, in a public park on a Saturday morning. Zilch.
So, I got back home and looked at and cleaned up my knee which has a long bloody scratch on it. For all I know, the scratch was caused by the stupid spiked collar the Staffie was wearing!!
So I rang 999, to be told to ring 101 instead and got through to what I think was a policeman and politely gave him my story whilst he was sat in a building some 22 – 26 miles away from my rural town. He had no idea where the park I was ‘accosted’ in was at all, but he did his best.
But I mean, where are the ‘local’ police? The local police station was closed down around 2008. It has no front facing victim or inquiry reception, but the cops hang out there as there are police cars around the back.
So again, there is the CBRA standing there in total splendour and in plain sight doing what Tim Rideout, John S. Warren and Clive Parry say it does, no doubt, whilst just a little episode in a park on Saturday morning seems to sum up the hollowing out and weakening of the supporting architecture of our public society and commons.
All in the name of what exactly? Greed? The destruction of hope? Wearing us down?
Until I hear Labour or some other party telling me that they are going reverse all of this, I’m not voting for any of them. I’m not sanctioning a sham anymore. Sorry.
I have been a dog owner but am no more
Fascinating now I am jot because I see how dire dog owners are
I have a friend who is a competitive Nordic walker – walking with poles
They have had police complaints to deal with claiming they hit people’s dogs. They don’t. Dog owners let their dogs – usually in 10m leads (I hate extendable leads: my dogs always learned to walk to heel and always did) walk into my friend and so the polls hit them because the dogs are 10cm from my friend’s knee, which is apparently just fine – when it most certainly is not
The police are more sympathetic to the dog owners than walkers, it seems
Not surprised at all by your encounter. Where we used to live in Hove, a woman was walking on Hove lawns and a big dog knocked her over and she suffered a broken leg. The dog’s owner and friends just laughed at her and walked on. When she phoned the police they said it ‘was not a police matter’. It does seem that they only get engaged when it’s something ‘political’ or’ drug’ related. As any would be recruit who is perceived to be centre or left of centre never gets any further Joe Public must expect this kind of treatment to continue.
I live in a small town in SW France, a 5 minute walk from the GR36. It’s been resurfaced all the way to Albi (16K) so great for walkers/cyclists and dog owners. I have never encountered a single dog owning klootzak in the 4 years I have lived here. The cyclists are considerate, the worst you can expect is not to have an acknowledgement returned. It used to be the same in the UK but that was a long, long time ago.
She seems to prefer a windfall tax on the banks – which seems a roundabout way compared with just reducing their interest income on ‘our’ money. Seems she is going to produce a detailed note .
She blocks me
I also argue fir a windfall tax on banks – because they are unproductive rentiers
But why tackle this problem that way when the whole policy if high interest rates is wrong and can be best solved by stopping it at source?
As usual, baffling
But she never understood QE or money so I guess I can’t expect better now
QE (Quantitive Easing) was always a way of removing banking risk to the populace (collapse of banks), who depended on stable banking (which was severe) to the national government. Nothing has changed. Promises were made that need to be kept, one way or another, by the nation, for its (locally) stable money.
The hidden problem is more about whether wealth has been unreasonably extracted from the nation (people), and whether it can be clawed back. “My pension is still promised for many a year”.