Since writing my last post on the bankruptcy of the UK government, I came across a different story in the Times:
The Bank of England will begin radical moves to “print money” in as little as two weeks as it embarks on an aggressive new phase of its efforts to stem the economic slump.If you read the article, there is clearly a sense of urgency coming through. When Quantitative Easing (QE) was originally proposed, it was suggested that March would see a start. This is replicated in the current article, but there is a sudden sense of urgency. Why?
In a surprise acceleration of its fight against the recession, it emerged that the Bank has already written to Alistair Darling to seek his permission to begin so-called “quantitative easing”.
However, the reason for my returning to the subject is this, from the same Times article:
With the Chancellor expected to give a rapid green light to the scheme, the modern equivalent of printing money, the MPC will deploy the cash that it plans to create to buy up company IOUs and other assets held by Britain's banks, including gilts [Bonds] previously issued by the Treasury.This was the original Telegraph article I used in my last post:
'Charlie Bean [the Bank of England Deputy Governor] put his weight behind the pound's 25pc fall over the past year in an unusual comment on the pound. Mr Bean also confirmed that the Bank is poised to start buying government bonds in a drastic attempt to resuscitate the stricken economy.'As you will note, the Telegraph article implies that the bank will buy bonds (gilts) directly but the Times suggests that the BoE will buy gilts from banks, not in direct auctions by the UK Debt Management Office.
The interesting thing to consider is that the banks are now in the pocket of the state, so a deal where the banks sell the BoE gilts, then the banks replace these with newly auctioned gilts looks a realistic way of burying the BoE's buying of the gilts overall. The banks can just keep buying the gilts and selling them on to the BoE, whilst the bank holding of gilts remains relatively static.
If in doubt, however, the answer is to go to the original source, so I took at look the latest minutes from the the Bank of England MPC and this was how they stated their intentions:
But the MPC could also influence the economy by controlling the quantity of that central bank money directly. Increasing the supply of central bank money in the economy through additional purchases of government securities should raise private sector spending, both directly (through the increase in money holdings of private sector asset sellers) and indirectly (through an expansion by banks of the supply of credit).You will notice that all of this is a bit vague and not too clear at all.....I conducted a search on the BoE website, to see if I could find any details under a search for 'quantitative easing' and found no results which offered any more detail on their policy, and how it will be conducted. My search is linked to here (the search was made 19th February, and may change if new material is added by the BoE).
This is rather curious, in light of the fact that the BoE is about to be creating £billions of money (printing money). I would have thought that, with the country in an economic crisis, the BoE might offer something about what it is planning? I mean, they are about to embark upon an action that, even amongst their own economists, is surely seen as drastic. And no details....??? Surely such a dramatic move would have a dedicated and detailed outline of the action and policy....
However I did find this document, which is Mervyn King talking to the press. A Financial Times reporter points out that the BoE February 2009 inflation report is a 'bit waffly' on the subject of quantitative easing, and refers to the BoEs discussion on pages 44-45. Inevitably, I took a look at this section. I found the following quote (the APF referred to is the Asset Purchase Facility which was granted to the BoE in January to buy up to £50 billion of financial assets):
In such circumstances, purchases by the APF would be financed by the creation of central bank reserves. This approach to monetary policy would continue to exploit the Bank’s position as monopoly supplier of reserves. But instead of focusing on reducing the price of those reserves — as now — the MPC would focus on expanding their quantity, using the proceeds to purchase a range of financial assets, for example government securities and the private sector assets targeted by the current APFThe FT reporter is quite correct, in saying that it is waffly. In response to the FT reporter's comment, Mervyn King points out that the BoE has always purchased gilts as part of open market operations. However, this is entirely a distraction and not of any relevance. He goes on to say the following:
What we now will be moving to is a world in which, again, we will be buying a range of assets, but certainly including gilts, in order to ensure that the supply of money, initially base money, but the impact is on the broader supply of money - that's what matters - in order to ensure that the supply of money will grow at an adequate rate to keep inflation at the target, and that normal rates of economic growth can resume.Are we any the wiser as a result of this response? I would say not. He later adds even more confusion by mixing together the APF with buying gilts in normal open market operations, and the general purchasing of gilts, and QE measures.
And that I think is the essence of the operations. Now we've already announced a variant of that, which I think is a more unconventional approach. I mean, what I've just described, which is central banks buying government assets in order to ensure that either the overnight rate or the monetary base are consistent with their target for inflation, those are very conventional activities and they've been going on for decades. And that's why I called these - in my speech recently - I called these activities conventional unconventional measures.Here he is suggesting that QE is comparable with normal central bank operation, whilst at the same time saying it is not! Followed later by:
As a result I think we think these operations, which I call unconventional conventional measures, and the more conventional ones - buying gilts - are a natural partnership; they go together. And I would see us operating on both of them.You may notice that there is no mention of how the gilts will be purchased here. We are still none the wiser as to how the operation will be conducted.
A Bloomberg reporter also later presses Mervyn King on the issue, and on transparency, and independence of the BoE. Again, the answer is waffling. Mervyn King goes on to say:
If we were to get to a point and we may well when the Monetary Policy Committee feels that it would like to create Central Bank money to finance purchases of assets, whether it's gilts or whether it's further credit easing operations then a resolution willIf you look at the minutes, and the form of the minutes, there is no obligation to provide any detail on what will be done. The minutes are meaningless as a reporting instrument - and they are not designed as such. They are there to show the overall policy decision, not implementation and detail. As such, there is no mechanism for reporting what will actually be done, or how.
be put to the Monetary Policy Committee after a discussion and the Monetary Policy Committee would vote on the operations it wanted to carry out. And it would then delegate to the Executive as now the actual authority to carry out the operations itself to deliver that impact. And the minutes would come out at the normal time and would reveal what the Monetary Policy Committee had decided to do. [my italics]
Just to add to the worries, Mevyn King later admits that the the BoE will be coordinating with the government's Debt Management Office:
But it's clear the Central Bank has to work in a way that the Debt Management Office, or the funding operations of government are not working at cross purposes, they have to work together. That is the only difference I can think of. But there is certainly no compromise at all of the operations of the independent Central Bank. And we will be just as independent as the Federal Reserve.In other words, the government and the BoE are going to be working together. I am genuinely puzzled as to what these 'cross purposes' might be, in light of the explanations of why QE is being undertaken. It seems simple - the BoE buys assets to inject more money into the money supply....what coordination does that require? They later give a very vague answer to this, that never deals with the specifics.
In a later reply to a BBC question we get a little closer to an explanation (of which I am very dubious) of why gilts are being purchased, which hints at direct purchase, but is still unclear:
Well I think what we're doing in terms of our buying government gilt is to reduce the net purchases which the private sector have to make of those instruments. And that is the essence of under funding. So provided the Debt Management Office keeps itsIn a reply to the Economist, Mervyn King later gives a hint of the potential scale of Gilt purchases:
sales of gilt the same, if we then buy them and create Central Bank money that will reduce the size of purchases that will have to be made by the non-bank private sector.
[...] order to increase the supply of money overall by an appropriate amount to top that up by actually making potentially significant purchases of gilts. [my italics]Interestingly, the Economist journalist was having difficulty in untangling the APF from ordinary operations from forthcoming QE measures. I find it a little worrying that none of the journalists even asked how much money might be printed, how it might specifically be used, and what the operation of purchase of assets will be. This perhaps explains the difference between the reports in the Times and Telegraph.
The problem is that, throughout the whole press conference, there is absolutely no detail on how much money will be created, what assets will be purchased and how they will be purchased. I did find one other document, but it offered even less clarity.
What we therefore have is a situation in which the BoE is going to print unspecified amounts of money with no clear policy statement, no detail on either how or what they will buy, and with no formal system for reporting on this.
Does this not seem odd to you?
Meanwhile, in the comments section of my last post I added my own comment and linked to this news:
I like the words 'such as' which I have highlighted here, which are suitably unclear. By strange coincidence, this change will allow the BoE to make direct purchases......A funny coincidence perhaps?
The U.K. government-bond market is set for its biggest overhaul in more than a decade amid concern that buyers could be swamped by a huge increase in issuance.
The expected changes would overhaul the 300-year-old system of auctioning the bonds, known as gilts, to specialist market makers employed by banks. They could instead open up the gilt market directly to investors such as pension funds.
The problem here is that the government has got form on this kind of odd behaviour, but were 'found out' last time. This is the matter of the BoE not having to publish the amount of money that it creates. I will quote my post on the subject.
It is for this reason, I suspect, that the Bank of England is planning to print money, and the same reason why they changed the law in the banking in an Act of this year as follows:It all looks painfully familiar. In one case, a little clause in an act so that they do not have to tell people how much their printing in a change to a very old act, and now changing a 300 year old system. It seems that, as if by magic, modernity is finding its way into the system.....235 Weekly returnThe act can be found here, and the relevant section is on page 115. Here are the words from the original act of 1844 that has been repealed (to be found on the first page of the pdf copy on the BoE website):
Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall
cease to have effect.6 Weekly account in form in schedule (A.) to be rendered by the Bank of EnglandEssentially, it now possible for the Bank of England to print money and not tell anyone about it. I was originally made aware of this on the Guido Fawkes blog here. I have previously quoted several reports that there have been problems for the government in raising finance.
… An account of the amount of Bank of England notes issued by the Issue Department of the Bank of England, and of gold coin and of gold and silver bullion respectively, and of securities in the said issue department, and also an account of the capital stock, and the deposits, and of the money and securities belonging to the said governor and company in the banking department of the Bank of England, on some day in every week to be fixed by the [Commissioners for Her Majesty’s Revenue and Customs], shall be transmitted by the said governor and company weekly to the said commissioners, in the form prescribed in the schedule hereto annexed marked (A.), and shall be published by the said commissioners, in the next succeeding London Gazette in which the same may be conveniently inserted.
As regular readers will know, I am not very positively inclined to conspiracy theory. However, what we have is two significant changes in the financial system which also happen to be very useful for the hiding of mass direct purchase of government debt. These changes happen to be happening at a time of financial crisis, at a time when the government is running up a debt mountain, and when the £GB is falling like a stone and likely to scare off overseas investors....
...and quantitative easing will be taking place with no publicly available formal policy document, with the sole reporting being the MPC minutes.
You may note that I am, to say the least, rather suspicious.......
One other thought keeps nagging me.
Why the urgency? If this policy is not an act of desperation, why must it be done right now....?? I mean, what difference would a few weeks make? An economynormally takes about a year to respond to interest rates= changes, for example??
I will leave you with that thought.