Bank of England - Straight Answers on Money Printing

As many readers will be aware, I have been pressing the Bank of England (BoE) on details of the Quantitative Easing (QE - Printing Money) policy that they are undertaking. As I mentioned in my posts there were several changes taking place that would allow for the BoE to directly finance government borrowing with printed money. However, I do not like conspiracy theory, and would rather seek clarification of the situation, and therefore wrote two letters to the BoE to this end. I now have had a response from the BoE.

I will let you make your judgement on the responses overall. However, there are three possible interpretations of the answers as follows:

1. I asked the wrong questions, or asked in the wrong way.
   
2. The answers are clear and represent policy
3. The answers are not telling the truth

My own view is that I believe the answers to be truthful, and they appear to be clear and seek to answer my questions. I do have a few doubts about my questions, but think that they were well enough phrased to have some confidence. The questions and letter follow, with the answers from the BoE in blue text.

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In the letter written by the Governor, he mentions a figure of £150 billion being available for the purchase of assets. Can you clarify whether this figure is an additional facility over and above the £50 billion that was previously available in the APF? In other words, can you confirm that this £150 billion is all central bank created money?

This is not an additional sum - the MPC has now been authorised to use the APF to purchase eligible assets financed by central bank money up to a maximum of £150bn. The issuance of Treasury Bills for the purchase of assets will cease and funding will be through the creation of central bank money. Up to Friday 6th March, the sum of commercial paper purchased through the issuance of TBills, less redemptions valued at initial purchase price, was £985mn. Any purchases from Friday 6 March would be purchased using central bank money.

Can you give a projected split / proportion of which type of assets will be purchased in the period March-May, and the period June-August 2009? Please give totals or ranges under consideration, and any projected figures that you are using as the most likely scenario?

At last Thursday's meeting the MPC decided to undertake a programme of asset purchases worth £75bn. The Committee recognised that it might take up to 3 months to carry out this programme of purchases, so it is only possible to talk in terms of March-May. Over that period the MPC anticipate that the majority of the purchases by value will be gilts, with the remainder purchases of private assets. The first gilt purchase operation will be held on Wednesday 11 March. The total size of that operation will be £2bn. Subsequent auctions will normally take place every Monday and Wednesday (to be clear, next week there will be just one operation, on Wednesday). The Bank will announce on its wire service pages each Thursday the size of gilt operations to be held the following week. There is more information in the Market Notice published 5 March 2009: http://www.bankofengland.co.uk/markets/marketnotice090305.pdf

Can you give a clear description of how the split/proportion of assets to be purchased under QE has been determined?

The Governor stated in his letter to the Chancellor dated 17 February 2009, that in recognition of the importance of supporting the flow of corporate credit, up to £50bn of the £150bn total should be used to purchase private sector assets. The Bank currently accepts commercial paper issued by UK corporates, both at issuance and in the secondary market and is consulting on proprosals to purchase: Corporate Bonds, paper issued under the Government's Credit Guranatee Scheme, syndicated loans and asset backed securities with viable securitisation structures. It will be up to the Bank executive to decide what mix to buy, and how much, up to the £50bn authorised. The Bank will not necessarily use all of the full amount. Purchases of commercial paper are very much supply driven, hence the Committee's acknowledgement that in order to meet their objective of £75bn worth of purchases, the majority by value over the next three months will be of gilts.

Can you confirm that, under no circumstances, will the BoE be making direct purchases from the DMO of gilts? This question includes a request for confirmation that you will not be using a proxy to act on your behalf in DMO auctions, or a proxy used for direct purchases.

The Bank of England will not make direct purchases from the DMO, nor will it use a proxy to purchase assets from the DMO on the Bank's behalf.

Can you confirm that there will be no use of the provision of the Bank of England Act of 1998 15.2 (a) and (b) as a reason for non-disclosure of any purchases made through the APF, or any other provisions of the act? In other words, will there be full disclosure of what has been purchased, how it was purchased, and in what amount? I note that the MPC has no obligations to report this information, and the readers of Cynicus Economicus would therefore be reassured by a formal statement committing to such a policy.

The Bank intends to operate in an open and transparent manner. As indicated in the Market Notice of 5 March 2009, the Bank will announce on its wire services pages each Thursday the size of auctions to be held the following week and the stocks to be purchased. The results of the competitive auction will be anounced on the Bank's wire services pages as soon as possible after their end. The Bank will publish, for each stock offered, the amount purchased, in terms of total proceeds; the total size of offers received; the weighted average price; the highest accepted price; and the lowest accepted price. The Bank will publish each Friday at 10am the total amount of gilts purchased in these operations that week, in terms of the total proceeds; and the sum of gilts purchased, less maturities, to date.

And as indicated in the Governor's letter to the Chancellor dated 17 February 2009, the Bank will continue to operate the APF in an open and transparent manner, including publishing a quarterly report of the transactions undertaken, and where appropriate, information on specific transactions and operations. The amount of commercial paper purchased is already reported at 10am each Friday. To aid transparency, purchases financed by central bank money will be identified separately from earlier purchases using TBills. I hope that satisifies your concerns in this regard.

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I am still not of the view that the policy is as transparent as it should be, but am largely satisfied with these answers (comments welcomed). From the above it is still possible, as I highlighted in other posts, for secondary purchase of gilts by the BoE to be used to stimulate the purchase of new issues gilts at DMO auctions. However, from their answer, they appear to be in a position where they will not take a role in this process over and above what is stated.

The alternative method for the BoE purchases to drive purchases of new issues of debt is through an indirect method. This method is for a government entity (e.g. the Treasury) to ask for a bank to sell their holdings of gilts to the BoE and then replace these with purchase of new gilts. Under normal circumstances this would be an improbable scenario, but now that the government has significant influence/power over certain banks, it becomes possible. However, having said all of this, it can only be speculation at this stage.

In the end we are left with what appears to be a non-conspiracy (at least on the part of the BoE), and speculation about other means by which the same outcome might be achieved. None of this conclusively proves that nothing is happening, but I am inclined to believe that the BoE is taking no greater role than they discuss.

In the event that the Treasury, for example, is asking a bank/several banks to use the method of recirculation of gilts that I have described, I am finding it difficult to find a way that might confirm or disconfirm such a thesis. Such a scheme might be enacted with a 'nod and wink' with very few ways of finding out what was being undertaken. The best hope, if such a scheme is being enacted, is a 'whistle blower' leaking what is going on. Such a person might be inclined to whistle blow resulting from a sense that what was being undertaken was wrong. Another possibility is that an 'insider' in the bond market might see unusual patterns of trading. This is far beyond any understanding of the market that I have, as my knowledge is very limited.

I still hold with my argument that, without some form of money printing, it is increasingly difficult to believe that the ongoing and escalating borrowing of the government might be financed out of ordinary bond sales. With governments all over the world competing for finance, and the dire warnings about the UK economy (e.g. the IMF), it is difficult to see who might want to purchase gilts. As such, I remain suspicious (to say the least) but am left with few avenues of further inquiry. Quite simply, I am left with speculation.

I will try to keep an eye on the situation, and perhaps a new approach might occur to me in the future. In the meantime, I can offer no 'smoking gun', no evidence, and nothing that should sway you to a conclusive view on the issue. For the conspiracy theorists out there, I am sorry that I can find no evidence of a conspiracy, but my aim in this blog is not sensationalism, but my best understanding of the situation.

Note 1: Thanks to the BoE for taking the time to reply to my questions.

Note 2: A heated debate on the last post.

Lemming, ended with a very tough question, which is to ask how the BBC fits with the view of minimal government involvement. This is tough because, like many, I have a curious affection for the BBC, and believe that many people share this affection. I am not 'offended' by the BBC. There are a set of principles that suggest that it is an unnecessary government intervention meeting a widespread desire for the retention of the service. Similar might be said of other services....

I will confess that, in this case, I find myself trying to square a circle. I mentioned in my post that each case intervention by government should be taken on its relative merits as to whether government should be involved, or to what degree. Curiously this is one of those questions I have debated with myself, and to which I have no satisfactory answer- but where I should be able to provide a satisfactory answer. Perhaps in this one case I am being inconsistent, or perhaps I have simply not found a way to determine the arguments either way. I am sorry that in this case, I can not give a satisfactory response, as I simply seem to be bereft of reasoned argument. Apologies.