tag:blogger.com,1999:blog-6093560390959788459.post6849418553348863084..comments2024-03-21T09:29:25.220+00:00Comments on The Financial Crimes: QE: What is it for?Alexhttp://www.blogger.com/profile/13775753218753337766noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-6093560390959788459.post-68250337909193495212009-10-17T15:56:27.878+01:002009-10-17T15:56:27.878+01:00Bill, I don't think I was blaming Brown for th...Bill, I don't think I was blaming Brown for the actions of the Bank of England, although I think there is ample evidence that the BoE is only nominally independent from government.<br /><br />Indeed the government often points to QE as one of the actions it is taking, and until now has claimed that the primary purpose has been to increase liquidity and promote growth. The BoE has also quoted that as a purpose of QE, but also gage the purpose of supporting asset prices. Now the Bank has dropped the government's most often stated reason for QE.Alexhttps://www.blogger.com/profile/13775753218753337766noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-77523126381247806202009-10-17T09:52:44.785+01:002009-10-17T09:52:44.785+01:00Your posts and subsequent comments would be much m...Your posts and subsequent comments would be much more readable if they weren't so politically biased.<br /><br />The BOE is independent of the government. You can't blame Brown for everything they do, including changing their rationale for QE.<br /><br />Nobody really knew what was going to happen with QE. It was all entirely theoretical before we started doing it so when it turns out to have a slightly unanticipated impact you can't blame them for reconsidering their stance.Bill Bellhttps://www.blogger.com/profile/16904154961709182748noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-20360256940124232682009-10-15T01:58:12.718+01:002009-10-15T01:58:12.718+01:00One thing we're all wondering, is, how would t...One thing we're all wondering, is, how would the markets react is the gvt annouced they were cancelling the gilts held by the B of E.<br /><br />After all, if there is no serious £ price/wage inflation threat, why do they need to hold the debt to push back in.<br /><br />And even if there is, surely they can print the debt as easy as the cash?<br /><br />I've come to the conclusion (in hindsight) that the way to 'solve' this 'financial crisis' would have just been to seize the banks, print enough money to put into the assets column of their balance sheets to arrest the insolvency, then float them again and destroy the cash raised.<br /><br />I mean, we seem to be doing this the slow and painful way whilst paying off a load of useless pen-pushers and snake-oil peddlers on the way.<br /><br />If politicians were going to try and micro-manage the nations balance sheets to keep the homeowning vote on side surely this would have been the way to do it?<br /><br />Or would people have realised how the illusion of wealth works in some sort of sharp shock that would have rocked the world worse?<br /><br />Now that we (well everyone who is interested) knows it is all a crazy illusion - but better than communism - why not just cancel the gvt debt at the BofE?Steven_Lhttps://www.blogger.com/profile/05029437876479574883noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-16722465905657025142009-10-15T00:22:54.996+01:002009-10-15T00:22:54.996+01:00Assuming that the value of QE is not going to go m...Assuming that the value of QE is not going to go much higher, then the total value of QE at less than 20% of GDP is very relatively small compared to the value of planned gilt issuance even if you go with the government's most optimistic forecasts, so I don't think it will have had that much impact on gilt yields.<br /><br />What I don't know is what is supposed to happen at the "end" of QE. Does the BoE sell gilts into the market to repay its funding or does it just continue with the status quo (down, down, deeper down - I must use that as a headline some day).Alexhttps://www.blogger.com/profile/13775753218753337766noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-37838119928655136432009-10-14T23:52:23.681+01:002009-10-14T23:52:23.681+01:00Your last remark in the comment above is surely ri...Your last remark in the comment above is surely right. But as to the conclusion of the main article: yes, maybe gilt yields are approx. where they were before QE began, and in that sense the programme hasn't achieved the aim of increasing gilt prices (if indeed that was really the aim). But imagine what gilt yields would be now if all that new money hadn't gone into the market to offset the level of issuance. I reckon the best part of 1% higher at the long end, and rising. Now begin to imagine what yields will be like once the QE programme closes down, with the deficit running at £4bn per week...<br />With that in mind QE must have had a pretty substantial effect on yields - and will continue to do so until they turn the tap off (the QE tap not a Friday afternoon gilt mkt tap). I wonder if the end of QE will more or less coincide with the General Election?Sterencenoreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-51236906942489344142009-10-14T22:52:14.854+01:002009-10-14T22:52:14.854+01:00The usual idea behind quantitative easing is that ...The usual idea behind quantitative easing is that it performs a similar role to short-term interest rate management in controlling the money supply, but when interest rates have fallen to near zero, instead of dropping interest rates the central bank buys in a lot of assets and puts a lot of new money into the reserve accounts of the selling banks.<br /><br />In theory the banks take this money and lend it out stimulating the economy. The problem is that the banks were never constrained by their liquidity (or rather the ones that were B&B/NR hit the wall a while back). <br /><br />The banks are constrained from more lending by a shortage of Tier 1 capital, and their lives are not made any easier by the FSA/Govt insisting that they have a hier Tier 1 ratio.<br /><br />So on the one hand you have one side of the Treasury pumping cash into the banks, and on the other another part of the Treasury is telling them they need to lend more and a third is telling them they need to have more capital to lend more.<br /><br />All in all a bit of a bugger's muddle, but par for the course from this administration, and I think it is quite clear that the changing justification for QE comes about because nobody in government has a clear idea of what they are doing and why it is supposed to work.Alexhttps://www.blogger.com/profile/13775753218753337766noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-31003407181982019802009-10-14T20:40:55.691+01:002009-10-14T20:40:55.691+01:00There seem to be three main theories circulating o...There seem to be three main theories circulating on why they are doing the QE.<br /><br />1) To bring/hold down interest rates<br />2) To fund the gvt deficit<br />3) To cause more inflation<br /><br />On 1, I was under the impression that central banks had to push more cash into the banking system in order to reduce interest rates, that this was normal (especially in the US where the Fed pay no interest on deposits but target the interbank overnight rate) and they usually just called this 'open market operations'. <br /><br />On 2, I've seen charts suggesting that there aren't enough foreign purchasers of gilts to fund the gvts borrowing requirements.<br /><br />On 3, this is what King says he is doing (to some extent) and what some commentators (i.e. Liam Halligan) accuse him or doing to a larger extent. However, with commodities priced in $, globalisation, spare capacity and weak trade unions I can't see how it will work.<br /><br />What do this the idea is then Alex? 1? 2? 3? All of the above? Or have a missed one?Steven_Lhttps://www.blogger.com/profile/05029437876479574883noreply@blogger.com