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QE Day (2)

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Stephanie Flanders | 13:27 UK time, Thursday, 5 March 2009

The Bank of England has pressed the button on quantitative easing (see earlier post). The initial size of the scheme - £75bn over the next few months - is smaller than some analysts have suggested, but it's a lot more than if they were dipping their toes in the water.

To give some perspective, £75bn is the equivalent of about 5% of GDP. And the fact that the chancellor has authorised purchases up to £150bn shows that the Monetary Policy Committee (MPC) also knows it may have to do more.

In light of the discussion in my previous post, one quick conclusion I might draw from both the headline amounts and the content of the statements is that the MPC thinks that the asset price (or yield) effect of the policy is going to be more important than the traditional money channel.

I don't know for sure, of course - but, as we saw, if you thought that the money multiplier was in good shape, you would be talking much smaller amounts.

The Bank might demur. Officials tend to say that they don't care how it works if it achieves the right result. By making the purchases over several months, the MPC is also giving itself room to stop, if the effect is much greater than anyone expects.

12/11/08 Bank of England Governor Mervyn King during a press conference at the Bank of EnglandBut in his letter to the chancellor, the Governor, Mervyn King also highlights that £50bn of the total allowed purchases of £150bn should be of corporate securities, "in recognition of the importance of supporting the flow of corporate credit".

Given the size of the two markets and the dangers of taking too much corporate risk onto the Bank's balance sheet, the majority of the purchases will have to be gilts. They don't want to increase the risk premium on government assets, which would push up borrowing rates for everyone and defeat the purpose of the exercise.

But the governor's emphasis is striking. Of course, by emphasising the credit aspects to the policy, King also wants to draw as sharp a contrast as possible between this policy and a policy of printing money simply to finance government deficits. As he will continue to remind us, buying government bonds as part of QE is a means to an end. It is not, as in Zimbabwe, an end in itself.

As I've discussed before, it's an important political and practical difference, even if the short-term effect of what the Bank is doing is the same: namely, monetising part of the government's debt.


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  • Comment number 1.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 2.

    "QE2" would, of course, have been a much punchier heading, although I accept that it would have conjured up images of a 40 year-old floating museum doomed to be tied to Dubai, in the Middle East, and that some commentators might make an unfortunate connection with the British economy.

  • Comment number 3.

    I hope that the Bankof England understands its policy as well as you do.

  • Comment number 4.

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  • Comment number 5.

    Thank you for this very clear explanation of what the Bank of England is doing.

  • Comment number 6.

    QE really required is between a third and a half of GDP. Unfortunately, 75bn is not even the full antipasto.

    There are those in the Treasury who know this.... as do some MPC members in the depths of wakeful night....

    They just do not want to frighten the horses.

  • Comment number 7.

    I would like to know what would happen if the Bank of England just set an interest rate for the long term, as it seemed to do until the middle of the 19th century. Could it not control the money supply with QE like it is doing now, so that borrowers would know how much they had to pay over the whole term of their mortgage and savers would know how much interest they would get?

  • Comment number 8.

    Looks like just another stop gap measure, for piece meal flawed scheme, like the rest in the past, that has not done much good. What good will it do for the Government to buy these almost worthless securities.

    The Central Bank loans money to private banks, that for their own profits loan it to businesses and individuals. Most private banks through flawed scheme of derivative, hedge funds, private equity funds, assets they do not have to meet their commitments, obligations etc are inviable. The over all economic situation is has gotten worst and there is no end in sight.

    Why not just cease these private inviable banks, arrest some of these uncouth shysters who cooked the books.

    Liquidate the most unworthy, pay off the depositors. The housing market is still tanking. There is no movement in either home sales or mortgage lending. The home and property values were inflated to start with and there is no way in hell the prices will start rising.

    Folks on the short end of getting foreclosed, should be either just given their homes or pay a sliding scale as to what is within their means.

    The Government buying these mortgages then selling the same to other shysters at cut rate prices is just compounding the situation to help prop and shore up the flawed economic system, and in the process sacrificing the taxpayers, with coercion, reckless abandon and impunity to promote the its own outward / hypocrite self image of good and the flawed economics system that need wholesale reforms.

    Business as usual will not prevail.

  • Comment number 9.

    The economy must be in a real mess when we hear all parties more or less singing from the same hymn book.

    This is a big gamble and I have yet to hear any one person say it will definitely work. In fact most have intimated that it is the last desperate throw of the dice.

    150 billion is nowhere near enough to sort out the problems ahead so I can see this figure continuing to rise indefinitely. Then we shall see the real problems of inflation in the years ahead.

    No-one has yet convinced me that deflation is the real threat. Reducing prices will only be seen if businesses are holding large amounts of old stock they must shift.

    The car industry for one. But how many people will be confident enough to borrow money while unemployment continues to rise.

    The main threat to ordinary people is that some could be lulled into a false sense of security over the next few months and be caught out when inflation and interest rates start to rise.

    We are only into the first six months of this recession so the word boost which is freely bandied about is hardly relevant.

    Slowing down the inevitable is more appropriate.

    Because this has never been attempted here before and although it is welcomed by businesses who need help at the moment I think this should also come with a health warning so everyone is aware of what could go wrong if it fails.

    After all it will again be the poor taxpayer who has to eventually pick up the tab assuming there will be enough of them left to pay for it.

  • Comment number 10.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 11.

    The QE erred economy is yet another device to get uneconomic bonai driven AAA,s holes back into the driving seat thus keeping the statAAAs quoerrs dangling in happy valley whilst they try to get their Rock up one more time,it will all end in tiers for sueveneers,and the patter of littleducky feet.

    The western world is following the same destructive epidemology of sodom and gommorrah

  • Comment number 12.

    The BoE buys second-hand gilts from banks or other institutions who happen to have a few for sale. These banks and institutions could easily sell their gilts on the open market anyway; so why do they need to sell to BoE, unless BoE pays more than the market value.

    To finance its spending plans the government then issues new gilts to the open market. The same banks and institutions buy these new gilts, to replace the gilts they sold to BoE.

    Therefore, to finance its spending, the government has merely sold gilts to the BoE through an intermediary. The only money "created" by the exercise was the difference in the price paid by BoE above the price paid by banks and institutions to replace the gilts in their balance sheets.

    BoE will be sitting on lots of gilts it may not be able to sell. If it tries to sell its gilts into the secondary market in the future, there could be an over-supply of gilts if investors don't want to buy them from both the government and the BoE. Therefore, the government could quietly default on the gilts owned by the BoE.......and hope no-one notices.

  • Comment number 13.

    75bn is a tiny increase when put against the negative effects of the reduction and depression of the propensity of savers to spend caused by today's 50 percent reduction in income from savings.

    These men at the Bank and the Treasury are fools (and should have been sacked some time ago) and they have got it absolutely wrong. The problem is the depression in demand brought about by the change in interest rates and the consequence purse tightening of the 88 percent of the population whose savings income is being halved yet again.

    It is a demand problem and the Bank is totally wrong - indeed QE should have been accompanied by a quadrupling in interest rates.

    I reiterate my post in QE Day (1)

  • Comment number 14.


    Great job in explaining this - a couple of questions : The 50billion GBP Facility for private assets is funded with Treasury Bills, but the remainder 100billion GBP for buying gilts is funded with central bank IOUs - the latter is monetizing debt is it, rather than funding asset purchases by issuing debt? Do the differing routes have differing effects? How is debt management policy going to react/interrelate.

    What worries me is twofold : 1) how will the banks react when this is being done when credit demand is weak and asset prices are falling 2) when asset prices turn upward, the search for yield could elasticate a violent inflationary surge, egged by the multiplier?

  • Comment number 15.

    I am really not convinced this will work, given the time lag as it bites and the inability to control and target the consequences. Perhaps an even bigger fear is that it will work but the politicians will be unwilling to turn the taps off at the right time. If Crash Gordon is in charge it seems highly likely that the consumer bubble will simply be re-inflated and we will end up in a worse situation….

    I genuinely hope it will work but will it?

    The biggest fear amongst consumers is surely unemployment. This seems to be the main reason for falling expenditure and a lack of desire to borrow. Those with a job are using the additional funds created by reduced mortgage rates to repay debt. Those with savings are seeing their income decimated such that they are not in a position to spend.

    Banks are being asked to lend to businesses for working capital purposes but are seeing this as very high risk, as a result of falling consumer demand. The price of credit does not seem to be the problem - it is the risk of default which is the problem. Hence the record low interest rates are not showing any signs of being the solution.

    Sadly the technological age means that, now, very few workers are required for most industrial, agricultural and service processes. However, is not the solution to find and fund the creation of a huge number of Keynesian jobs? Ideally these would be in the green, environmental sector or in the "build the infrastructure for the future" sector but they could equally be elsewhere. Even clearing the streets of rubbish would help.

    One high-tech suggestion that would reap future dividends would be to introduce "smart" electronically controlled variable speed limits on our roads. Thus, roads outside schools could be limited to 15mph during school hours/terms but 30mph during the holidays, or sub-urban dual carriageways could be 40mph from 7.00am to 11.00pm but 60mph during the night. Assuming we could handle the complications this would counteract "speed camera stealth taxation" and provide a lot of employment for the installation crews. They could all be solar or wind powered, thereby helping to create economies of scale for that green sector.

    Creating a bit of confidence would hopefully lead to reduced fear of unemployment and increased spending which would lead to working capital loans being less risky etc.

    The biggest boost to confidence would be very simply achieved through holding a general election. We saw the Obama effect in the US last Autumn. Whilst a possible winning Tory team might, at the final reckoning, be no better than New Labour at least it would be different. Crash Gordon is part of the problem and, as such, will always find it harder to be part of the solution. His refusal to admit, and learn from, his past mistakes and his role in the past mistakes means that it is totally impossible for him to be part of the solution.

  • Comment number 16.

    Quantative easing makes no real difference. An equivalent amount of debt is being created. What's needed is simply to print money.

    Of course, with less debt around, people would be free to act independently of banks and government. The insistence on debt is purely about control.

  • Comment number 17.

    The QE announced today makes sense, although the amount concerned is eye-watering and if it proves to be too large, it will lead to currency collapse. Time will tell on that.

    But the even lower interest rates are CLEARLY stupid. Already we have seen people withdrawing funds from savings accounts:

    "Figures from the British Bankers' Association (BBA) showed a £2.2bn fall in personal deposits with the major banks in January. The BBA suggested that this was due to people moving their savings from ordinary savings accounts to alternative assets which offered bigger returns. " (reported by the BBC yesterday).

    Lower rates will reduce the amount of money available for banks to lend. And of course lower rates also reduce the profits that banks make when they do lend.

    The lower rates will therefore reduce the likelihood of the QE working.

  • Comment number 18.

    The effect of QE (however clever and well meaning the reasoning behind it) is to reduce the individual worth of each pound in circulation.

    Can someone please explain to me why this is not the same as Wilsons devaluation of the pound in the 70s and why the effects will not be the same?

    If the banks are in such a mess, where are the asset fire sales? The fact that we are not seeing this just shows that they are waiting for the tax payer to pick up the bill.

    This announcement combined with the additional interest rate cut has destroyed the last of my faith that the BoE knows what it is doing. Sorry to be so gloomy after two relatively chirpy blogs (I assume for an economist this is a fascinating experiment), but I see today as the beginning of the end of the pound as we know it :-(

    Time to find a job that pays in Euros.......

  • Comment number 19.

    THE QE, QE2 AND TITANIC....... sorry that's rather obvious

    Stephanie first let me say that your twin posts about QE are very clear and considered, unlike some of Peston's efforts!

    I have some doubts and worries about QE

    They have gone for a figure of 75-150bn which is near your suggested 1:1 ratio, so if you are right, they are admitting that they think the banks will sit on a lot of the funds...

    So why do they persist in putting all the various stimuli through the 'zombie' banks! Is it just the politics of the new right - a hatred of nationalisation etc - and the fact that Brown, Blair and Mandelson are in thrall of the City and in love with Big Business?

    Or something else?

    My economics 101 seems to still say to me that the stimulus has to go direct to the key groups of consumers who would have to spend a windfall; it might not seem fair to some (rewarding the reckless etc) but these groups would include the recently unemployed, school and uni leavers, first time buyers; also need to go for the incentive programmes of scrapping old cars and paying people to insulate their houses; and get the loans to SMEs and the mortgage relief to distressed families proposals implemented now! these things would create economic activity immediately, wouldn't they!?

    I fear that QE via the usual suspects (the banks) will have little or no good impact, but will worry and undermine many......

    Also if we were to experiment with QE surely it has to be co-ordinated; do it after the G20 meeting and only if the EU and US agree to do it at the same time!

    I've tried to resist the use of CAPS but can't stop myself using exclamation marks I'm afraid!

  • Comment number 20.

    Given money creation by the banks is one of the reasons we are in this mess to begin with (look at the M4 measure of money supply, especially in the last decade- its gone through the roof), why not just give every adult over 18 500 pounds and hey presto, 20 billions worth of debt will be paid off and money will be put into the economy. Why use the banks as go betweens?

  • Comment number 21.

    I may be naive but I don't see how QE is anything but inflationary.

    More money in the system means its value is less. In effect the GBP is devalued so our imports are more expensive and our exports cheaper.

    We import a lot of food so the poorest who spend a greater proportion of income on food are the ones who suffer most.

    We hardly have any manufactured goods to export so we're not much helped there.

    Meanwhile people earn less as they lose jobs or are put on shorter hours, people on fixed incomes (pensions and benefits) also suffer from increased prices and those who rely on savings for income also find it doesn't go as far.

    Who exactly will benefit? If we're all supposed to be spending more to boost the economy, I don't see how this can happen.

    We don't have the money; we're broke.

  • Comment number 22.

    I offer the Quantum Mechanics explanation as per the Schrodinger's Cat Thought Experiment.

    ...Using 3 mad scientists ( the Treasury, the Government and the BoE)....
    Take 1 Box (the Economy)
    Take increasing doses of Radioactivity (QE)
    Take 1 Cat (stable pound, interest rates etc)

    Put Cat in box and shut lid.
    Apply radioactivity doses.

    As long as the lid is not opened, no one can know if the Cat has died or not.

    This 'not knowing' allows the Mad Scientists to speculate that the Cat is either dead or it is not dead.

    If the guess is that the Cat is not dead yet, then nobody can be wrong until the lid is opened.
    Similarly if our Cat is dead, then once again nobody knows until the lid is opened.

    So under the Schroder's Cat experiment, the 'not knowing' becomes the theory question as opposed to the question of whether the poor Cat is alive or dead .

    THUS as long as the 3 Mad Scientists keep pumping in increasing amounts of radioactivity
    AND they do not open the lid to find out if the Cat is a deceased Cat or not
    THEN they cannot be proved wrong - or right for that matter either.

    So if all the brains down at the BoE say 'suck it and see' at 75 billion pounds a suck..... could be forgiven in preferring that they followed the earlier Mad Scientists and just conducted it as a thought experiment rather than applying real radioactive doses to the Pound and the Interest Rates.

    Meanwhile and more importantly, does anyone know if Merv has a first aid badge in mouth to mouth recussitation on a radioactive moggy ?

  • Comment number 23.

    Why QE will NOT work:

    Your not going to expand money supply by injecting 75 billion as your not buying the gilts and corporate bonds directly from the issuer, but at auction or on the open market - as the majority of sellers will be banks or international institutions the proceeds will be used to shore up the solvency ratios of the banks (not increase lending) or be repatriated back to the international lender (4400 billion the UK has been “borrowed” the last 10 years).

    How QE COULD work:

    Create a differentiated currency (interest free) pegged to sterling and guaranteed by the BoE for 75 billion and give it away to the tax- payers.

    This special currency MUST stay outside the fractional reserve franchise of the banks and can only be used for purchasing goods and services in the UK - the currency must be “spent” 11 times in 24 months - the 12th person cashes it for it’s sterling equivalent at the BoE.

    This is the only way that you can be sure that QE will have the desired effect.

    Prove me wrong if you can’t I am Genius.

  • Comment number 24.

    Printing money is the right thing to do in order to counteract the reduction of the money supply caused by the banks reducing their lending. We don't ever want the banks to lend again in the foolish way they have in recent years, so I would assume that some (most?) of the newly printed money will just stay in the system indefinitely.

    Whether this form of QE is the most effective way of printing money is a more questionable. Just giving it to ordinary citizens to spend or pay off some of their debts might have been better.

  • Comment number 25.

    Doubtless, this is just the first installment of QE / gilt buybacks, which will likely take a lot less than the mooted three months to use up. Most of HMT /BOE's initiatives seem to have been in units of around quarter of a trillion - this will probably get to that point by Jun, when £50bn will seem a quaintly modest amount. Should have been done last summer, when it was already obvious we were facing serious contraction of the money supply via deleveraging. How long though before the entire national debt is back on BoE's books? About 9 months I would think.

  • Comment number 26.


    here we go... i'll see ya'll on the other side

  • Comment number 27.

    This article is very interesting:

    Anyone who has been made redundant has my sympathy of course (it happened to me 2 years ago, so I do know what it's like), but I can't bring myself to feel sorry for people who merely have to cut down on holidays, or live off their capital rather than interest for a while (especially when they own more than one property). Honestly! Living off interest payments! Living off rental income! I'd say they were very fortunate to have done so well in the first place.

  • Comment number 28.

    Printing money to buy your own debt ( gilts ) doesn't sound like a very sustainable solution to me. Thats like using one credit card to pay off another. We need outside investment, so surely we should be increasing interest rates to make stirling more attractive and to make lending more attractive to the banks.

  • Comment number 29.

    Seems a bit random, velocity is a vector not just how much how quickly but where it goes is it for ideological reasons the Government/Bank of England decide to launch all this money in this way?rather than launching it to do specific things as a customer to companies rather than a lender, it would still be launched into the sysytem but its first use would be determined as something useful like infrastructure projects. It seems like replacing one lot of fantasy money that the banks convinced each other they had with another lot which at best could take us back to where we were before but then commodity prices would rise again and reveal weaknesses this time in the form of rampant inflation.

  • Comment number 30.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 31.

    However it happened there's this stonking great hole in the finances.

    It doesn't take a genius to comprehend that just filling the hole with fiction, isn't going to benefit anyone.

    Filling it with printed money, isn't quite filling it with fiction though. Money is (was/may once have been) a token representation of life effort integrated over time.

    The printed money is fictitious because it simply never can be a representative token of life effort integrated over time. Clearly money that already existed yesterday, was not squeaky clean. It would be interesting to see (but would not be possible to calculate) exactly how representative of life effort the old money was compared with this new fictitious money.

    What cannot be denied is that as the hole is filled with this fictitious money, is that the representation of life effort in money has reduced.

    This affects those with the most, most representative money the worst.

    Anyone who has benefited from the creation of the hole will have spent that money already.

    Those who are genuinely prudent, recognised the error of the preceding conditions, and waited to invest in something truly ethical, will be hit the hardest.

    These are the people who can provide the funding to enable us to work our way out of this crisis. This is the most noble of missions. To fill the hole with with hard earned life effort.

    The hole must be filled, and it should not be the case that those who worked to fill the hole with actual value are forgotten. Neither should those who took that value not be indebted to those who will fill the hole.

    QE just hides the the indebted from their creditors, and damages those who would seek to resolve the problem with integrity. It will not work.

    Gordon Brown? Prudent? No way!

  • Comment number 32.

    #22 strategycall

    I too listened to the Radio 4 physics programme this morning and I agree with your analysis of the situation and the remedy.

    The learned boffins were debating the interface between Newtonian and quantum physics and how the 2 theories don't work cohesively. No-one mentioned QE. I fear it won't assist in this instance.

  • Comment number 33.

    Every time I see or hear the term 'quantitative easing' I cannot help but conjure up the mental image of a huge fat banker's backside squatting over Britain... the faces of the population upturned in wide eyed horror... as that fetid ring opens and let's loose it's rancid excremental deluge!

  • Comment number 34.

    This is all wrong - the bank can play semantics with how it is expanding the money supply but this is exactly what it is doing.

    One thinmg we should have learnt from the last 30 years is that some control of the money supply helps the economy and relaxing the reigns only damages it. In real terms the Bank of Englands figuresfor Jan 09 state that the M4 supply grew by 17% in the last year.

    They are trying to fix the wrong problem, egged on by a criminally negligent government. Firstly, we can not go back to the lending levels of the last few years anyway as we cant afford to write off another £500 billion.

    Secondly deflation is not occuring. The bank is reacting to the wropng measure. Gordon Briown removed petrol, power, housing costs and food from the inflation measure citing them as non-essential. The British Retail Consortium just today announced an annual inflation rate for food of 9%!!

    This is hell in a handbasket stuff, I though this government could stoop no lower but I have been proved wrong. Disaster awaits with ever greater certainty.

  • Comment number 35.

    As I understand it, if QE stands any chance of working, the "new money" created has to stay within the country and flow through the economy, as predicted.

    (The "trickle down" effect, that despite no precedent, is tumpeted as the Last Hope).

    Does that not require some sort of supervision - regulation - to ensure that the flows follow the intended course and don't get syphoned away?

    Is this not a time to show that "lessons have been learned" and that an appropriate regulatory regime is put in place?

    Or can we expect more "we didn't see it coming" admissions in a few months?

    At a time when the FSA is reeling from being caught between allegations of not being strict enough and being prevented from being so by its creator, I hope they aren't about to bring the shutters down - we've not seen any evidence of "right touch" regulation yet.

    (I am reminded of trying to buy roubles at the time of the Soviet Union money crisis, when the cashier pulled her blind down on the face at the front of the queue.)

  • Comment number 36.

    So can someome tell me have I got this right?

    The BoE buys HMG bonds (gilts). It does this in its simplest form by printing money and giving it to HMG.

    HMG feeds this into the economy.

    HMG pays BOE for this until the bond matures.

    When bond matures HMG (taxpayer) pays back the BoE.

    But the BoE uses taxpayers money to buy said bonds?

    I think I've not quite got a handle on this!

  • Comment number 37.

    Even if I was in favour of QE - which I am not - I don't think this will work, because we have the budget coming up (admittedly delayed until the last practical moment).

    In the budget, the chancellor will have to reveal the full scale of the deficit (well, 'full' excepting PFI and public sector pension obligations, of course).

    The deficit is now way, way beyond the 3% of GDP generally considered prudent, and is probably already in double digits. This is unprecedented - and potentially disastrous.

    The budget will reveal that borrowing has hit eye-watering levels, and will probably prove impossible to raise on the (there has been a marked lack of appetite for gilts lately, and we have still to reach anything like peak requirements).

    At the time of the budget, markets will look at UK borrowings, stir the money-printing exercise into the equation, and drop sterling like a hot potato.

    If you have accounts in foreign currencies, it's time to move a big part of your assets into them.

  • Comment number 38.

    No. 23. selvtak wrote:
    "Create a differentiated currency (interest free) pegged to sterling and guaranteed by the BoE for 75 billion and give it away to the tax- payers."

    "guaranteed by the BoE for 75 billion"

    There's the achilles heel.

    Someone has to pay. You can't create an asset without a corresponding liability. One sided accounting entries cause black holes in balance sheets. Taxpayers and creditors get sucked in and are never seen again....

  • Comment number 39.

    It bothers me when officials remark that they don't care how it works so long as the result is right. So the end justifies the means; where have I heard that before?

    In some way I am relieved that it is a smaller figure than expected and that the Bank is going to tackle it piecemeal.

    Having spent a good part of my life living in the inflationary economy of Seventies & Eighties Britain, I am terrified of an inflationary outcome.

    I am advised that the Bank is reacting to the prospect of deflation so why has my dentist just written to me saying he has to put up his charges? Also the goods I import are now 30% more due to the decline in sterling. So where is this deflation?

    No doubt the argument is that the Bank will be looking one or two years ahead, so do we have a scenario remarked on by another blogger that inflation will begin to take off in three to four years time.

    Wilson devalued sterling in October 1967. Prices remained largely benign for another four years: they then took off for another twenty five years. We don't want all that again as in the end there will be nothing left worth having.

    Is the medicine going to be worse than the disease?

  • Comment number 40.

    Stephanie, I hope you and your readers will forgive any blatant ignorance in what follows as I am an outsider to economics and finance and especially to how the bond market works.

    You mention that the BOE's main purpose in implementing QE is to reduce the yields paid in the bond market on gilts and other corporate bonds. To my understanding, this increase in price and reduction in yield will not impact on the coupon rate payable by the government and corporate borrowers on already existing bonds as these amounts are contractually agreed when the bond is issued.

    If successful in driving up the price, and lowering the yield on existing bonds what QE will do is result in a lower coupon needing to be paid on newly issued bonds and gilts.

    Given that the government is going to be borrowing £120billion to fund this year's budget deficit (as well as any previous years debt that needs to be rolled over) is this just a huge exercise aimed at lowering the coupon which it will have to pay to convince investors to buy the gilts? If so, Britain will borrow these huge amounts at a much lower interest rate than if QE had not been implemented and its lenders will receive smaller interest payments than they otherwise would have.

    Does this seem odd to anyone else? In what other market would a borrower be allowed (indirectly i suppose given its strictly the BOE doing the buying) to meddle in the processes that lead to determining what interest it pays to its lenders? Or have I misunderstood something?

  • Comment number 41.

    No 33 said: "Every time I see or hear the term 'quantitative easing' I cannot help but conjure up the mental image of a huge fat banker's backside squatting over Britain... the faces of the population upturned in wide eyed horror... as that fetid ring opens and let's loose it's rancid excremental deluge!"

    ----- ----- ----- -----

    It's weird that the above is allowed in, but my comments aren't. Who is the moderator, Gordon the Golem or Mervyn "I hate, loathe and despise savers" King.
    King is a disgrace and should be immediately sacked and arrested.

  • Comment number 42.

    Its all very well the BoE reducing the interest rates to 0.5%, who does that benefit? Nobody!

    The BoE reduces the interest rates, the banks then immediately reduce the interest rates for savers, so nobody wants to save money in the banks as they are only going to get peanuts.

    At the same time the banks and mortgage lenders don't reduce their interest rates for borrowers, they will only do so when pressure is applied from the government to pass on the rate reduction, they will do so grudgingly and will probbaly not pass on the full reduction of 0.5%, we shall be lucky if we see a reducion of 0.25%. In fact although the interest rate has been reduced by nearly 5% in the past year I hav eyet to see a change in my mortgage repayments to reflect this change in interest!

  • Comment number 43.

    PMR ribbins #34- deflation is occuring in assets, eg houses, land, 2nd hand cars, and some other things. Inflation is occuring in things which have to be imported or rely upon imported stuff to be produced, eg food, because the pound has sunk against the Euro and Dollar, meaning more pounds will be needed to buy the same amount of stuff.

  • Comment number 44.

    Mr Tweedy #38- if there has to be a liability with every bit of money created, you end up with what we have today- lots of debt and a lovely bubble. I'll post a link or two tonight that explain things.

  • Comment number 45.

    I've read, re-read and read again the "House Rules" and fail to see how posts 3 and 30 do not comply.

  • Comment number 46.

    No. 38

    Regarding my post 23 - You miss the point you turn 75 billion of debt in to nearly 1 trillion of money supply.

    It's fractional reserve banking without the needs for banks or interest. The government is going to QE for 75 billion, I am just telling them the most effective solution.

  • Comment number 47.

    I am not an economist. I like to think that I am reasonably intelligent. I understood your explanation. But, I am baffled about what is going on. Worse still, I feel sure that HMG and BoE are even more confused than I am.

    We started the whole mess by thinking we could generate wealth through investing borrowed money in bubble enterprises. Everything fell apart when we ran out of ‘bigger idiots’ to buy the investments. Now, the HMG and BoE are trying to put things right by buying more bubbles in order to generate more lending and correspondin borrowing by people who cannot repay.

    Might I suggest an analogy? We are in a car without any fuel. We are rolling downhill and we are putting the brakes on to reach the bottom of the hill as late as possible. Unfortunately, that also means we shall arrive at the bottom without any energy or hope of getting up the other side.

    Now for my stupid suggestions:

    1. Abandon most of the existing ‘plan’ including the VAT reduction.
    2. Raise interest rates to increase the income of savers and stimulate the flow of cash into UK banks.
    3. Guarantee all deposits worldwide in UK banks. If your bank fails, you automatically become a depositor to the same sum with an account held at BoE.
    4. Spend, but not on financial bubbles. Our military are badly equipped. We need more power stations, more ecological vehicles, better railways, better equipped hospitals….. There are vast opportunities for government spending with Rolls-Royce, BAE, Jaguar Land Rover and other UK based industries.
    5. Raise pensions and reduce employment costs. Negative social security contributions are far more sensible than negative interest rates.
    6. If we can rescue banks by buying their equity, we can save small businesses from bankruptcy by buying their equity.

    Please tell me why my suggestions are stupid and would not work.

  • Comment number 48.

    #17 - just a thought, but is the drop in deposits in janujray not simply due to the self employed paying their tax liabilities in January?

  • Comment number 49.

    37, Friendlycard:
    "If you have accounts in foreign currencies, it's time to move a big part of your assets into them".

    I'd be surprised if the people responsible for this lunacy haven't already done so.

  • Comment number 50.

    " quick conclusion I might draw from both the headline amounts and the content of the statements is that the MPC thinks that the asset price (or yield) effect of the policy is going to be more important than the traditional money channel." - Stephanie Flanders

    How elastic is demand for gilts? At a point in the future under unknown conditions?

    Because this could not possibly ever backfire faster than humans could react, right?

    Using QE to target the price/yield of gilts could squeeze out private buyers if the Bank of England bids them up to a "no bid" price. A failed gilt auction would be bad enough - the government's spending plans would be in tatters. But when accumulation ceases, selling is not far behind. Might gilt investors attempt to sell into the bid, and then into any available bid? Who can say what the sentiment and cost/benefit analysis of investors might be next year or the year after?

    "We will only do it a little bit at a time" misses the point and is probably reassurance for public consumption. They are taking a huge gamble. £75-150bn minus £50bn is large enough to move the sovereign credit market and they know it, otherwise there would be no point doing it. There is nothing to say theirs will be a winning trade, and a failure could display nonlinear characteristics.

    Is this worth it to avoid the losses out there?

  • Comment number 51.

    The writers who've mentioned balancing the books have the right idea, but the books are supposed to contain fixed and fluctuating, or current, assets.
    Current assets represent liquidity, shortermism, and fixed assets give long-term stability. However, where fixed assets aren't really fixed, there is a problem that affects liquidity.

    Looking for someone to blame won't put the wheel back on the wagon, and creating current assets won't work in the long term.
    What will work is for land asset values to be fixed at a level that's commensurate with real earnings, not with people’s hopes, dreams, aspirations or even to suit the greedy who pocket vast payments just for turning up occasionally, and to stabilize the market by underpinning the only assets that actually represent England. The people and the land.

  • Comment number 52.

    No matter who, or how it is explained I can't quite shake the feeling the QE is printing money without the inconvenience of actually printing anything...

  • Comment number 53.

    I've said it before and I'll say it again:
    a) With control of the banks, write off debts in some cases, decrease the interest rates while keeping monthly payments at the same level in others. This would have 2 effects -
    1)accelerated deleveraging
    2)Inflationary effect
    b) Instead of wasting 150bn on useless QE, spend it on subsidies of specific key new technologies, particularly
    1) End North Sea Oil subsidies for exploration and wotnot, if they still apply
    2) Offer huge incentives for companies to go out and build cheap renewable energy
    3) Assist recreation of British manufacturing industry, particularly electric powered or Hydrogen powered automotive

  • Comment number 54.

    I think the critique of QE is pretty nailed on: it's the objective of the exercise which is so mysterious in its banality - namely, reviving consumer overspending.

    An economy built on docile, soft consumers bloated by their ugly spend psychosis is at least untenable, probably disastrous. That's the lesson of all this.

    (Also- small point - please can we stop using the adjective 'eye-watering' now. It's become as over-used and unwelcome as 'quantative easing'...)

  • Comment number 55.

    In my personal, not an economist but I knew this was a bubble and it was going to go pop, opinion, this url explains what a large part of the trouble is down to:

    I personally don't expect this round of quantitative easing to have much of an effect. Asset prices will still fall from the bubble high, and imports will still get more expensive.

  • Comment number 56.

    OK, so Will Hutton says this is too safe - he wants new banks created for infrastructure / housing and for the APF to be used to buy their bonds, with them lending the money - skirting around the existing 'croc' banks which he thinks should be avoided. Howard Davies agrees that the banks are unpredictable intermediaries for this and that Bernanke's preferred route of buying corporate paper direct should be the channel.He doesnt want new banks. Ofcourse, if policy is designed to skirt around the banks into which we have just sunk loads of dosh, what happens to taxpayer's capital and the risk we have assumed on their balance sheets?So, we're married to suspect intermediaries?

    Are we getting clear explanations for policy from the policy-makers?

  • Comment number 57.

    The relentless pitch by the Govt. to make banks lend is remorseless....and useless. Does GB and AD not realise that having weighed in on the side of the monied, jobs have been lost. It would have made more sense if it had kept the bottom of the iceberg afloat rather than trying to exorcise the demons of its mismanagement.
    A bigger issue is whether Cameron et al will pledge to repeal the Govt's excesses? If the opposition parties stay silent the electorate will infer they are complicit in this folly.

  • Comment number 58.

    >@47 WolfiePeters

    If they had done that five years ago, we wouldn't be in this mess now.

    Proper technology has been struggling since exactly the end of the last bust. Letting the like of RACAL go to the French.

    We let go of the good and kept the poor; DERA, DSTL QinetiQ.

    My view is that a space programme would be good right now. It actually endeavours to employ the intelligent people that the politicians keep saying that we need!

    It's all about entrenchment in my view.

    Taking an industrial/technology line now for New Labour is just too late. The boom went on for too long, and the proceeds were not invested in the stuff we need to get through the hard times.

    Why this is, is down to trendiness. Industry is about taking fuel (coal/oil/gas) and levering "life value" out of it with technology. That's the kind of "life value" that we need to pour into the hole.

    The trouble is that the psyche of the nation says that burning fuel is bad, and that the money should be spent propping up stuff that cant deliver.

    The only thing I can imagine that we're going to be any good for in twenty years time is "handmade rugs from lambswool fostered from ecologically sustainable grasses".

    There is a choice to make.

    I suspect that it won't be until you can't guarantee to get food and/or cook it through lack of energy that we'll be bitter enough to make the breaking change of attitude that we need.

    I'm sorry but that's my view as an unemployed graduate engineer.

  • Comment number 59.

    "I don't know how long it will take, much depends on the situation in the rest of the world. But if countries work together, these measures will I believe eventually work." M King BoE.

    And we are supposed to take a policy backed with this amount of confidence seriously.

  • Comment number 60.

    So we follow ZIMBABE economics after




  • Comment number 61.


    Yep that Steve Keen seems to have hit the nail on the head there. It's a wonder these so called 'leaders' don't have the likes of him helping them to run things.

  • Comment number 62.

    This won't work. It's insanity. This is the Bank of England versus the market and the market always wins.
    The market solves all problems. Tampering with the market, or trying to subvert the course of the market leads to disaster. But governments believe they have to try anything. The "court of popular opinion" demands it.
    The current government is desperate for re-election, thus is can't have too many losers running around, so they try and take on the market, but the market will always win. This is just throwing printed money after bad money.
    Let the market do its job, we'd all be a lot better off in the future.

  • Comment number 63.



  • Comment number 64.

    Another angle:

    This policy amounts to colluding with issuers of debt to misprice risk.

    In the marketplace, investors price risk and discount accordingly. There is always disagreement over value, but where there is a bid and an ask, there is a potential trade. We are undoubtedly in a mess because for a variety of reasons bidders were not given accurate information to support the ask. Now that we have belated price discovery, the information coming to light is unwelcome. By design, QE will outbid other bids and in suppressing yields, will prevent true asset price discovery, concealing the price of risk. However, whatever the short-term political benefits of lowering borrowing costs in this way, it is powerless to change the underlying risk. The private capital that stays in the game, will have to tolerate masked price signals.

    In a way, the "printing" aspect of QE is a red herring. This is where past foolishness in risk evaluation gives way to conspiracy.

  • Comment number 65.

    Mr Mervin King
    Governor of the
    Bank of England
    Threadneedle Street

    Dear Mr King,

    I heard that the Bank of England is planning to buy assets from the private economy to stimulate the wider economy.

    This is just to let you know that I have a whole garage full of old furniture and other unneeded items that I would like to sell to your Bank. For you, I would even agree a price of just £10,000 – a bargain seeing that with the inflation you are generating you'll soon be able to sell these items for more than that.

    Can I also take this opportunity to let you know that I have been saving hard for years now in order to be able to afford a semi-decent house for my small, young family. Now, the Bank of England is trying to reinflate the housing market bubble and thus to punish those who have lived within their means to save up. I do not believe that mortgage and credit availibility is a problem, the banks are leaning over backwards to lend. The problem is that there still no affordable and nice houses, even though we have a good deposit and a very good family income.

    If you buy the items in my garage, I pledge to use the proceeds to buy a house in this country, rather than emigrating, thus stimulating the economy.

    Further, I note that the Inflation Rate is actually still above the target, so I don't see any reason why action is needed now.

    Finally, have you ever considered that there may be a REASON for the lack of economic activity currently. An economy is not like a fire that can be stimulated by adding fuel. People must have needs, desires and aspirations in order to spend, and if they don't have those then no amount of money will change that.

    So please let me know if you are interested in the items in my garage. I can arrange free delivery in central London.

    Yours sincerely,

    PS - can anyone explain whether at some stage in the future the BoE will sell these assets back to the private sector?

  • Comment number 66.

    The UK is about to have one last desperate throw of the dice: quantitative easing (ie: printing money). This will not work. It's another way of saying that the UK is desperately in debt and that no-one is prepared to lend us any more money - so we'll print it ourselves. Basically the UK is bankrupt. At the very least it will devalue the currency and it will probably cause it to collapse within the next six months. It doesn't make sense for the East (China in particular) to continue lending to the West when it must know by now that it won't be repaid.

    Because the UK not is self-sufficient in even the basics of life (such as food, clothing and energy) the population will get very poor very quickly. If our currency is only really valid within our own borders then we'll only be able to afford to buy what is produced within them. Worse still, it's likely that anything we do produce will be snapped up by foreigners because it's so cheap. When food becomes very scarce and very expensive, life will be very unpleasant.

    Can't happen? It's already started . . .

    "Shop price inflation rose last month because of the increasing cost of meat, fresh produce and tinned goods, with overall prices up at an annual rate of 9 per cent, from 7.5 per cent in January."
    "Stephen Robertson, the director general of the BRC, said that the slump in sterling had driven up demand for British produce overseas, which is 'restricting supplies at home and pushing prices up'." (quoted from The Times)

    Of course the Eurozone will not be without its problems either, though I think that - having a common currency and a better agricultural base - it will fare much better when things get really bad. Nevertheless my main priorities in the coming months are going to be building up as much stock as possible of food and heating.

  • Comment number 67.

    A significant proportion of your contributors seem to be monetarist recidivists who haven't learnt the lessons of the 1980s. The real economy doesn't respond in the way Friedmanite metaphysics says it should. The effects of monetary policy on real demand are highly uncertain, both in the scale of their impact and its timespan. I expect the strategy pursued by the Bo E and the Treasury to have a more immediate, certain and visible effect on corporate lending, thereby (we hope) supporting healthy companies through the short-term effects of the slowdown in economic activity.

    To support this, I'd like to see more government support for investment expenditure. The benefits of this should also be clear, both in improving public infrastructure and in the multiplier effect on demand. It's also easier to hit the target with this than support for general consumption, which can easily be lost if individuals use tax windfalls to run down debt and increase savings.

    On a separate point, we have a recession but we don't have deflation. The CPI is still above the government's 2% target. Consumers however are behaving as if the CPI was in freefall. Other than in the housing market, prices appear inflexible downwards. This is bad news. When are supply prices going to start responding to the market signals? Until they do, levels of economic activity cannot bottom out.


  • Comment number 68.

    this is no doubt very fine, but I have the impression that the banks just go on doing as they please, playing hard ball against government effoprts particularly where consumers are concerned. In this case, how much was it possible or 'appropriate' for the BoE to challenge the banks as to cooperation before making today's announcement, interest rate apart.

  • Comment number 69.

    That's three times, now, that I've watched Mervyn on the telly. Articulate, suave, polished, in control... and, every time, what the WORDS actually communicate are:

    1. I'm completely confident that this will work, but...

    2. it might not.

    Thank heavens for reassurance in these uncertain times.

  • Comment number 70.

    So, what did happen in Japan?
    The Japanese wouldn't allow banks to fail (sound familiar), so they created the infamous "zombie banks" and then bought assets off them via "quantitative easing". The banks, may have been zombies, but they weren't as stupid as politicians, they took the cash and invested it...overseas. Why lend the money out in an economy when interest rates are so low? No point at all. If the banks have any sense, they'll ship the money overseas in search of better returns than are available here.
    The Japanese domestic economy has never recovered from the stupidity. Only their exports kept the economy ticking over - domestic consumption never recovered.

  • Comment number 71.


    Right, so now we will find out what happens when there is no "overseas" in which to invest, and the risks of doing business with domestic companies cannot be valued.

    At a minimum, Japan had a functioning global economy to which it could sell its products for twenty years.

    The ex-Soviet states had a different set of problems, but in their time of need, they too had access to a booming global economy. The arbitrage just across a border was phenomenal.

    We are all about to be treated to a re-run without the rich uncle. There will be no similarities in the outcome.

  • Comment number 72.

    Recidivism tends to suggest that one reverts, and perhaps this is true.

    What it does not convey, is the idea that one may be pushed into recidivism.

    I consider that one may have been pushed by a force that has got everyone into a mess. This is the same force that can only *hope* to get us out, and by many accounts seems to be making it worse.

    I'd not mind had I not been pushed back, but more significantly, were it not my future with which the hopefuls now gamble.

    If I had a choice, I wouldn't be offering up my future for this gamble of theirs. I'd much rather take my share of the return due, as a result of helping to fix it.

    If the hopefuls fix it, then surely I may benefit. But if they don't then I certainly won't.

    To me it's the kind of deal you'd rather see as a contract. I mean is this a "triple A" deal, or just "sub prime".

    If I won't accept it for myself, why should I accept it on their behalf?

  • Comment number 73.

    Or is quantitative easing in this instance a cover for bailing out the insurance companies by buying their dodgey corporate bonds from them?

  • Comment number 74.

    "They don't want to increase the risk premium on government assets,"

    Oh that is really funny. The British government is in hock up to its eyeballs in worthless shares of common stocks of bankrupt banks and they don't want to increase the risk premium of government assets. What assets??? What asses!!! Where were "they" when Gordon Brown threw away all the money the Bank of England had and everyone hailed him a genius?

  • Comment number 75.

    UK burns while Brown et al fiddle.

    Branson got it right. We have been living beyond our means for the past 10+ years, living on fictitious property values, borrowed money, which in turn meant that all aspects were living in cloud cuckoo land - retail, manufacturing, company profits became exaggerated.

    We need some realism, trying to kick start the economy in this way is just deferring the time when we must pay ourselves less, retail/services need to ask more justifiable prices, and company profits need to be ratcheted down. This strategy IMHO is just making things worse, and eventually making the price of putting things right, greater.

    We need a new government that can take a 5 year view to sort this (and that probably won't be long enough unfortunately) rather than the 14 mnonth view that the current clowns are taking.

    Lastly I don't believe that dear-old Eddie George would have been such a wimp as the current incumbant.

  • Comment number 76.

    If the bank is saying they don,t care how borrowing this money works, and by saying as long as it acheives the right result. What if the result is not what they want and collapses then by borrowing this money is only going to put the country deeper in to debt and increase the unemployment 10 fold.

    I think before injecting this £75bn they should get a clear and concise plan then share the plan with the people of britain

  • Comment number 77.

    I'd love to see their plan for measuring the effect of the injection. It's all about as scientific and planned as economics itself: not at all.

  • Comment number 78.

    I don't understand why we keep focussing on this kind of stuff. It's so short term.

    Who cares if the government tries monetary or fiscal stimulus? Of course they are going to. It is inevitable at least for political reasons. We also all know that the effects are going to be minimal.

    Why do we closely monitor the daily events in economics? They are irrelevant. What we are witnessing is the culmination of a century long megatrend - the inevitable outcome of industrialisation and technological advance accompanied by a money system that relies on scarcity. Two opposing forces.

    The clear prognosis is ongoing economic decline, for years and years. The debt levels are much higher than before the Depression. This deleveraging needs to either take place catastrophically or gradually over years or decades.

    So, as I keep repeating, let us accept this and invest our time and money into procedural and technical optimisations. This means clean energy, new types of transport, cheap or almost free energy.This is the ONLY WAY OUT.

  • Comment number 79.

    No. 78. FrankSz

    I'm glad to see your comments Frank.

    The irony is, if the BoE succeeds in its stated aim of generating inflation, then it will push up the input costs of the businesses we need for the future. We don't want inflation in an environment where businesses need to keep costs to a minimum. If input costs rise, then business will be forced to make more staff redundant and cut back further on research and development. This is the exact opposite of what is required.

    QE will not lead to an increase in demand. Households and businesses are already over-indebted.

    Alas, Mervyn King and all the mainstream commentators fail to understand this fundamental point. QE will make things worse, not better.....

  • Comment number 80.

    I note that today we read in the press that the Bank is worried by what amounts to a savers' strike undoing all that it is trying to do in increasing liquidity.... (as I have been warning about for ages!)

    This is because the Bank is pumping money into Banks NOT into the hands of spenders. The spenders buy things. These new things increase demand and this is where the problem is - NOT in bank liquidity. Business would not need loans to tide them over if they had increased demand.

    The French and Germans understand this and are giving money to the buyers of new cars if they scrap an old one. Our 'fools' seem not to grasp the problem at all! They need sacking NOW.

    The BoE is making things worse overall. They are deliberately generating a savers' strike and this will undo everything they have done and are doing - indeed it will dwarf everything they are doing.

    The moves they made yesterday are a direct contradiction of everything they have stood for fro the last 315 years. They are destroying the Bank, the currency and the Nation. They are making the same errors as the Bank of Japan, except faster - and in my opinion more disastrously.

  • Comment number 81.

    #75. robmar0se wrote:

    "Lastly I don't believe that dear-old Eddie George would have been such a wimp as the current incumbent."

    I feel I must disagree with you. I wrote to both Mervyn King and Eddie George about the critical need to take cognisance of asset price inflation in their management of the economy and interest rates.

    I received a very similar response - "nothing to do with US - we are only required to manage to the CPI". The first was from Eddie George directly and the latter from some apparatchik on behalf of Mervyn King - I guess because they received so many letters of a similar nature by then.

    This goes to the very heart of the cause of our present problems - spineless economic management in the Bank of England for well over twenty years. They need sacking and the whole organisation (what ever will be left of it) re founding. They are the custodians of this disaster.

  • Comment number 82.


    As far as I understand it these levels of base money injections cannot have much, if any, inflationary effect. Perhaps they are aware of this, and the purpose of the transaction is not fully disclosed.

    I heard Gordon Brown on the radio saying (quote):
    "Today was the start of a European consensus on all these major issues that are facing the world community:
    -yes to better regulation;
    -yes to action on the shadow banking system and hedge funds;
    -no to protectionism;
    -yes to fiscal and monetary stimulus;
    -no to maintaining the old status quo on the role of our financial institutions."

    For me that was a very important quote for a couple of reasons:
    a) It is what I expected, it reinforced my lines of thinking
    b) The way 'yes to fiscal and monetary stimulis' was said, the way it placed at the bottom of the list, the way the two concepts of fiscal stimulus and monetary stimulus were placed adjacent to each other

    For me monetary stimulus and fiscal stimulus are worlds apart. One is a woolly, indirect psychosocial manipulation of the expectations of money purchasing power, the other is a somewhat more direct and focused energisation of specific groups or industries, where the aims are presumably chosen based on an understanding of the 'real economy' (if you know what I mean).

    That Mr Brown treated them as a single concept in that sentence shows to me that he perceives the two as bound together. Without the former he can't afford the latter, and that he sees them as one item in a much larger toolkit (direct regulations!), as shown by the other points in his quote.

    It seems clear to me that the government would feel compelled to be involved in a monetary stimulus, at least to be seen as having executed on a possible solution, but the size of that stimulus (low) indicates their level of belief in the effect it will have.

    In all probability the sale of government debt will help them fund nationalisations and fiscal stimuli, and that is their real aim.

  • Comment number 83.

    No. 80. John_from_Hendon

    I agree with your sentiments.

    I think many consumers are cutting back on their spending, in order to save more of their income to (i) replace the losses they have made on their stock market investments and (ii) replace the lost interest on their savings.

    The BoE is attempting to prop up unprofitable businesses who have an over-reliance on debt, at the expense of viable consumers and businesses who would spend if their wealth is not constantly being depleted by the BoE.

    The BoE seeks to reward the unviable half of the economy, while at the same time punishing the half of the economy which is viable. The BoE thinks this is a proper solution. The people who led us into this mess are attempting to lead us out of it, but they are only making the whole situation worse. The BoE needs to do the opposite - it needs to help the viable and let the unviable go under.

  • Comment number 84.

    No. 82. FrankSz

    A fiscal stimulus would stand a chance of working if:
    (i) The government had the money in reserves, saved from past tax receipts.
    (ii) The government spends the money in supporting viable private sector companies who stand a chance of developing more efficient use of the planet's scarce resources, leading to an increase in their profits, which in turn increases the government's tax take.
    (iii) If the recession is short lived (which it won't be) the government could also prop up businesses who are in financial difficulty. If the economy then picked up in a year's time (which it won't) these businesses would then begin to make profits and be able to pay back their government loans.

    However, today:
    (i) The government has no money, and is being forced to borrow.
    (ii) The government is not helping viable long term businesses.
    (iii) The recession won't be short lived. Money spent on helping unprofitable businesses is just depleting the government's scarce resources.

    Someone has to pay for this mess, and it will be the viable businesses and households, who are the ones who should be encouraged instead of being punished by having to pay for other people's bad debts.

  • Comment number 85.


    Agreed. To add: (ii) - this would also help offset trade imbalances with China through hi-tech exports of alternative energy, water and other infrastructural tech, avoiding the risks of later trade wars.

    The trade imbalances with China are large enough to tempt one to ban Asian imports for the sake of domestic stimulus alone. It would make more sense to come to an agreement with China that the EU and the US will focus more on clean tech for both domestic stimulus and exports to Asia.

  • Comment number 86.

    I must admit I find it greatly frustrating that the answers to this problem seem so clear, namely stimulus through technology and movement to sustainable infrastructures, and that nobody seems to be focussing on these longer term issues or making moves in this direction, other than President Obama.

  • Comment number 87.

    Stephanie or anyone else - can you help? I want to know whether this QE is a Bank Bail-out Number 4 ( purchasing bank paper underwritten by the Credit Guarantee Scheme) plus an underwriting exercise on gilt issuance or a monetary manoeuvre pure and simple. The Debt Management Office needs to raise a lot of money and has been getting concerned to find ways other than the usual auctions to raise primary debt cash. They say the Gilt edged Market Makers ( Barclays Capital,BNP London,Citigroup,Credit Suisse,Deutsche,Dresdner,Goldman,HSBC,JP Morgan,,RBS etc.etc.) have balance sheet constraints and cant hold a lot of gilt stock on their balance sheets so they need to get channels directly through to insurance/pension funds etc. Insurance companies and pension funds who require medium / long term / index linked gilts provide "lumpy" actuary driven demand and worries could arise on unsuccessful auctions / impact on strerling if new distribution methods are used inefficiently. IF QE is now used to liquidate the secondary market in gilts, does that provide ready demand for new gilt issuance? Does this crowd out the corporate bond market?

    Other than provide a liquidity platform for HMG debt issuance and more liquidity boosts for banks, what are the real monetary effects being claimed. Without knowing the investment strategy, the answers are only known to BoE executives, arent they?

  • Comment number 88.

    Re 78 and 83

    I agree with these comments which are consistent with my contributions to the recent debates.

    Is not the underlying reason for this policy a clear but unstated desire amongst our leaders to have inflation, in order to hope to erode the value of all the personal and governmental liabilities? It would be honest of them if they admitted this but I am sure they will not. The danger is that we will have the inflation burst and will be unable to control it through approriately timed policy reversals.

    House and other asset values have to stabilise at their appropriate new level. Without inflation and keeping other things broadly constant, this will be lower than currently is the case and it can either be achieved quickly (but very painfully) or slowly. Alternatively we have a big dose of inflation which enables the asset values to remain where they are in monetary terms, though not real terms.

    Clearly each scenario gives rise to different sets of winners and losers (sadly as an employed, but possibly soon unemployed, saver, I am firmly in the loser camp at the moment). We might also find that international competitiveness means that the inflation burst relates to prices but not wages.

    The end result will be a significant fall in overall wealth and living standards. We therefore need very rapid investment in new, green technological industries and products to try to counter-act the falling standards. We are being given a wake-up call but our leaders seem determined to keep taking the sleeping tablets.

  • Comment number 89.

    No. 86. FrankSz

    Frank, old chap.

    I agree with you.
    The "powers that be" still act as if this were a short term recession. They know it has more in common with a depression which will last 10 years, but still they behave as if it is a mere recession which will see growth return in 2010.

    We do need a working banking and insurance system, but other than that the government is spending its scarce financial resources in the wrong areas. We need to invest in protecting our necessities, such as food and energy production. We need to be more self sufficient in necessities, and ensure their production is as cheap and efficient as possible. Apparently, the coastal tides around the island of Alderney are so strong they could be harnessed to produce as much electricity as one nuclear power station. All told, the tides around the Bailiwick of Guernsey could produce electricty equivalent to 25 nuclear power stations. This is where the money needs to be spent.

  • Comment number 90.

    Supposedly the banks were the professional middle men to link savers to business and thereby produce sustainable benefits all round.

    The middle men threw money every which way and "lost" billions. They encouraged unsustainable debt levels in both individuals and business, leading to depression. Bringing the REAL economy to its knees.

    So now, we do not encourage savers (viable input) but we give more money directly to the irresponsible middle men, for what reason exactly? To lend to whom? Is good sound business and enterprise (viable output) being encouraged?

    Isn't it necessary to get the whole equation running smoothly before there can be any turnaround?

    Why insist on punishing those who are actually keeping the economy going and rewarding the mess in the middle?

    I've been thinking of where to put my savings and have concluded the only way is to fund new small business directly. Miss out the waste in the middle.

  • Comment number 91.


    So how to push this forward?
    Books, films, god knows what, have all been released to make the ideas around this clear to people.

    Perhaps some website stating a cause or purpose, acquire subscribers, and petitioning a political party?

  • Comment number 92.

    "I've been thinking of where to put my savings and have concluded the only way is to fund new small business directly."

    Very interesting! "Social lending" they call it. There is a successful website in Germany that is doing this. I believe that in credit-dry times it is a good model, a profitable and worthy one.

  • Comment number 93.

    "Forget the reading, I'm off to bed to do a bit of quantatative easing. The Great Leader tells me it's a great way to relax after you've finished adding up the pig iron production figures for the day. And you don't even need a partner. Good night." -- Andrew Neil, _This Week_, BBC 1, 2009-03-05.

  • Comment number 94.

    The aim of all this 'easing' is to reflate the asset price bubble, and hence rescue the banks and other financial institutions from an utter collapse in value of all their off-balance sheet derivatives.

    The glaring flaw is that the shadow finance system that created these monsters cannot be brought back from the dead.

    The patron saints of this false system are Greenspan and Bernanke. Brown is in thrall to these people and has been for years. So long as the effort is centred on reviving a failed economic model, then all the money used for to do that is WASTED.

  • Comment number 95.

    Once again the 'great minds' of our Economic world demonstrate that they are prepared to take their beliefs over logic.

    The reduction in money supply is CAUSED by the crisis, therefore increasing the supply does not in fact resolve the crisis - it just moves us to a different kind of crisis.

    For the simple explanaition, the country has caught a cold (a regular event that happens every few years).
    The BoE and Government are Doctor and consultant. First they cheap Asda tissues (interest rates) to get rid of the cold, that wasn't too successful, so they went out and bought a box of king size Kleenex - which should be much more effective.

    However as most of you know, you cannot cure a cold with tissues as sneezing is merely the SYMPTOM and not the CAUSE.

    Eventually the cold will be defeated - but not by the authorities, but by a long period of rest - in the Economy this means a devaluation of all the over-valued assets.

    We may feel grotty during this period and it will be unconfortable for many. However using more and more tissues will not get rid of this cold virus.
    We only got into this state after we ran ourselves down by partying hard with money we hadn't earnt yet.

    With regard to the 'control of quatitive easing' - well that is like trying to re-ignite embers by pouring on petrol. As most people who have tried this know, that there is very little that happens at first, so you are tempted to try a bit more, and more, until WHOOSH - the petrol lights ond you loose your eyebrows! - In the case of the BoE - due to it's statistics being so inaccurate (look at the RPI joke) - it's like trying to re-light that fire with your eyes closed!

    ....and there is NO DIFFERENCE between what we are doing here and what Zimbabwe did. As most of us now know the 'credit' scenario is only any use if it gets paid back. The purchase of corporate bonds can still result in a default by the issuer - and the buying back of your own Gilts is exactly what printing money is.

    Either the BoE don't understand the concept of printing money (which would be a huge worry) - or they think we're so daft that as long as the public don't see wads of cash flowing out of the BoE - then somehow it's different.

    You wait until the rest of the world starts - then it will be back to BOOM, BOOM, BOOM, with tonnes and tonnes of worthless paper flying around - only good for burning.
    In all previous instances of printing money, it's been done in isolation (by country) - this time it will be global and they will all be doing it. We will either end up in the final boom of mankind before the next bust takes us back to the dark ages - or it simply won't work as all currencies will simply devalue together as the countries print off more and more. Whoever prints off least will have the most valued currency.

    If this idea were a dog - it would have been shot.

  • Comment number 96.

    #90 veryfaraway

    Yes - I agree with your point, savers should simply cut out the middle man and lend direct to businesses.

    The over-riding problem with this is that the Law is not suitable to do this.

    If a saver lends directly to a business and it defaults, the saver may well loose everything and the costs of chasing the money would probably outweigh the probabilty and size of any money recouped.

    The banks get away with it because they do it on a massive scale and spread their risk. It also means they can have a team of lawyers on standby to chase any outstanding debtors.

    The only body that could take up the banks role is the Government as it is the only other institution that could handle the risks involved.
    Sadly the Government does not 'trust itself' enough not to cock it up and is determined to force this square peg into that round whole no matter what the damage is.
    That means they would rather have the banks doing a bad job - than do it themselves.

    It's not logical and it's bordering on the insane.

  • Comment number 97.

    The BOE may not know what they are doing. No-one would ever admit it, now would they?

    Maybe it is different to Zimbabwe.

    Some business leaders have been calling for months for interest rates to be left alone or even raised a point, to stimulate growth.

    Banks may have empty coffers, but sinking money into them to pass on to business or consumers is not always the only way.

    If banks speed up dealing with their toxic assets, they could be accused of 'repossessing with undue haste'. If they delay, of 'withholding lending'.

    Perhaps the only answer is instead of insurance and guarantees, every dodgy debt was simply written off for now, by each countries respective governments and when eventually 'realised' or 'liquidated', becomes an asset to the treasury.

  • Comment number 98.

    Rather like one or two other posters, it feels a bit like 'money market manipulation' a sort of insider trading... Something like this

    We need to issue a load of government bonds to pay for all these bail outs and loss of revenue from VAT and stamp duty.

    How much is it going to cost us? What are the yields?

    Oh still over 2% for 3 month and over 3.5% for 10 year.

    Crikey thats alot of interest on all this debt we're piling up. Do you think we can push the price down a bit?

    Well we could cut the interest rate again and we could buy back the expensive stuff in the secondary market and re-issue at a lower price but we'd need a bit of cash to do that

    Print a bit???, QE???

    Well we could give a try

    Any consequences?

    Don't ask me, I'm just following orders.


    I've said it before but if the flow of money is all that's at stake rather than the cost to the government and eventually the tax payer I would raise interest rates. The value of holding our debt would increase to the purchaser. There might be more of them.

    If I had the opportunity to be a benign dictator/supreme leader, I would

    Have a clearout of all sorts of individuals

    Take a hatchet to traditional government spending and quangos etc

    Increase interest rates to 3% and increase further as required

    Redefine RPI/CPI or have two measures or maybe three - one for commodities

    Reduce employers and employees NI contributions - why would you set up business here????

    Get rid of HIPS for purchases and energy performance stuff for rentals - red tape, cost, nonsense

    Reinstate 17.5% VAT

    Increase the threshold for stamp duty
    payments to 200,000

    Double duty on alcohol and tobacco

    Re-introduce tougher licensing laws

    Get some planet-brained bloggers to come up with some schemes for funding and doing R&D, manufacturing, design. Anyone who can refer to Schrodingers Cat is very welcome. Also unemployed engineers, people who type in CAPS or manage to avoid them, small business people etc. I am not interested in wafflers. Doers please.

    Introduce grants for students studying engineering, maths, science and teacher training for such subjects

    and I might cut the Zombies loose (not lose)

    I would not ponce about the globe spouting platitudes.

    I might rant once in a while.

    For a variety of family based medical reasons it became clear to me over the last two years that on a personal level, yesterday can't be repeated and tomorrow can't be guaranteed so make the most of today. So....

    Have a great friday night, one and all and a great weekend.

  • Comment number 99.

    This article has an interesting take on quantitative easing -

  • Comment number 100.

    Does anyone else think that Mervyn King looks like a character from the League of Gentlemen in that photo?

    'This is a local bank for local people!'

    Money is fictitious right? It is not linked to anything tangible? It is not even linked to the gold standard anymore (and even gold was 'given' a value by humans). So if the whole world is in this mess why dont they just all agree to cancel all debts - reset everything and start again?

    Seems mad? Maybe but letting possibly millions of people die from hunger if the developing world is badly hit by this and millions even in the west if some of the more apocalyptic posters are right, seems more crazy to me!

    We have the resources in this world - no one needs to end up on the streets eating tins of Chappie!


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