It would seem that the Bank of England hasn’t a clue where it’s
going or why. The only thing to be said about it is that it does
have slightly more realism than Alastair Darling’s ludicrous budget.
Those who want to be angry about something should concentrate on the
government that has brought Britain so low at a cost to all of us of
hundreds of billions of pounds rather than the petty thieves who
despite their deplorable excesses (or worse) don’t really themselves
affect our financial stability.
The Telegraph Business News had a fourth article by Ricard Fletcher
entitled “Mervyn’s strangely serene despite our worrying
similarities to Zimabwe”. Try as I will so far I can’t find it on
the web! If I run it to earth I will forward it.
xxxxxxxxxxxx cs
============ ========= ========= ===
TELEGRAPH 14.5.09
The shoppers in Manchester could hardly believe their luck. A cash
machine was mistakenly dispensing £20 notes in place of tens. Word
got around: friends and family soon arrived, and used their cards
over and over. A queue snaked down the pavement until late afternoon,
when the machine finally ran out of money.
As those shoppers found out that Thursday in January, nothing smells
as sweet and glorious as free money. [And they have the nerve to
complain about MPs! -cs] And that intoxicating scent is, against all
odds, currently overpowering the money markets. After almost two
years of misery, banks and hedge funds are swooping upon the
financial equivalent of a monumental, incontinent cash machine. This
malfunction has been going on for months and is not likely to be
fixed any time soon – and it is leaking taxpayers' money straight
back into the pockets of bankers.
Here's how the wheeze works: you buy some cheap bonds off the
Government, swap them with other City folk, sit on them for a bit and
then sell them straight back to the Bank of England – at a higher
price. Voila, you pocket a tidy portion of the difference. And not
only is this legal, it is actually endorsed by the Government.
Welcome to the weird world of post-crisis markets, a dysfunctional
netherland where a government's butterfly wing-flap can trigger a
million-pound win for a trader here, a million-pound loss for a
company there. Previously, the way to make money in these kinds of
markets was to slice and dice complex debt instruments, sell them on
to clueless investors and pocket a fee on the way. That line of work
became defunct in the early days of the financial crisis, costing
banks a lot of money. But if you thought that was the end of the
money-go-round, think again.
The debt carousel has been replaced by the quantitative easing quick-
step, whereby traders make millions buying Government bonds (gilts)
cheap and selling them high to the Bank, which is purchasing vast
stretches of the gilt market to pump money back into the economy. It
leaves a distinctly bad taste in the mouth, for the Bank's scheme is
designed to support the economy – to safeguard jobs and prevent
bankruptcies – not to line the pockets of City traders.
The Bank would rather buy gilts off non-bank investors – mainly
pension funds – who are then compelled to go off and spend the
proceeds on other things, such as corporate debt, which in turn helps
the economy to recover. As things stand, however, the investment
banks and hedge funds, who are far quicker-footed – and, let's face
it, often far smarter – have stepped in and are making millions. You
can criticise them, just as you can criticise those eager shoppers in
Manchester who took their chance at the cashpoint. But more of the
blame must surely be placed on the bank behind the malfunction.
It is lesson number one of capitalism: create a market and people
will trade on it. The Bank and the Government can surely recognise
the sad irony that institutions responsible for causing the economic
drought have diverted the flow of healing water their own way. They
must also recognise that it is a problem of their own making because,
once again, they have allowed themselves to be outmanoeuvred by bankers.
The Institute for Economic Affairs published an excellent pamphlet
this week diagnosing the causes of the credit crunch and its
conclusion is quite simple: this was not down to a failure of markets
or misbehaviour by bankers and hedge funds; the most important factor
was a catastrophic failure by governments and regulators to oversee
markets.
We know from bitter experience that if you set up rules and
restrictions designed to restrain banks and traders from
inappropriate behaviour, at least some will bend those rules as much
as possible without breaking the law. This is human nature. We may
disapprove, but, short of instituting a hideously inefficient command
economy, there is little we can do to change it. Instead, we must
rely on the Government and the regulators at the Bank of England and
the Financial Services Authority [A section of the FSA - the section
concerned? - is shut because somebody there’s got Swine Flu! -cs] to
do everything in their power to stay one step ahead of the traders.
One look at what is going on in the money markets shows that they are
failing – again.
You can take the view that it is reassuring that financial
opportunism has not died – that people are still finding innovative
ways to make money. This capitalist spirit is the fuel that, properly
channelled, can help power our economy ahead in the future. But the
Government must not take that view, and must instead beware. Its
failure to police the system properly in the past decade ultimately
led to the worst economic and financial collapse in almost 80 years.
If it fails to get its act together, if it fails to anticipate better
the consequences of its decisions, it risks allowing the seeds of the
next crisis to be sown
============ ===
Mervyn King, governor of the Bank of England, cut his growth forecast
and declared that there is as much chance that the economy will still
be shrinking this time next year, as there is of it growing.
In its closely-watched Inflation Report, the Bank also appeared to
rule out raising interest rates from their current near-zero level
for the foreseeable future, indicating that economists expecting it
to yank up the cost of borrowing before the end of the year had got
ahead of themselves.
The comments caused both the pound and gilt yields to tumble as
traders digested the fact that the Bank has no immediate plans to
take its foot off the economic accelerator pedal and tighten policy.
Sterling dropped by more than a cent against the dollar to $1.5159,
and by just under a cent against the euro to €1.1143.
The Bank cut its growth forecast for this year to around -4pc, well
below the 3.5pc contraction the Treasury projected in the Budget last
month, In comments which will further embarrass the Chancellor, Mr
King said that the recovery was likely to be "slow and protracted".
This downbeat view is in stark contrast to the Treasury's own
forecasts, which imply that the economy will bounce back to above-
trend growth of 3.5pc within two years.
Instead, Mr King said: "The economy will eventually heal but the
process may be slow. This is not like the typical business cycle in
the post-war period... Even if there is some recovery in output over
the next six to nine months, we don't know how sustainable that will
prove to be."
He added that there is as much chance that the economy is shrinking
midway through next year as there is of it growing.
Shadow Chancellor George Osborne said: "It is a further blow to the
credibility of the Chancellor and the honesty of the Budget. The
model of economic growth is fundamentally broken and we cannot have a
sustainable recovery until we have a Government that understands that."
The Bank expects inflation on the consumer prices measure to fall to
around 0.4pc in the fourth quarter of this year, before rebounding at
the turn of the year, reflecting the weak pound and reversal of the
VAT cut. However, the projections also deemed there was less risk of
deflation than the Bank forecast in February.
Mr King said it was "much too early" to assess the impact of its
quantitative easing programme but pledged to be ready for an exit
strategy as soon as the economy starts growing again.
However, economists said the Bank still need to clarify to what
degree this involves raising rates or selling gilts.
Some said the forecasts indicated that the Bank may spend more than
the currently-pledged £125bn on Government and corporate bonds, with
David Page of Investec saying the Bank may raise the amount given
over to so-called quantitative easing to the Treasury-consigned
ceiling of £150bn.
Mr King also issued a warning shot to Chancellor Alistair Darling on
the size of the Budget deficit, saying: "There is no doubt that we
will need to move back to a path for fiscal sustainability, that is
very important."
============ ===
are two grapjs included wqhch some may not be able to read but this
would not affect the overall argument-cs]
As we filed out of the presentation theatre in the Bank of England
this morning, there was one phrase that kept repeating itself between
the economics journalists gathered there: "they haven't really got a
clue".
Will there be an economic recovery by this time next year? Maybe,
maybe not. Will inflation start picking up soon as a result of all
this monetary ammunition thrown at the economy? Probably not, but we
can't be entirely sure. Is there another impending wave of financial
failures? Hopefully not but we can't be sure.
The Inflation Report wasn't a complete concatenation of confusion,
but most of us were left slightly less the wiser as to where the Bank
of England thinks we're heading. That said, there are a few important
points to take away from the report, which can be found here:
1. Interest rates are not going anywhere for a while. Before the
report markets were expecting that by late this year the Bank would
start raising rates. In fact, they prices in an increase in the Bank
rate by a full percentage point within a year or so, starting from
late on this year, rising all the way up to 3pc by mid to late 2011.
There is a clear signal from the Bank today that they have nothing
like this in mind. The clue is in the inflation projections. They
produce one chart predicated on the market's rate expectations.

The path for inflation based on market expectations - in other words
based on the premise that the Bank raised rates to 1pc by early next
year, and to 3pc by mid-to-late 2011
This shows that if they did indeed raise rates as expected, inflation
would be well below target in two years' time (and in fact would stay
below it even after that). They produce a similar chart, but this
time based on the scenario that rates stay at 0.5pc: even in this
case, inflation will be just below 2pc in two years' time, though it
is rising rather than falling. So the message is that you would be
foolish to expect much of an exit strategy from QE until at least the
end of this year. In fact, from those charts I wouldn't rule out a
little more in the way of quantitative easing (ie on top of the
existing £125bn blast) to get us out of this.
2. Don't believe the green shoots. The Bank is forecasting a v-shaped
recovery, as one can see from its charts. However, the recovery is
unlikely to feel like much of a boom at all. One suspects that a
little bit of politics are involved here. The Bank's natural
inclination is to expect a far weaker recovery than the trampoline-
shaped one anticipated by the Treasury, but it cannot rule it out. So
it has picked out a halfway house, with a v-shaped recovery but with
the proviso that there is a significant chance that the rebound could
be far less vibrant than this.0000

The Bank's growth forecast (this is based on rates staying at 0.5pc
by the way)
3. The risks of deflation are diminishing, thanks to the weak pound
and the massive monetary boost from near-zero interest rates. But the
Bank is not as concerned as many in the market about the return of
inflation. This may, to some degree, be a bit of PR. The MPC are
inherently quite hawkish. However, they are also aware that talking
too much about exit strategies, about the need for higher rates and
for measures to clamp down on growth in the future, could be self-
fulfilling, exploding the recovery before it has even started.
4. The Governor is not unduly worried about the big rise in gilt
yields since March. This seems esoteric but is important. According
to economics textbooks, you would like for government yields to drop
as low as possible if you're fighting a deflationary threat. In other
words, real interest rates - the ones across the entire economy, not
the official Bank rate, must be brought as low as possible. It is
rule number one in quantitative easing, at least according to the
Federal Reserve's Ben Bernanke. Although yields dropped sharply when
the Bank announced QE, they have jumped back sharply since and now
stand higher than when this policy started. Some view this as a
failure of QE. [And they’d be right -cs] The Governer argued today
that there were plenty of other reasons for yields to have risen, and
he is right on this front: the Government has said it is about to
borrow a World War-sized slug of cash. That kind of thing is certain
to push up government borrowing costs (in the same way as a bank
expects higher interest rates from borrowers with more debt).
Likewise, the equity markets have recovered some of their poise
recently, another factor which pushes up gilt yields.
5. The Bank hasn't yet made up its mind on how to do the exit
strategy - whether it will sell off the pile of gilts and corporate
debt it is acquiring through quantitative easing first, or raise
interest rates, when it finally brings this period of unconventional
monetary policy to an end. That at least is my reading of a number of
King's responses to questions about this. King said they will
probably do a bit of both, but it feels like neither he nor the
committee have really worked out how it will tackle this rather
delicate issue. And it will be difficult. If it does start selling
off its gilts next year, the Bank will be doing so at the same time
as the Government is raising a massive amount of debt in the capital
markets. At that point the chances of the government facing further
auction failures and a possible strike in capital markets rears its
ugly head in terrifying fashion. [The sequel to the recession
itself is what has worried me all along. Those without jobs are
already feeling the pain but everyone will suffer in the aftermath as
those massive debts cause vast interest while they exist amd even
greater sacrifuces to pay them off. Most of the population only
think as far as tomorrow and the lunacies of MPs’ expenses but
they’ll have some very nasty experiences to deal with as the mess of
tackling the recession leaves our finances very precarious -cs]
6. The forecasts imply QE is a success, the Governor's words were
less clear. The GDP forecasts seem to imply that the £125bn of cash
injected into the economy will boost demand significantly. This is
something that has also been built into the Treasury's forecasts.
However, no-one on the Committee was capable of explaining how much
difference an extra billion of printed money will actually make to
the economy, short of an arbitrary notching up of its GDP forecast.
In fairness, as King pointed out, it is still too early to tell
whether it has been successful, but if it is not, the Bank's
forecasts will start to look all too much like wishful thinking.
[I’ve run out of verses from ‘There’ll be bad times just around
the corner’, but you get my drift I hope’
Thursday, 14 May 2009
1. Traders take a ride on the cash carousel
Bankers are making millions from the latest financial policy, says
Edmund Conway.
2. Bank of England hedges bets over recovery
The Bank of England has thrown cold water over hopes that the green
shoots of economic recovery have sprung.
By Edmund Conway and Angela Monaghan
3. Bank is almost as clueless as the rest of us
Posted By: Edmund Conway
[In this section all the emphases are the author’s, not mine! There
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