Chris Giles had an article in the Financial Times this week asking whether the quantitative easing (QE) programme run by the Bank of England had been worth its cost, particularly in the context that in relative terms the UK QE programme has proved to be much more costly than that of the US Federal Reserve and the European Central Bank.
To summarise what Chris Giles said, he suggested that the cost of this programme cannot be fully known as yet. That is because the impact is continuing. However, he concluded that whatever the cost was it must have been worthwhile because it prevented massive further economic breakdown in 2020/21. To that extent, Chris got his commentary right.
He was also right to conclude that the Bank of England will, eventually, have to be held to account for the reason why their programme is proving to be so much more expensive than that of other, similar, institutions.
The disappointing aspect of this was that Chris failed throughout the article to give any hint of understanding as to why this might be the case.
Firstly, he did not discuss the wholly unnecessary quantitative tightening (QT) programme that the Bank of England is undertaking a present to shrink its balance sheet when there is no proven need for shrinkage to take place. That is because the size of that balance sheet has had no obvious impact of any sort on the economy, excepting interest costs on central bank reserve accounts (CBRAs). It has most certainly not had any impact upon inflation.
Chris also failed to discuss, in this context, why it is that the UK QE programme has involved extraordinarily high levels of payment of interest on central bank reserve accounts in the UK. He did, however, acknowledge that these payments have amounted to what are, in effect, free gifts of cash to the banks when institutions, such as the European Central Bank, have mitigated such costs.
In addition, Chris failed to note the exceptional impact of the excessive used of index linked bonds in the UK on costs in recent times.
But, perhaps most damning, is the fact that Chris Giles has not recognised that there was never any need at all to undertake the QE programme. It has been from start to finish an expensive sham.
This claim can be briefly explained. As we know, from April 2020 onwards, the UK government ran substantial deficits to cover the cost of its various Covid programs. The total cost exceeded £400 billion. No third party funding was required for this deficit spending programme. In reality, all that happened was that new Bank of England created money was injected into the economy, inflating the CBRAs in the process. Nothing much has changed with regard to this situation, except as a consequence of the current QT programme, which has partially (but only very partially) reduced those balances.
No bond issues or acquisitions were required to inflate the central bank reserve accounts, the inflation of which were the only transactions with true economic substance that took place as a consequence of the government incurring deficits on the scale it did.
Despite the fact that no bond issues or repurchases were necessary in association with the creation of this deficit funding, the Bank of England, with government approval, undertook both QE and then QT programmes. As a consequence it did a number of things.
Firstly, it issued new government bonds of almost exactly equal value to the amount of deficit created, with such sums rising in close lockstep throughout the period when deficits were run.
Then, having issued such bonds to create the impression that deficits were being funded by the bond markets, the Bank of England repurchased bonds of equivalent value to those that had just even issued from those very same bond market participants. The bonds the Bank then acquired were not necessarily those just issued, and as a consequence, the opportunity for profit making by the banks on arbitrage trading was created.
In reality, these issues and repurchases did, for all practical purposes, cancel each other out in value terms at the time. As such they had no net impact on the value of the CBRAs created by deficit spending. In other words, as I noted, they were just a sham.
Now, however, QT is happening. In reality the bonds sold under the QT programme are, in effect, new bonds, but because of the absurd charade of issues and repurchases that QE involved it is claimed that old bonds are being sold back into the markets, but often at a considerable loss. When the purchase of those bonds was never necessary this only adds to the cost and grief of the QE programme and suggests that it has been managed with gross incompetence by the government, the Treasury, the Debt Management Office and the Bank of England. The cost cannot be known, but overall the cost of this incompetence might exceed £100 billion.
Chris Giles misses all these points because he still does not understand that there was literally no need to do QE. If the government had openly declared that it was going to run an overdraft with the Bank of England, and that interest to be paid on the CBRAs was to be limited, then vast amounts of cost, and the whole loss on bond dealing arising from QE could have been entirely avoided.
Why is that not being said by Chris? That is a question for him to answer. But unless those issues are not addressed then no analysis of the QE era will be complete.
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I think we know why many of the questions you posed are not being answered………..”Why is that not being said by Chris? ”
We are in Andrew Marr/Chomsky territory. Giles is a safe pair of hands, won’t upset the apple cart – quite possibly is functionally incapable of even posing the questions you raise let alone answering them. Owned, unquestioning men (& women) in the media. There by design, to keep the neo-lib roadshow on the road, in this case by producing an article that veils the real problems. Ask pointed questions? goodness me no.
Until voters recognise they live in Scamland where the rich deploy shills (mainstream media, politicians, so-called “think” tanks, and academics) to avoid awkward questions being asked nothing much is going to change.
https://www.merriam-webster.com/dictionary/shill
Whom does the Bank of England actually serve?
Might the destination of related monies give some indication?
Might unexplained errors be submerged purposes?
QE was primarily about reducing long term interest rates in the economy by buying in gilts, money creation on its own would not achieve that. Why have you missed this point?
Are you saying that this could not ave been done any other way?
And why was that necessary in 2020?
“Are you saying that this could not ave been done any other way?”
Yes intervening in government bond markets to manipulate interest rates lower is the only way to influence long term interest rates. And I reiterate this is what QE was about. And I say again why have you missed this point?
I haven’t
I think bae rate adjustments would have been enough
The rest is entirely unproven
No Jeff you clearly are not au fait with fiat money reality! The government by paying interest on its superordinate money (reserves) controls interest rates. It can also of course use tax regulation and licenced banks lending under-writing prescriptions to regulate inflation.
@ “jeff”
QE was not “primarily about” reducing long term interest rates. That was a means to an end, i.e. “primarily about” (supposed) effects on the economy. Post-crash, it was was “primarily about” economic stimulus/staving off disinflation – which could indeed have been achieved by “money creation on its own”. Trying to do it with QE “on its own” is like trying to fill your kettle by flooding the floor above. By the late 2010s, even the central banks were quietly admitting it and urging govts to do their fiscal bit.
If you wanted to design a system to obfuscate how government finance works, you would be hard put to find anything better than QE. It also gives central bankers a new toy to play with, one which most people, including most politicians, don’t understand.
There is something bizarre about discussing whether something totally unnecessary and of no conceivable benefit to society has been done well or badly, but that is the situation we find ourselves in.
I see the question of CBRAs a totally independent issue. They are an artifact of (1) the way we have chosen to run our commercial banking system and (2) the chosen mechanism whereby the government both spends money and collects taxes and other fees. I can’t see any problem with that provided the issue is widely understood. However neither of these functions of CBRAs seem to require interest being paid on them. Personally I can’t see any reason for doing so.
“Personally I can’t see any reason for doing so.”
Depends whether you think adjusting base rate is a useful tool relative to other ones. This is the real debate! The following article provides some context for this debate:-
https://neweconomics.org/2023/09/reducing-stealth-subsidy-to-banks
Is the following statement in the article really true:-
“Paying interest on these reserves is said to set a minimum floor, as banks wouldn’t lend to others (and give up reserves) below this rate and miss the opportunity of a higher profit margin.”
The positive side is that even the “owned, unquestioning” monetary journalists (in Mr Parr’s words) can see that the BoE is a badly run, inefficient and probably incompetent institution (as the LDI Pensions disaster also proved); and performs wretchedly in international comparison. In other words, it needs cleaned out, reformed and replaced by people who know what is important in monetary policy and operation, and understand what they are doing.
That is a start.
I think that Chris Giles and the Bank of England know exactly how the system works.
Just follow the money to see who benefits.
Alternative arrangements may have saved £100billion, money that could have helped the less well-off.
Just as Government should have as its prime duty to serve the citizens who supposedly give them that power and ensure their best interests are taken care of and the “five giants” are kept at bay then it is also the duty of the BoE to play its part in that exercise. But it doesn’t, it serves the interests of banking and the financial sector. In fact it makes citizens poorer and jobless. In any decent State that would be considered an outrage.
Thank you for this succinct explanation, summarising the continuing folly of BoE actions.
The question above of “Who does the Bank of England serve” deserves our full attention.
Andrew Bailey’s position as Chief Souk would seem to be solid with Reeves as Chancellor, but reversing Brown’s sleight of hand, and bringing monetary policy under direct government control would rid us of the fictional independence of the BoE and hopefully its City biassed management.
“Firstly, it issued new government bonds…”
On a pedantic note, this statement would imply (from the previous paragraph) that the BoE issues government bonds, which of course it doesn’t. The Treasury does.
If only the politicians would understand that there is no operational reason that the government that issues a fully floating fiat currrency needs also to issue bonds to the value of its anticipated deficit I think we would be in a better place. And, of course, that the issue of government bonds is not borrowing; it’s providing a safe, government backed savings vehicle.
Richard the New Zealand Treasury seems sympathetic to your concern about interest on reserves
https://www.treasury.govt.nz/sites/default/files/2023-04/t2022-2562-interest-settlement-cash%20balances.pdf
Thanks – and rightly so
Yes. Very interesting. As far as I have ascertained, NZ is the only other country that operates Crown (as they call the government) accounts at commercial banks like the UK does.
Nigel I had an unsubstantiated impression Canada had such accounts
So did I but like you I can’t substantiate it.
I take the point that QE (from the start) involved issuing bonds and then buying them back in secondary market. BoE at the time said this showed they were not monetizing debt. Still a farce, though did bypass legal rules. My question is which was the most effective way of getting liquidity into the financial system: 1) buying gilts from banks so the banks had an embarrassment of funds (yep, led to speculation in financial assets and not productive investments) or 2) use central bank reserve accounts (CBRAs). I don’t remember latter ever being considered back in 2009.
Only yje latter happened
No net bonds were bought