Nonsense about the Banking bill

I fear that a hatred for the government has clouded the minds of some of its critics. Guido and the Devil’s Kitchen are upset by the proposal in the Banking Bill to abolish the obligation upon the Bank of England to produce a weekly balance sheet.
This will, says DK “abolish one of the major controls we have had over the Bank of England.” And the Telegraph quotes some Tory loon warbling about Weimar and Zimbabwe.
Their concerns are, I fear, exaggerated.
1. The idea that “printing money” is something sinister associated with banana republics is just gibber. As Willem Buiter says, printing money is what all central banks do.
2. The Bank couldn’t print money in secret even if it wanted. Quantitative easing (QE) works by the Bank buying assets from commercial banks - and giving them money in exchange. It must, therefore, announce its intentions to do so to banks, and therefore the rest of us.
3. There’s little point doing QE in private. The point of QE is to prevent severe deflation. This is best done by raising inflation expectations, which in turn is best achieved by making as much of a song and dance about printing money as possible. Indeed, in theory it’s possible that the announcement of QE alone would be sufficient to raise inflation.
4. Even if there’s no weekly balance sheet released, it’s quite likely that the data contained in it will be released elsewhere, as it is now - for example, table B1.1.1 of Bankstats.
5. The notion that the weekly data is a “major control” over the Bank is pish. The current data show that the Bank’s balance sheet has more than doubled in size since late September. I’d be happy to be corrected here, but I don‘t recall this arousing critical comment and analysis from Guido and DK.

Comments

[nick]

If it's not an important check on something or other, why abolish it? Any why now? Just tidying up? How did the clause wander into the bill?

[Luis Enrique]

And, might not a bit of seingorage, while we can get away with in an deflationary environment, also ease concerns about the government's long-term debt position? (because some of the stimulus is being paid for via the printing press).

A small point. You write: "Quantitative easing (QE) works by the Bank buying assets from commercial banks" - does that include the Treasury raising money via issuing bonds, the commerical banks buying those bonds and then the BoE buying them with newly printed money? Which amounts to the BoE part funding the Treasury via printing money? (because the Treasury never has to repay that debt, because the BoE effectively tears up the bond? or maybe holds it indefinitely).

I'm not at all sure about this, but it's something that puzzles me about how Macro is taught. Students are taught that the BoE increases the money supply by buying bonds and decreases it by selling them. But in the long run we need to steadily increase the money supply, and you can't do that just by buying the bonds you've issued because they'll run out and issuing more would decrease the money supply. So you need some way of injecting new money into the system that doesn't entail buying assets that you issued in the first place. Is the way that's done by using central bank money to cancel government debt?

[Luis Enrique]

I guess all I'm saying is that macro as taught skirts over the idea that the entity issuing bonds (Treasury) isn't same as that buying them (Cent. Bank) to increase M0. And I guess when the Treasury issues bonds it doesn't reduce M0 because money stays in circulation whereas students are taught issuing bonds reduces M0.

[passer by]

Sounds like fiat currency alchemey. This will decend unto HMG shuffling bits of paper between depts...followed by by a IMF.

[Bonapart O Cunasa]

The proposed abolition isn't about QE at all - it's about lender of last resort. If the BoE has to shore up a liquid but insolvent bank by lending it loads of money, it won't necessarily help confidence if it has to reveal that it's done so in its weekly balance sheet.

[D iversity]

Of course the weekly balance sheet is useless to commentators, and publishing it has ben a waste of time for many years. But abolishing it now was a lovely opportunity for guido to tease the powers that be. Consider yourself duly suckered into replying.

[MC Shalom]

Chairman Ben S. Bernanke, Quantitative Easing Can't Work.

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity it doesn't create $1 of investment.

In a Liquidity Trap the last thing the Market needs is liquidity. This is why, Mr Chairman, we call it a Liquidity Trap,

Force-feeding the Market won't achieve anything useful.

If short-term risk free interest rates are at 0.00% doesn't that mean that credit is worthless?

Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.

Those purchases maintain the demand for long-term asset in an unstable equilibrium.

When this disequilibrium resolves the Market turns chaotic.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order

Abstract:

This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labor, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The other option would be to wait till, on the long run, most of our productive assets get physically destroyed either by war or by rust.
It will be either awfully deadly or dramatically long.

In This Age of Turbulence People Want an Exit Strategy Out of Credit,
An Adventure in a New World Economic Order.

We Need, Hence, Abolish Interest Bearing Credit and Cancel All Interest Bearing Debt.

✔ Exit Strategy Out of Credit
http://edsk.org

✔ A Specific Application of Employment, Interest and Money
[Intended for my Fellows Economists].
http://edsk.org/interest.html

Press release of my open letter to Chairman Ben S. Bernanke:

Chairman Ben S. Bernanke, Quantitative Easing Can't Work!
http://www.prlog.org/10165667.html

Yours Sincerely,

Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1776 - Annuit Cœptis.

[cityunslicker]

Replied to this on my blog, could not help it...

[Ralph Musgrave]

Chris Dillow’s rationale for Q.E. leaves a bit to be desired. One of the main justifications for Q.E. that I have seen is that it forces down long term interest rates, which Chris Dillow does not mention.

The debate would be much improved if we distinguish two quite different meanings of the word “deflation”. It can mean “falling prices” or “lack of demand” – that is the definition in my Penguin Dictionary of Economics.

I not agree with Chris Dillow that the one of the objectives of Q.E. is to bump inflation up. I accept that there are a few odd balls who think that falling prices equal the end of civilisation as we know it, and hence that inflation is needed. However, prices fell at an average rate of 0.5% a year during the 1800s in the UK, as I understand it, so gently falling prices are no more a problem than gently rising prices.

But personally, I think Q.E. is for the most part a waste of time. In that it consists of governments buying the toxic “assets” of banks, and thus putting banks on a firmer footing, then that makes sense. Otherwise its pretty senseless.

I agree with Louis Enrique’s first para, i.e. that seingorage in a deflationary environment eases the government’s debt position.

Louis Enrique asks a question, as follows. “You write: "Quantitative easing (QE) works by the Bank buying assets from commercial banks" - does that include the Treasury raising money via issuing bonds, the commercial banks buying those bonds and then the BoE buying them with newly printed money?”

My first answer is that Q.E. seems to consist of the “government – central bank machine” buying securities in the market and not necessarily just from commercial banks.

Secondly as to whether Q.E. is the same as “the Treasury raising money via.....”, the answer is no. This latter activity takes place, on and off, all the time, and no one over the last decade has called this activity “quantitative easing” as far as I know. (Indeed Louis Enrique himself points out that the “Treasury raising money” activity takes place all the time in his third para, doesn’t he?)

In Louis Enrique’s third para he asks whether the continuous expansion in the monetary base is matched by a continuous increase in government bonds held by the Bank of England. As I understand it, the answer is yes. This exercise is something of a nonsense. Or as someone commenting on one of Willem Buiter’s articles put it, central bank balance sheets make no more sense than sidereal astrology. For example, the monetary base appears as a liability in the Bank of England’s balance sheet. But is a £20 note (which is part of the monetary base) really a liability of the bank? Take a £20 note along to the bank and try getting £20 worth of gold (or anything else): they’ll tell you what to do with yourself.

However, the Bank of England is formally a separate entity to the government, so I suppose the former has to have a formal balance sheet.

And finally will someone please explain something I don’t understand, as follows. Keynes advocated government borrowing and spending as a solution to a recession. Since borrowing is deflationary, and spending is reflationary, what on Earth is the point of borrowing? I.e. why not just spend printed money? A further attraction of “just spending printed money” is that it does not matter whether this policy works because of the monetarist effect (increased money supply) or the Keynsian effect (increased money incomes).