Ranjit Sidhu explains why a second round of quantitative easing means more funding of London, with its isolated economy, by the rest of the country.
By Ranjit Sidhu
This morning when discussing the extra £75 billion quantitative easing taken by the Bank of England and its effect on the commercial property market, Nick Leslau, the manager of Max Property Group Plc, made the interesting observation (22 minutes in) that there is two countries in the United Kingdom: London and the rest.
In the rest of the UK commercial property prices fall, but in “country London” commercial property prices are not just ok, but are acting “robustly”.
Wow! We are living through a double-cycle world crisis which is mostly due to the banks over-leveraging on sub-prime loans and now government debt and one of the world’s financial capitals is confident enough to have a “robust” commercial property market? Not a sniff of a commercial property crash or housing price crisis?
The question has to be asked: How could an area whose main industry was not just near the precipice, but has had both feet hanging off the cliff, be so different to the everyday world of industry, where when the steel yard, coal mine, factory collapses it is followed by a ghost town, boarded up properties, an area in strife?
The plain fact is that the “country London” institutions had not simply been “bailed-out”; regardless of the benefits on the economy, it can be argued that quantitative easing has meant that the Bank of England has watered down every pound in our pockets – wages, pensions and savings – by increasing the money supply so that financial institutions could have an extra £275 billion pounds to prop up the markets and increase profits.
Wondering how the banks made record profits a year after the crash? It was almost impossible for the banks not to make money after the first “windfall” of quantitative easing, expect record banking profits next year again.
Lets get the figures into context; if we cut out the middleman, the Bank of England has created enough extra money through QE to purchase from the banks an extra £4,600 worth of government bonds and shares for every man, women and child in this country. Putting it into an alternative context the bank could have “guaranteed” every year since 2009 the £76 billion they now have targeted commercial banks to loan to small and medium size businesses under “Project Merlin” without commercial banks ever getting involved.
These are astronomical amounts which make it even more unbelievable that we still don’t know whether quantitative easing does really make a positive effect on the economy, how much it will actually cost the government, let alone what/if there is a “trickle down” benefit to the economy or simply eaten up by de-leveraging banks and profit taking- all moot points.
If the two banking crisis since 2008 have taught us anything it is that we must not be put off by the mesmerizing smokescreen of complex financial jargon and a Kafka-esque banking system not to question why £275 billion was needed to be given so freely to the banks in an obligation free way. The Bank of England has not just magicked up £75 billion of money yesterday, but is creating it on the back of and at the risk of our whole countries’ wealth.
We should have the right to demand to know whether it is a wise choice or if the Bank of England is acting as an anti-Robin Hood stealing the value of everyones’ pound and throwing a sack of gold to the financial sheriffs of country London.
See also:
• Economic update – October 2011 – Tony Dolphin, October 7th 2011
• One-club Osborne drives economy further into the rough – William Bain MP, October 6th 2011
• Just who WILL Osborne listen to? – Cormac Hollingsworth, October 3rd 2011
• Vindicated Balls gives absent Osborne an economics lesson – Shamik Das, September 15th 2011
• Osborne set to U-turn on QE – so why not on Plan B? – Shamik Das, September 12th 2011
64 Responses to “Quantitative easing: The latest windfall from us all to “country London””
Steve Cottrell
Quantitative easing: The latest windfall from us all to “country London” http://t.co/HVjZmorm
Floyd Wise
Quantitative easing: The latest windfall from us all to “country London”: By Ranjit Sidhu This morning when disc… http://t.co/VdDwx0pD
entertainmentfy
Quantitative easing: The latest windfall from us all to “country London”: In the rest of the UK commercial prope… http://t.co/rHXq3bEw
Ranjit Sidhu
Dear Loius,
Can I make one point clear I am not in anyway making a statement whether QE works as a stimulus or not- that is another issue.
The extra is obvious . The government bonds and shares the BoE buys do not disappear they are still there held by the BoE. Pre QE:government bonds post QE : same government bonds held by BoE + £275 billion. The BoE cannot just print money and by up its bonds to non existence otherwise it would worse then RObert Mugabee and with less economic credit. So what happens to the finite gilts- don’t ask me, but the market after the QE announcement: – erm could this be considered also be considered a slight windfall for the holders of bonds? THAT IS THE WHOLE POINT OF QE – cash for the banking system !!!!!!!
You need to place your argument as to cheaper borrowing by QE for government to the private sector as well. It the cheap credit that lead to the huge investment in commodities etc… by the banks after QE1 that also lead to price spirals and another windfall for this hedging
You seem hellbent on making the argument as monetarist policies good or bad, I am not against monetarist policies to boost demand and the economy, however (and this is the crux of the article) I am against printing money, buying up bonds, then the banks using that cash and the cheap credit to speculate on commodities and other hedges to maximise profit. It is not the BoE job to do that.
If you think that BoE losing say 30% on the transactions long term is nothing then I am sorry you are totally wrong. The money it created does not just disappear, it could perhaps print less each year, BUT that money is there in the system. Bank sells bond for 100 then buys back bond for £70 the 30% doesn’t disappear someone has made a profit ! Now who could that be ?
To paraphrase One Mr Bogart: I don’t depise monetarist policies, but I do a cut price one.
Luis Enrique
my old pal, the only thing I am hellbent on is trying to get you to acknowledge the difference between “QE gives banks an extra £75bn” and “QE gives private sector investors £75bn cash and takes away £75bn bonds”. Oh, and also that it is quite wrong – Sarah Palin style wrong – to talk about printing base money as if it simply dilutes existing money. That is 1st year undergrad stuff.
I did mention, however, that should the BoE make a paper loss because QE has worked, the economy is boosted and interest rates start to rise, that would be cause for celebration. You have not explain why we should worry about BoE losses.
I don’t know where you got the idea this round of QE involves buying shares from, by the way, afaik it’s 100% gilts.
now, of course those bonds don’t disappear. They are held on the BoE balance sheet where, broadly speaking, three things can happen to them. They can be rolled over in perpetuity, which would constitute monetizing the government debt, something many on the left like the idea of. Or the government could run a surplus, and repay the bond, thus removing money from circulation. Or the BoE could sell then back to the private sector, thus removing money from circulation. I’m not sure what point you were trying to make by saying bonds don’t disappear.
Now, when the BoE buys a £100 bond for, say, £99.5, whether anybody made a profit on that depends on what they paid for it in the first place. They, should the price of a £100 bond fall to £90, so the BoE makes about a 10% loss on the transaction if it sells the bond it bought for £99.5, whether anybody makes a profit or not depends on what subsequently happens to bond prices after they have paid £90 to the BoE to buy it. You seem to suggest that if the BoE is losing 30%, somebody is profiting by 30%. You are right that in this example £99.5 of cash was injected into the system but only £90 of cash removed when the BoE resells the bond. Never fear, if the BoE wants to remove more cash than that, it can sell more of the bonds it holds on its balance sheet.
Finally, banks are quite capable of speculating on commodities whether or not the BoE is running an asset purchase program. Are you aware of the regulatory implications for banks involved in selling £Xbn of government gilts and spending the cash on commodity futures?