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””
Luis Enrique
Is this website being guest-edited by Rick Perry today?
Read this:
http://krugman.blogs.nytimes.com/2011/10/07/way-off-base-2/
And think again.
And banks don’t get “an extra £275bn” for crying out loud, investors who owned, roughly, £275bn worth of government bonds and high grade corporate bonds swapped them for cash.
Luis Enrique
I’d like you to explain in some detail how this windfall works.
I’ll get you started. Some investment banks charge fees for arranging bond trades, so to the extent that QE freezers and increase in bond trading volumes, that’s income for those banks. Do you know how large the increase in volume is?
Now, you own a bond, before QE is announced. For simplicity, this bond will pay you £100 in one year’s time and is yielding 0.5% so currently trades at roughly £99.5. Then QE is announced and the BoE buys £75bn of such bonds. Please estimate the size of the windfall by looking at how bond prices have changed after QE was announced.
Further, if you think rising bond price are a windfall for banks, do you think falling bond prices hurt them?
Oh and while you are at it, please explain how QE could cost the government.
Luis Enrique
Freezers? Damn autocorrect. Causes an
Sources of Wealth
Property News: In the rest of the UK commercial property prices fall, but in “country London” commercial p… http://t.co/rHdz8pi1
Shooter
Left foot Foward seriously needs to improve its economic commentary. Almost every article I read is fundamentally flawed. The problem here is the connection between QE and rising property prices. The reason for rising prices has been foreign demand. London is one of the best cities in the world. The other problem is the usual perjoratives of “windfall profits”, banks don’t make a good return on capital…end of. The absolute profits they make are large because they are big businesses but relatively, they aren’t making much money. As the post above implies, you are also extremely vague about how QE benefits banks. I don’t see how you find out that banks are always long bonds or that this makes them money (the primary dealing market is notoriously competitive). Either way, this is why people think Labour isn’t economically competent.