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””
Ranjit Sidhu
Dear Louis, Thank you for your comments and the link, an excellent article.
Must admit I haven’t heard to QE freezers, what are they? (sorry ;-))
But, moving on to your other points:
1. The “windfall” comment is not mine but from there New Economics Foundation (NEF): As per the link above they commented as to QE 1 that
“The mechanism through which the bank does this is by buying bonds from banks.
“Merely for being passive conduits for this risk-free arrangement, the banks took a cut of every trade,” the NEF said.
This amounted to a “significant windfall” for the banks, it argued.”
Further in this QE round the BoE has said that it would buy shares AS WELL as bonds, I do not have to explain to you how this could boost say an investment arm of a bank.
As for the risk of QE to a loss is that the BoE are taking a massive risk in again quoting from a link above the excellent analysis from the BBC when taking the example of 100 billion QE:
“Here’s the funny thing, therefore.
If quantitative easing is a success, the Bank of England will inevitably make a loss on the gilts it buys.
How big could that loss be?
Well the Bank of England may buy £100bn of government bonds in the coming weeks and months, or possibly even more. And if there were then a bit of a rise in inflation, coupled with investors becoming keener on purchasing riskier assets (such as equities, property and lower-grade corporate debt), well a 30% fall in the price of government bonds would not be out of the question.
And that would generate an eye-watering loss for the Bank of £30bn.
Not nice.”
There’s also a worse case scenario – which is that inflation could take off with a vengeance. And in those circumstances, the Bank would probably have to dump a load of bonds on the market to drain surplus money from the system as quickly as possible.
In those circumstances, goodness knows how substantial the losses could turn out to be.
That said, many would see that as a price worth paying, however chunky, if it helped to deliver an economic recovery.
But there is a paradox here – which I have already alluded to.
If investors have confidence in what the Bank of England is trying to achieve, the price of gilts would not have been rising over the past few days – because if Quantitative Easing were to work, demand for gilts and the price of gilts would both fall very substantially.”
Again, thanks for your comments
Ranjit
Dave Citizen
Ranjit – you are quite right to ask the bigger questions around what’s going on at the moment – when the ship is holed below the water line its no good focusing on the technicalities of how to bring the engines back up to speed.
Unfortunately, those in control at the moment are locked into a mindset of reviving the corpse of western economic dominance. Of course, they have a very good reason to keep trying: the efforts they make may harm ordinary people, but they are probably the only way of saving the privileges those at the top amassed during the good times.
teachmeproperty
Quantitative easing: The latest windfall from us all to “country London” http://t.co/AH8Ar5GF
Property Search
Quantitative easing: The latest windfall from us all to “country London” http://t.co/HVjZmorm
Luis Enrique
Ranjit,
the idea of a windfall for banks seems to be central to your argument. Are those idiots at the NEF your only basis for thinking it exists?
also, you have described QE as giving the banks and extra £275bn. The word “extra” means “more than they had before”. The point of my question was to get you to see that even if you accept a rise in the price of bonds constitutes a “windfall” for banks, your characterisation of its size is out by about a factor of 1000.
Now, why do you think it matters if the Bank of England makes a loss on the bonds it buys? It printed the money to pay for them. Who sufers as a result of this loss? Who do we, on the left, care about? If QE was to work, economic growth would be boosted and as a result interest rates would rise, bond prices woudl fall and the bank makes a paper loss. That is good news we want the economy to expand, unemployment to fall etc.
I also hoped you might appreciate that for every 1p added to the price of a £100 bond, that’s 1p less the government has to pay to borrow £100 … it’s a windfall for taxpayers hurrah!
furthermore, any reduction in interest rates entails higher bond prices, so if you are going to oppose expansionary monetary policy on the basis it is a windfall for banks, via boosting bond prices, that means you would have opposed cutting interest rates from 2% to 0.5%. Perhaps you could start a club – “left wingers for contractionary monetary policy” – I like the idea of a non-partisan cross party alliance with Tory wing nuts that share your views.
Oh, and if you favour some deficit spending, that too involves trading bonds … oh dear, another “windfall for banks”, by the lights of the NEF.
What I’m driving at is, I think you’re understanding of monetary policy and such like might be a bit patchy.
here is an articel written by the excellent Rortybomb in which he tries to explain why left wingers need to get on board with monetary policy
http://www.tnr.com/article/politics/95217/progressives-fed-monetary-policy