Taking on the currency cranks

[littlebabyjesus]

LD is arguing that the intent behind the injection of £370 billion of actual cash into the banking system that resulted in the freeing up of the interbank lending rate, and Libor dropping like a stone and staying down had nothing to do with any of this, the fact that it actually sorted the situation out was just a happy byproduct of it's true purpose or something.

But what has been the effect on the real economy of that reduction in the libor? That would be my question. It's had far less effect than was hoped, I would suggest, because easing the credit crunch doesn't in itself create demand for loans. That is the criticism levelled at qe from certain quarters - that it has the way the system works back to front. And as a result, the only 'positive' result of qe is that the government can fund itself for a bit longer.

 

[free spirit]

you keep saying this and i keep telling you that you're incorrect

In post 184 of this thread, almost 300 posts ago i said this



That you seem to keep on insisting (in the face of a whole lots of posts from me that say the contrary) that I have argued anything like what you suggest above in your case says a lot more about your lack of comprehension and reading skills than it says about me

so you believe the libor rates are being driven down by the yields on gilts?

can you not see the difference in our positions?

for the record, I'm saying that libor rates were driven down directly by the influx of £200 billion or so of cash into the banks in 2009, not indirectly via some weird linkage with gilt yields.

 

[love detective]

I've not denied this would also have been a motivating factor.

You're the one that seems to be denying that the rise in the libor rates at the same time could have had anything to do with it, as you're denying that this aspect had anything to do with the motivation for QE.

I have been saying consistently that the fact that libor rates (which generally track yields on gilts) went down as a result of QE - is a banal truth which neither gives any evidence to support your assertion or mine as to the reasoning behind QE

Rates going down is an objective of QE yes - the question is why did the state want rates to go down. You contend that the main reason for them wanting this was purely to help the banks (despite many other existing schemes in force which specifically and explicitly state their aim is to help bank liquidity). I contend that the main reason for them doing this was

1) on the surface to stimulate activity in the wider economy, and

2) to ensure continued demand for govt gilts to allow the economical unsustainable political austerity to be sustained artifically

can you not see that pointing to rates going down does not provide evidence one way or another as to whether you are correct or whether i am correct?

 

[love detective]

so you believe the libor rates are being driven down by the yields on gilts?
.

of course - that was the objective of QE - to drive down wider market rates through pushing down gilt rates - this is exactly what i said in post 184, nearly 300 posts ago

The reasons the state indulges in QE is that they think they can stimulate real activity in the economy purely through monetary shenanigans, and part of this reasoning is that by pushing down the yield on gilts (through artificially driving up the price of gilts through QE/Central bank purchases) and therefore pushing down market interest rates in general it will encourage people to 'do stuff'.

as per my post above though, this is not the crux of our argument - the crux is why the state wanted that to happen. you say it was primarily to help the banks, i disagree and say it was primarily to help the state and give it cover for its political programme

 

[free spirit]

But what has been the effect on the real economy of that reduction in the libor? That would be my question. It's had far less effect than was hoped, I would suggest, because easing the credit crunch doesn't in itself create demand for loans. That is the criticism levelled at qe from certain quarters - that it has the way the system works back to front. And as a result, the only 'positive' result of qe is that the government can fund itself for a bit longer.

please don't think my position is somehow a defence of QE as a policy to improve the wider economic situation, it isn't.

IMO QE solved the immediate cash crisis for the banks, but they've then gone on to use a significant portion of the extra cash they had sloshing around to join a global effort to pump up a massive commodity price bubble, which actually damages the global economy as it's grown, as well as building up for another major problem when the bubble inevitably bursts.

 

[free spirit]

of course - that was the objective of QE - to drive down wider market rates through pushing down gilt rates

as per my post above though, this is not the crux of our argument - the crux is why the state wanted that to happen. you say it was primarily to help the banks, i disagree and say it was primarily to help the state and give it cover for its political programme

can you be a bit more precise.

You initial post said that it had 'nothing' to do with the banks cash situation.

This is the point I was arguing against, what exactly would class as the primary motivation is a lot more debatable.

 

[littlebabyjesus]

please don't think my position is somehow a defence of QE as a policy to improve the wider economic situation, it isn't.

IMO QE solved the immediate cash crisis for the banks, but they've then gone on to use a significant portion of the extra cash they had sloshing around to join a global effort to pump up a massive commodity price bubble, which actually damages the global economy as it's grown, as well as building up for another major problem when the bubble inevitably bursts.

What's been happening in Iceland interests me. From deepest shit to a return to growth in a few short years, in stark contrast to Ireland or Greece. They allowed the banks to go bust rather than bail them out. Hurting various individuals whose savings disappeared, but as a result, they have been able to move on. In many ways, I see qe as a prolonging of the crisis, postponing the day of moving on. In this sense it is a very bad thing.

 

[love detective]

can you be a bit more precise.

You initial post said that it had 'nothing' to do with the banks cash situation.

This is the point I was arguing against, what exactly would class as the primary motivation is a lot more debatable.

No i said the motivation for doing it had nothing to do with helping the bank's out, QE was about trying to help out the economy and state out in various ways - using the banks as the transmission mechanism for doing so

i've never deined on this thread that a by-product of doing this has been to help out banks in various ways (even more so given that the scheme didn't end up doing what the stated objective was), but i still maintain that this was not the motivation for doing so

 

[free spirit]

you keep seeming to miss the point that at no point on this thread have i argued against the simple/banal truism that QE forces up the price of gilts thus driving down their yield

is this actually what you intended to say here?

£200 billion of QE in 2009 seems to have had minimal impact on Gilt Yields, and if anything there was a slight rise in Yields through 2009, but dramatic impacts on LIBOR, with a virtually immediate fall to a steady low rate within 6 months of QE starting.

Therefore you're wrong to ascribe the impacts on LIBOR rate to having anything to do with gilt yields IMO.

eta - long term maybe the reducing yield on gilts could be related to QE, I've not really looked into that side of things. It definitely wasn't this that caused the almost immediate drop in the libor rates, and increased bank to bank lending in 2009 though.

 

[free spirit]

No i said the motivation for doing it had nothing to do with helping the bank's out, QE was about trying to help out the economy and state out in various ways - using the banks as the transmission mechanism for doing so

i've never deined on this thread that a by-product of doing this has been to help out banks in various ways (even more so given that the scheme didn't end up doing what the stated objective was), but i still maintain that this was not the motivation for doing so

ok, so do you still maintain that the motivation behind QE had nothing to do with solving the banks cash problems?

I note you've changed the last part of your post to saying 'the' motivation... but was it 'a part' of the motivation behind it as I stated in my first post on the topic.

 

[littlebabyjesus]

is this actually what you intended to say here?

£200 billion of QE in 2009 seems to have had minimal impact on Gilt Yields, and if anything there was a slight rise in Yields through 2009,

You could argue perhaps that stopping yields from going up was an achievement, given the way they've shot up in many other countries.

 

[free spirit]

You could argue perhaps that stopping yields from going up was an achievement, given the way they've shot up in many other countries.

you could, but then you'd have to also consider the fact that they dropped significantly in the year before QE, and actually rose in the first year of QE, which really disproves that logic.

 

[free spirit]

It's interesting what happens to a debate when someone actually introduces some facts and figures isn't it.

I'm going to have to leave you all to it, but I hope I've now actually proved that I've been right in virtually everything I've said in this thread all along, and LD has been wrong.

 

[littlebabyjesus]

you could, but then you'd have to also consider the fact that they dropped significantly in the year before QE, and actually rose in the first year of QE, which really disproves that logic.

It doesn't support it, but it also doesn't disprove it. I'm not sure what the time-lag on such measures would be. I'm up against my own ignorance here too, as I don't know exactly how governments issue bonds - do they drip-feed them constantly or do them in big chunks? Also, regardless of qe, hasn't there been a fleeing of money to govt gilts from riskier investments in recent years?

 

[love detective]

It's interesting what happens to a debate when someone actually introduces some facts and figures isn't it.

you've introduced facts & figures, the problem is they do nothing to support the arguments you are making. they don't provide support one way or another to either your assertion or mine.

that you cannot see this is somewhat amusing

I'm going to have to leave you all to it, but I hope I've now actually proved that I've been right in virtually everything I've said in this thread all along, and LD has been wrong.

you've been proved right in the way that Jazz proves himself to be right - the main thing is though you've convinced yourself, nobody else though

 

[love detective]

ok, so do you still maintain that the motivation behind QE had nothing to do with solving the banks cash problems?

yes of course i still maintain that

there are a myriad of state/bank of england schemes that are specifically to solve bank cash problems. QE is not one of them.

the motivation behind QE was not to provide cash to banks to meet prior liabilities as you seem to maintain - but to funnel cash through the banks into the wider economy, the purpose was to get the cash to non-banks, not banks

so the reasoning & motivating factors behind it were actually the complete opposite of what you suggest

 

[love detective]

It's interesting what happens to a debate when someone actually introduces some facts and figures isn't it.

I'm going to have to leave you all to it, but I hope I've now actually proved that I've been right in virtually everything I've said in this thread all along, and LD has been wrong.

I've realised i've been a bit stupid in this discussion as I missed out raising something that I should have done much earlier on. This has meant that i've been relying on circumstantial evidence to prove your assertions incorrect, rather than going to something which proves beyond all reasonable doubt that you are incorrect with your assertions.

To recap, you maintain that the primary motivation of QE was to give assistance to the UK banks. Your assertion makes an assumption that QE was done to benefit the banks and therefore the banks were the main beneficiary of the scheme. Therefore the banks were the beneficiary of the £375bn of money that was created by the central bank in order to purchase gilts. This assumes therefore that the banks have sold in the region of £375bn of gilts to the central bank over the period of QE, and in return have received cash which they have then pretty much sat on, thus vastly improving their liquidity/cash reservers situation. This is your contention.

So let's look at the actual numbers relating to the distribution of Gilt ownerships both on the eve of QE commencement and also the latest figures.

According to page 203 of the Bank of England's 2011 report on The United Kingdom’s quantitative easing policy: design, operation and impact

Before asset purchases began, the main holders of gilts were UK non-bank financial institutions and overseas investors.

At the end of 2008, UK banks held only about 4% of the total stock of gilts, and these tended to be shorter-maturity ones. As Chart 2 shows, the banking sector actually increased its holdings of gilts during the period that the Bank was conducting asset purchases, suggesting that the main impact was to reduce the gilt holdings of the non-bank private sector relative to what would otherwise have happened.

So, at end of 2008, just before QE was about to be introduced, according to the UK Debt Management Office the total amount of debt in issue stood at £617bn, of which banks only held £18bn, which along with the £8bn held by building societies gives a grand total of £26bn (which as a proportion of overall gilts outstanding of £617bn gives the 4% figure quoted above in the BOE report).



So, when the first lot of QE was announced in Jan 2009 and transacted in March 2009, the UK banking sector only held £26bn of gilts in total which they could use to gain access to QE money.

Now, let's look at the current ownership distribution of UK gilts in issue. Again the UK Debt Management Office gives the numbers, with the latest available numbers being as at 30 March 2012



So at 30 March 2012, Banks had actually increased their overall holdings of gilts, not reduced them.

Below is a brief summary of the two tables above:-



So as stated, at the outset of QE, the banking sector only held £26bn of gilts. the latest figures show the banking sector holding £116bn worth of gilts. So in that period of QE where £375bn of gilts have been purchased by the bank of england for cash, banks have not decreased but increased their holdings of gilts by a net £90bn. This means that even if every single pound of the £375bn purchase of gilts by the bank of england had been bought from banks, then banks would have had to have bought £465bn (90bn + 3755bn) of gilts in the period to enable them to both sell £375bn of gilts to the bank of england and still end up with £90bn of gilts owned based on the most recent figures. So the exact opposite of what you claim has happened. Instead of banks having £375bn of additional liquidity as a result of QE, they actually have £90bn less liquidity in relation to movements in their gilt holdings.

The schedule below takes a look at what gilt ownership might have looked like if the central bank had not made any purchases, and applies the 31st Dec 2008 ownership spread to 31st March 2012 total gilts outstanding figure


So the first two columns are the 31st December 2008 holdings in £bns & % from the above table.

The third column applies the 2008 ownership distribution to the 2012 gilts total to get a rough approximation of the ownership spread had the BOE not been involved (and assumes the same ownership distribution as 2008, which is not really valid, but it doesn't really matter)

The fourth column shows the actual ownership distribution as at 2012

The 5th column shows the difference between the third & fourth columns. As we can see, the BOE holdings have increased by £319bn with the bulk of the reduction coming from Overseas (which are central bank foreign reserves and sovereign wealth funds), Insurance & Pension funds and other financial institutions (hedge funds etc.). As you can see for Banks, they have a far higher holding of gilts in both percentage and absolute terms now than they did on the eve of QE. So how you can claim that banks are and were intended to be the main beneficiary of the overall £375bn programme of QE, when the figures show they own more gilts now than they did before it started is beyond me.

To recap, the Bank of England report on The United Kingdom’s quantitative easing policy: design, operation and impact says:-

The aim of undertaking asset purchases was the same as a cut in Bank Rate, to stimulate nominal spending and thereby domestically generated inflation, so as to meet the MPC’s 2% inflation target in the medium term. (1) As discussed in a previous Quarterly Bulletin article by Benford et al (2009), there are a number of potential channels through which asset purchases might affect spending and inflation. (2) Purchases of financial assets financed by central bank money should initially increase broad money holdings, push up asset prices and stimulate expenditure by lowering borrowing costs and increasing wealth. Asset purchases may also have a stimulatory impact through their broader effects on expectations and by influencing bank lending, though this channel would not be expected to be material during times of financial crisis

Central bank asset purchases,through this channel, push up the prices of the assets bought and also the prices of other assets. When the central bank purchases assets, the money holdings of the sellers are increased. Unless money is a perfect substitute for the assets sold, the sellers may attempt to rebalance their portfolios by buying other assets that are better substitutes. (3) This shifts the excess money balances to the sellers of those assets who may, in turn, attempt to rebalance their portfolios by buying further assets — and so on. This process will raise the prices of assets until the point where investors, in aggregate, are willing to hold the overall supplies of assets and money. Higher asset prices mean lower yields, and lower borrowing costs for firms and households, which acts to stimulate spending. In addition, higher asset prices stimulate spending by increasing the net wealth of asset holders

Now, I know that whenever you are confronted with evidence from state sources which contradicts you assertions, you dismiss it as believing in the tooth fairy (unless of course you think the state evidence backs up your own case in which case it's accepted without doubt). So we can discount to some extent the textual remarks made in the BOE report as to the rational & reasoning behind QE.

However, what you cannot discount is that it is absolutely impossible for you to continue to suggest that the main reason behind QE was to pump £375bn of cash into the banks (through gilt purchases) when the figures show that the banks have not been net sellers of gilts during this period but instead net buyers. Meaning that as a result of net gilt purchases/sales, banks have actually reduced their cash reserves/liquidity position through gilt tranasctions, not increased it. And furthermore banks only held £26bn of gilts prior to QE being introduced, which represented only 7% of the overall QE amount. So to suggest that a programme which has consisted of buying £375bn of gilts was primarily intended to pump liquidity into a banking sector which only owned £26bn of gilts in the first place, can only come from someone who does not undertand what actually happened. You are that person.

This data also makes a mockery of your assertion that QE stepped in to take over from the SLS. You previously asserted (without any evidence to back it up) that when the SLS (which was open to UK banks only) run down, they just used proceeds from QE to repay the special liquidity loans. However it's now clear that the recipients of the SLS (UK Banks) were a completely different set of parties to the bulk of the recipients of QE money. So it's absolutely impossible for banks to have taken sufficient liquidity from QE to repay their SLS loans as they had nowhere near the amount of gils owned in the first place to do so.

In short, you're talking shite.

 

[free spirit]

I've just seen this last post by LD, which frankly I'm finding pretty bizarre given his and my previous posts on this thread, so despite the delay I'm going to respond.

In the post above LD tells me I'm talking shite because the banks didn't hold much in the way of gilts to sell directly, yet it was actually LD who was stating specifically that this was what had happened earlier in the thread, and me that told him he was wrong.

QE was not about swapping gilts for cash with the banks to give banks cash to meet their liabilities, it was about swapping gilts for cash with the banks in the hope that they would then create new assets in the shape of loans to customers/business with that money.

In fact this was the exact post that I used the 'do you also believe in the tooth fairy' line in response to, that LD attempts to throw back at me in the post above, while actually writing an entire post that proves his earlier statement had been wrong.

My main point all thread that was merely that QE acted to bolster the banks cash reserves, and free up the interbank lending system, as I clearly demonstrated earlier in this thread that it did.

In response to LD's post above, I'll merely point out that the institutions who did hold the gilts that did get sold to the bank of england wouldn't have then held that money down the back of the sofa, those that weren't actually banks themselves would have deposited that cash / hard currency / however you want to describe it in the banks.

So as I'd said all along, the banks gained significant amounts of immediate cash / liquidity from the QE scheme which they were desperately short of at that point, and this was a key problem that QE was designed to address.

 

[love detective]

Sorry but that's a fairly disingenuous post

The statement you quote from me above was in the context of discussing the objective of QE transactions, and in that particular example QE transactions with banks. That I described what happened when a QE transaction was undertaken between the central bank and a commercial bank (to counter your earlier description of that same transaction) in no way implies that I held the opinion that QE transactions only happened with banks. It's like if I described what happened when a woman who has recently discovered she is pregnant visits her GP, you would take this as though I was saying only pregnant women visited GP's.

Perhaps I should have made that more clear in the post itself, but If truth be told , until our exchange on this thread I was unware of just how small a role commercial banks actually played in QE. I knew it was not a major part but I was quite surprised to see just how small it was. Our discussion prompted me to look into the figures which I outlined in the post above and in turn back up what I've been saying throughout this thread.

To summarise:-

Around 90-95% of net gilt purchases/sales during the QE period was conducted with parties other than banks. And the small proportion of net gilt purchases/sales that was done with banks actually ended up extracting liquidity from them, not providing them with liquidity. So how you can claim that these figures back up your assertion that the primary objective of QE was to provide assistance/liquidity to UK commercial banks when 95% of net gilt transactions in that period did not involve UK commercial banks and the small proportion that did ended up doing the opposite of what you claim they did (i.e. they actually extracted liquidity from banks as banks were a net purchaser of gilts during the QE period).

If this assertion of yours is just a soft subjective hunch then I guess no amount of providing evidence and facts to counter it is going to make you change your mind, but if you'd like to have a go at providing the figures to back up your claims i'd be interested in seeing them.

If you don't believe my interepretation of the figures, I'll point you again to the Bank of England's 2011 report on The United Kingdom’s quantitative easing policy: design, operation and impact which states:-

At the end of 2008, UK banks held only about 4% of the total stock of gilts, and these tended to be shorter-maturity ones. As Chart 2 shows, the banking sector actually increased its holdings of gilts during the period that the Bank was conducting asset purchases, suggesting that the main impact was to reduce the gilt holdings of the non-bank private sector relative to what would otherwise have happened.

And i'm afraid your attempt at an explanation above doesn't cut it, you say:-

In response to LD's post above, I'll merely point out that the institutions who did hold the gilts that did get sold to the bank of england wouldn't have then held that money down the back of the sofa, those that weren't actually banks themselves would have deposited that cash / hard currency / however you want to describe it in the banks.

As your original contention was that QE was primarily designed to:-

meet the banks existing liabilities

and that it was:-

partly used by the banks to build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold in order to ensure they can meet a greater proportion of their existing liabilities?

You quite clearly stated in those posts that you believe QE helped banks cover their existing liabilities. If the non-bank Institutions who did hold the gilts that did get sold to the BOE deposited the proceeds at banks, this would increase the banks' liabilities. So how you can claim that the net impact of QE was to allow banks to 'meet a greater proportion of their existing liabilities' when you've just demonstrated that in this instance QE would in fact increase their liabilities is beyond me. While any deposits banked with them from non-bank institutions would give them access to additional 'cash', it would also at the same time increase their liabilities by the same amount.This is in complete contradiction to your claim that QE helped banks 'meet a greater proportion of their existing liabilities'.

The only way what you assert could have happened would be if it was commercial banks that made up the lions share of net gilt purchase/sales during the QE period. But as the figures i've provided above from the BOE show, this is nowhere near the case. So your initial claim that commercial banks benefited directly in this way is incorrect because the figures show that their involvement was insignificant , and your supplementary/back up claim that they benefited indirectly is false as it totally contradicts your original assertion about what QE supposedly did for the banks. You can't logically maintain both these positions as they contradict each other.

And just to add, I'm in no way claiming that the state did not provide an abundance of liquidity to UK commercial banks - i've talked in some detail in this thread about schemes that were setup to do this. QE however was not one of them. Those who argue that it was, particularly in front of all the evidence to the contrary, are lazily jumping on the post crisis omgzz, the bank the banks hysteria and are being blinded to any attempt to analysis things beyond the narrow role that banks play in capitalist society.

 

[free spirit]

You quite clearly stated in those posts that you believe QE helped banks cover their existing liabilities. If the non-bank Institutions who did hold the gilts that did get sold to the BOE deposited the proceeds at banks, this would increase the banks' liabilities. So how you can claim that the net impact of QE was to allow banks to 'meet a greater proportion of their existing liabilities' when you've just demonstrated that in this instance QE would in fact increase their liabilities is beyond me. While any deposits banked with them from non-bank institutions would give them access to additional 'cash', it would also at the same time increase their liabilities by the same amount.This is in complete contradiction to your claim that QE helped banks 'meet a greater proportion of their existing liabilities'.

It's been a while, so I'll let you off, but if you were to have checked about the next post on the thread you'd have seen that I clarified that I was referring to the actual cash reserves.

Actually, you're right about this, I meant to say cash reserve requirements, not the capital reserves.

So yes, QE resulted in hundreds of billions of new cash* being paid by the BOE for gilts, much of which one way or another ended up deposited in the banks, thereby solving their immediate liquidity crisis.

And yes it increased their liabilities by the same amount as the cash they received, but that's a 1:1 ratio, vs the 1:97 or so reserves to liabilities ratio the banks were / are operating on. I assume I don't need to do the maths any further to explain why this would be of assistance to the banks situation?


*hard currency / BOE credit / however you want to refer to it.

 

[free spirit]

As your original contention was that QE was primarily designed to:-

meet the banks existing liabilities

ps, that quote was also taken out of context from before we'd even started discussing QE specifically.

 

[free spirit]

Perhaps I should have made that more clear in the post itself, but If truth be told , until our exchange on this thread I was unware of just how small a role commercial banks actually played in QE

fwiw neither was I.

But it really isn't particularly central to my point, as it doesn't really matter who owned the gilts, the banks still end up with most of the cash being deposited with them one way or another (for UK owned gilts anyway).

The point is that one way or another QE solved the basic liquidity crisis in the UK banks that was at the heart of the credit crunch. If I remember right you've even accepted this point to a degree, but qualified it by saying that you didn't agree that this was the intent behind QE... as if it were more likely that the government accidentally solved the problem rather than deliberately setting out to achieve that, at the 3rd attempt.

I think it's important to understand the actual justification behind a scheme who's other impacts have apparently been to make the ultra rich even richer, and take from the poor generally through increased inflation rates, and the pensioners etc through reduced yields to their pension funds and reduced bank interest rates. It means that the poor, savers, pensioners etc have paid significantly in the UK for a scheme designed primarily to inject liquidity into the banks, while the ultra rich made money out of it.

It helps to put the cyprus situation into some perspective - we've avoided that sort of chaos, but the UK has achieved this by very slyly robbing most of the country to ensure the banks have enough cash reserves, and in the process the rich have managed to get even richer.

The reason we can do this and Cyprus can't is that we're able to issue our own currency as the BOE did with QE. Whether or not this is a better solution is another question, I just think we ought to at least understand and acknowledge what actually just happened under the guise of QE.

 

[love detective]

first off, fair play to you for attempting to move the discussion onto a more civil basis, it has gotten a bit heated/insulting at times (largely my fault) and there's no real need for that as we are essentially on the same side (something I can't say about the likes of Jazz and co)

That aside though, I still maintain you are fundamentally wrong in what you say though about the primary objectives/intentions of the state carrying out QE (while not denying the by products of some of it have had the effects you note). And if I had the energy i'd summarise all the reasons i've already given and evidence presented on this thread as to why I think you're wrong, and why I think it's important to understand the differing reasons for these various different state schemes being undertaken (for example the special liquidity scheme was to the banking crisis what QE was to the economic crisis that followed. I think all the evidence both in terms of stated objectives & intentions through to actual transactions & flows that stemmed from them, show that while the special liquidity scheme was specifically intended & designed to provide banks with liquidity to get them through the liquidity crisis, QE wasn't. The SLS was launched at the height of the liquidity crunch in 2008, was open only to UK commercial banks and provided them with unencumbered liquidity, QE in contrast was launched a year or so after the height of the liquidity crisis and only around 5% of it went directly to banks in unencumbered liquidity - it was a totally different beast from the SLS and was a response (admittedly a desperate one) to the economic crisis, not the banking crisis)

But I think we're past the point of just repeating stuff back over to each other as it's clearly not making any difference to our underlying positions on it - so I guess if anyone is interested ( ) it's all here on the thread from both 'sides' for them to read and take their own conclusions from it

edit: disagree that quote above was taken out of context though, it was that which started the whole argument in the first place!

 

[free spirit]

But the special liquidity schemes had failed to really fix the problem*, and were due to be repaid over the coming 2-3 years, which would have withdrawn all that extra liquidity from the market again, sending the financial sector back to square one.

QE appears to have solved the problem for the banks (for now at least), but moved the problem out to the entire country in the inflationary pressures it caused, and the reduced interest rates for savers etc.

As to how much of a motivating factor it was, I think it's a bit odd to think that finally solving the liquidity problem at the heart of the credit crunch wouldn't be a significant driving factor behind the policy that actually did solve the problem. I think that they laid a false trail on that score to hide the true motivations to avoid people putting 2 and 2 together and realising that they'd just been robbed via inflationary pressures to prop up the banks further.

TBH I think this is too important a subject to just leave, at a time when the EU/IMF/cypriot government have started enforcing capital controls and taxing a large percentage of bank deposits over 100k, but leaving everything under 100k.

I think it's important to analyse the alternative UK approach, which seems to have managed to sort the banks out, but to have come at the expense of the bottom 99% of society and enriched the top 1%, resulted in further commodity bubbles, and bank bonuses, but at least managed to stabilise the situation.

Those in the single currency don't have that option (whether it's the better option or not), which IMO is the real reason that the UK and US have got out of the situation with the banks and European countries are still in that cycle of trying to prop the banks up one way or another.


*Well, they'd temporarily papered over the cracks, but not much else.

 

[love detective]

But the special liquidity schemes had failed to really fix the problem*, and were due to be repaid over the coming 2-3 years, which would have withdrawn all that extra liquidity from the market again, sending the financial sector back to square one.

Your contention that the SLS had failed to fix the liquidity problem is fairly fundamental to your argument that QE was designed and intended to be a liquidity support scheme for banks. The problem is though this is completely untrue, and demonstrably false.

Here is the 3M LIBOR rate graph for all of 2008 (the graphs for 6M and 12M all show similar trends)

As you can see LIBOR rate had been hovering around the 6% mark for all of 2008 until around September when it then dropped dramatically over the last three months of the year to just over 2.5%*

The graph below shows the usage made of the SLS by UK banks


As you can see the SLS started in April 2008 and by the end of 2008 around £185bn of liquidity had been pumped into the market, with a steep chunk of around £100bn happening in the last 3 months of 2008/early 2009. The thawing up of the UK money markets at the tail end of 2008 (represented by LIBOR falling from 6% to nearly 2.5%) was concurrent with the usages and ramped up usage of the SLS scheme. Now i'm not even saying that the SLS singlehandely solved the somewhat narrow problem of the liquidity crisis (correlation doesn't necessarily require cause etc and the various other liquidity schemes by other central banks around the world would have had an impact on this as well), but the figures quite clearly show that by the end of 2008, well before QE had begun, the markets had not only 'normalised' but the flood of liquidity that had been pumped into them meant that market rates were not at historic lows.

I'm not sure how you can claim that by the end of 2008, when LIBOR had fallen from over 6% to nearly 2.5% that the liquidity crisis was still in effect. As at end of 2008 that figure of 2.5% was the lowest that LIBOR had ever been:-

If you contend that at the end of 2008, a good few months before the first few drips of QE had begun, that a 2.5% 3M LIBOR rate signified a continuance of the liquidity crisis then that means based on your logic the UK money markets have been in a perpetual liquidity crisis as there has never been a time when the rate has been lower than that. Sure QE pushed market rates down even more as a result but to claim that on the eve of QE being launched, a 3M LIBOR rate at a historic all time low represented either the continuation of a bank liquidity crisis or a situation that had just been temporarily covered over is pretty absurd to be honest.

The SLS scheme was launched in early 2008 and extended later on in 2008 as the situation worsened. If there was any indication of a further deterioration, the scheme would have simply been extended even more (i.e. either allowing further drawdowns or allowing the rollover of existing drawdowns when the initial 3 year period expired). It's not like there was any attempt or desire by the BOE/Treasury to hide what they were doing with the SLS, so your assertion that QE was a covert way of getting even more liquidity to the UK banks (which at that point didn't need it) just doesn't make sense, as at that point in time they had far more effective schemes in place to pump liquidity into the UK interbank market

It just doesn't make sense your claim that QE was about getting liquidity to UK banks , it was a scheme that was not efficient at getting liquidity to UK banks and launched at a time when the UK banks did not need further liquidity support. It wasn't until around the end of 2009, a good year later, when the level of QE transactions reached £200bn which was roughly the same level as that of the SLS - so I really hope you do not attempt to argue that it was the anticipation of this eventual QE in late 2009 that led to the dramatic fall of LIBOR in late 2008.

The simple fact of the matter is that even though the SLS (along with all the other injections of liquidity from other central banks around the world) thawed the freeze in the interbank markets, by the time that problem had been 'dealt with' the wider economic crisis was starting to take effect, QE was the (fuckwitted) respond to that.

*While we now know that submitted LIBOR rates during the crisis had been manipulated to an extent by certain submitters, at that point in time in 2008 the banks who were manipulating them were submitting lower figures than actual (to artificially make them look stronger than they actually were as it implies they could borrow at lower rates than other banks), so if anything the 6% at the peak of the liquidity crisis would have been even higher if the figures hadn't been lowballed, making the eventual jump down to 2.5% even more marked.

 

[free spirit]

Some interesting tit bits of information in an Observer editorial piece last weekend that support much of what I'd been saying earlier on this thread, or maybe the previous one, about the original interventions being needed to prevent a run on the banks, and the urgent need to avert complete collapse of banks that had massively over extended themselves.

by the time the bank collapsed in 2008, the gap between loans and deposits had exploded to an eyewatering £213bn.

What the commission did not tackle is exactly what happened in the three days from the Lehman Brothers collapse to the announcement thatHBOS would be rescued by Lloyds TSB.

It does provide some insight into why the rescue was needed: a former HBOS banker told the commission that £35bn of deposits from big companies were pulled out of the bank in the wake of the Lehman collapse. It was not a Northern Rock-style panic, where ordinary savers queued up to take out their cash, but a vast and silent run on the bank by big businesses in the know.

Now maybe a £35 billion withdrawal of corporate deposits in a 3 day period doesn't amount to the start of a dangerous run on that bank in some eyes, but it does in mine.

http://www.guardian.co.uk/business/2013/apr/07/hbos-collapse-lessons-disastrous-rescue

 

[free spirit]

If you contend that at the end of 2008, a good few months before the first few drips of QE had begun, that a 2.5% 3M LIBOR rate signified a continuance of the liquidity crisis then that means based on your logic the UK money markets have been in a perpetual liquidity crisis as there has never been a time when the rate has been lower than that. Sure QE pushed market rates down even more as a result but to claim that on the eve of QE being launched, a 3M LIBOR rate at a historic all time low represented either the continuation of a bank liquidity crisis or a situation that had just been temporarily covered over is pretty absurd to be honest.

The SLS scheme was launched in early 2008 and extended later on in 2008 as the situation worsened. If there was any indication of a further deterioration, the scheme would have simply been extended even more (i.e. either allowing further drawdowns or allowing the rollover of existing drawdowns when the initial 3 year period expired).

I think I've been pretty clear on this point previously.

The fairly obvious problem with your statements is that you ignore the fact that the libor rate began rising rapidly again the instant the SLS scheme closed to new lending at the start of 2009, and continued to rise rapidly until pretty much the exact point that the QE scheme started. Once QE started, libor then fell to it's precrisis levels and stayed there for 2 full years even while the loans made via the SLS scheme were being repaid.

As I said, SLS was papering over the cracks of the problem, and was only a stop gap measure until something more long term could be implemented. How could it be anything else when it was made up of loans that would all need repaying entirely over the 2-3 years starting at the end of 2008, so would be withdrawing all the additional liquidity from the market that it had just added.

It's not like there was any attempt or desire by the BOE/Treasury to hide what they were doing with the SLS, so your assertion that QE was a covert way of getting even more liquidity to the UK banks (which at that point didn't need it) just doesn't make sense, as at that point in time they had far more effective schemes in place to pump liquidity into the UK interbank market

Do you really not see the difference in public perception between a bank rescue scheme that's based on repayable loans to the banks vs a scheme that effectively prints several hundred billion of new money to pump cash into the banking sector, which in turn acts to inflate away the spending power of 95% of the country, rob savers of their interest rates on deposits, and seriously enrich the richest 5% or so of the population?

It's one thing for the government to be able to push this through with the stated aim of boosting lending to business and the economy generally, quite a lot different if it were explained what this was actually aimed at achieving, and how it would actually affect the real values of peoples wages and savings from that point forward.

It just doesn't make sense your claim that QE was about getting liquidity to UK banks , it was a scheme that was not efficient at getting liquidity to UK banks

The bank of england figures show £110 billion being added to the combined UK banks special deposit accounts with the bank of england through 2009, rising from £28.7 billion in February 2009 to £142 billion in december 2009.

I don't know how much more efficient a scheme could actually be in pumping liquidity into the banks - it was certainly a lot better at it than the previous SLS scheme.

For reference, the special deposit accounts of the banks were also where the SLS scheme money seems to have been deposited, peaking at nearly £80 billion in September 2008, but had dropped to £29 billion by Feb 2009 prior to QE starting.

If QE weren't a replacement for SLS, it's pretty odd that it had an immediate, bigger and more sustained impact on the exact same aspects of the banks liquidity as SLS did.

Monthly amounts
outstanding of UK
resident banks'
(excl. Central
Bank) sterling
special deposits
and other balances
with Central Bank
(in sterling
millions) not
seasonally adjusted
RPMTBGY
[a]
31 Jan 07 17344
28 Feb 07 17587
31 Mar 07 14533
30 Apr 07 17340
31 May 07 15973
30 Jun 07 13036
31 Jul 07 17370
31 Aug 07 14409
30 Sep 07 21712
31 Oct 07 17501
30 Nov 07 15754
31 Dec 07 21268
31 Jan 08 16735
29 Feb 08 14893
31 Mar 08 26130
30 Apr 08 21880
31 May 08 21708
30 Jun 08 26449
31 Jul 08 25965
31 Aug 08 22345
30 Sep 08 79986
31 Oct 08 48466
30 Nov 08 40836
31 Dec 08 51017
31 Jan 09 37146
28 Feb 09 28746
31 Mar 09 57943
30 Apr 09 75361
31 May 09 100541
30 Jun 09 138244
31 Jul 09 145168
31 Aug 09 121415
30 Sep 09 137981
31 Oct 09 139099
30 Nov 09 139324
31 Dec 09 142893

QE was the (fuckwitted) respond to that.

I'm not disputing that this was also part of the notion driving the scheme, or how fuckwitted a notion it was, but given that Brown had spent the last 2 years trying to solve the credit crunch crisis in UK and world banking, I just don't see it's very credible to not think that this might have been a key motivating factor for him and the BOE when they dreamt up QE.

 

[love detective]

I think I've been pretty clear on this point previously.

You've been pretty clear about what you believe and I've been clear that I find the assertion unconvincing

The fairly obvious problem with your statements is that you ignore the fact that the libor rate began rising rapidly again the instant the SLS scheme closed to new lending at the start of 2009, and continued to rise rapidly until pretty much the exact point that the QE scheme started.

Firstly - the graph you've posted is not a graph of 3M Libor as you state.It's a graph of the spread (difference) between 3M Libor and the General Collateral 3M Repo Rate, which is the rate that can be achieved in a 'repo' transaction (this involves temporarily selling high quality securities like gov debt to a counterparty and simultaneously agreeing to buy them back at a point in the future at a slightly higher price which reflects the interest cost - the point of doing this is to borrow money cheaper than in the straight LIBOR market as your are effectively borrowing secured, as opposed to LIBOR market which is unsecured).

So your graph is a graph that shows the difference between the rates for unsecured (LIBOR) borrowing and secured (repo) borrowing - not LIBOR itself as you suggest it is in your various references to it in your post

A graph of the actual sterling 3M LIBOR rate for 2009 is below, and it paints a different picture altogether

As you can see from the start of 2009 onwards there is no spike between the closing of the drawdown window for the SLS and the start of QE. So far from their being a spike/rapid rise in LIBOR rates in that period as you suggest, what the spike on your graph actually shows was that there was a drop in LIBOR during that period and an even bigger drop in the repo rate (representing the rate achieved through secured lending) - leading to the spread between LIBOR and Repo rates to increase.

So instead of it representing an increase in borrowing rates for banks as you suggest, it actually represents a decrease (albeit a bigger decrease in secured borrowing/repo rates than unsecured/LIBOR rates - but a decrease nonetheless). And I would hazard a guess that the cause of this was the announcement of QE itself in Jan 2009 - this announcement would have probably pushed down yields on govt debt which form the basis of the repo rate which was then reflected in an increased spread between LIBOR and Repo rate - as presumably LIBOR didn't decrease by the same amount at that time (although in time it did, as your graph which shows the spread between LIBOR & Repo rate shows)

However, even for the sake of argument if we take your graph of the LIBOR/GC spread as the driver of things (which it's not) - it's misleading to say that there was a rapid rise in that period between SLS drawdown window closing and QE starting. From looking at the graph it looks nothing more than around 20 basis points. This is tiny compared to the reduction of nearly 400 basis points in actual LIBOR that was seen in the last quarter of 2008 and which relates to the SLS drawdown period.

As previously stated, SLS was extended & increased after it's initial commencement in April 2008 when it appeared that it wasn't having the effect on market rates that it had hoped. If there was any indication of a rapid rise or spike in LIBOR in early 2009 (which there wasn't as the LIBOR graph above shows) it would have been far simpler and far more low key to simply extend it again.

I also find the logic of your argument for the rational of QE starting and being maintained somewhat contradictory. Putting aside the fact that there wasn't a spike/rapid rise in LIBOR in early 2009, your logic says that QE was needed because of this spike - so the first £75bn or so of QE in March 2009 you presumably see as a response to the spike/rapid rise (which didn't happen). OK so far so good - however from that point onwards LIBOR has continued to drop and drop through 2009, 2010, 2011 and 2012. During this time, when we've been seeing either a dropping of LIBOR or a maintaining of that rate, there has been another £300bn of QE. So essentially you are saying that QE started because of a rise in LIBOR (which actually didn't happen) and was then increased another 400% over a period of time when LIBOR was either steady or falling. So your basically simultenously using LIBOR rising and falling as a reason for QE. LIBOR rises so QE is required, then LIBOR falls so even more QE was required. It just doesn't make sense. But as the actual 3M Libor graph above show, regardless of the logic of your reasoning, the initial premise of a rising LIBOR rate in early 2009 simply isn't true.

Once QE started, libor then fell to it's precrisis levels and stayed there for 2 full years even while the loans made via the SLS scheme were being repaid.

Again, as you're not using a graph of LIBOR - this comment does not actually describe what happened. LIBOR didn't just fall to its precrisis level it plummeted far below it. Here are the the 3M LIBOR graphs for 2006 & 2007

As you can see at the beginning of 2006 LIBOR was around 4.6% and gradually started to rise from mid 2006 up to its crisis height of around 6.8% in mid 2007.

After the injection of the SLS liquidity LIBOR had dropped to around 2.5% in early 2009 and continued to steadily decrease from there (clearly aided by QE).

So I'll repeat what I said in my previous post. Your assertion that an all time historical low LIBOR rate of around 2.5% in early 2009 was some kind of indication of a liquidity crisis which in turn was solved by QE and the eventual injection of £375bn of QE money just doesn't make sense. To say a LIBOR rate of 2.5% in early 2009 was an indication of a liquidity crisis which needed any kind of response (let alone QE) pretty much means that you think there has been a perpetual liquidity crisis for the last 100 or so years as LIBOR has never been lower than that 2.5% rate in that period.

As I said, SLS was papering over the cracks of the problem, and was only a stop gap measure until something more long term could be implemented. How could it be anything else when it was made up of loans that would all need repaying entirely over the 2-3 years starting at the end of 2008, so would be withdrawing all the additional liquidity from the market that it had just added.

I think you misunderstand what the liquidity crisis was about. It wasn't that the liquidity that was in the market all disappeared/vanished and therefore needed a permanent replacement (although granted an element did disappear but this wasn't until later).

It was because it was so unclear as to which banks had the biggest & worst exposures to sub prime and the information was so muddy - liquidity in general dried up as a result. As those institutions (banks, but also hedge funds, insurance companies, pension schemes, money market funds, sovereign wealth funds) who would normally supply liquidity to the market got extreme fright about the potential solvency implications of those they would normally lend to. Over the next year or so the whole situation started to be unpicked and banks were forced to confront what exposures they had and begin to make write offs where necessary and get re capitalised or go bust if required. The picture then became more clearer as to which banks had the biggest exposures and risks, and once that happened, liquidity gradually started to return to the markets (albeit only flowing to those institutions that were deemed adequately capitalised enough to cope with any write downs they faced).

So the SLS was only ever seen as a temporary fix - because it was a holding operation to supply emergency liquidity until 'normal' market liquidity returned.

What needed a permanent fix was the recapitalisation of banks after they had took write downs on their positions - once this was done (or banks demonstrating that they were already sufficiently capitalised to withstand the write downs) then liquidity flowed back to those institutions 'naturally' (as hoarding of cash at central banks during the height of the liquidity crisis reduced)


(Continued in Next Post)

 

[love detective]

(Continued from Previous Post)

Do you really not see the difference in public perception between a bank rescue scheme that's based on repayable loans to the banks vs a scheme that effectively prints several hundred billion of new money to pump cash into the banking sector, which in turn acts to inflate away the spending power of 95% of the country, rob savers of their interest rates on deposits, and seriously enrich the richest 5% or so of the population?


It's one thing for the government to be able to push this through with the stated aim of boosting lending to business and the economy generally, quite a lot different if it were explained what this was actually aimed at achieving, and how it would actually affect the real values of peoples wages and savings from that point forward.

I don't understand your logic here. Up until now you've been arguing that QE was a kind of 'under the radar' way of supplying liquidity to banks (putting aside the fact for the time being that they didn't need it). With your point being that even though there already was an explicitly named scheme in place which explicitly stated that its objective was to supply liquidity to banks and had done this to the tune of nearly £200bn in a matter of months, your argument has been that the state somehow wanted to hide the fact that they were doing this and so decided to do it though QE so it wasn't as obvious.

Now, I'd hazard a guess that before this thread started, you weren't aware that the SLS existed. I'd say with even more certainty that if you went outside now and asked 1,000 random people in the street if they knew what the SLS and QE were, most people would have at least of heard of QE but not many would have heard of the SLS. Further, i'd hazard a guess that most people's description of QE would be something along the lines of 'the govt printing money and giving it to the banks'

So the public profile of QE is far far higher than the SLS, and further the public perception of what QE is and does, is usually one which assumes it's the banks getting free money. Now this is wrong, but it's a general perception, and one which is pushed by the media and the loon elements of the left.

And again, putting aside the fact that banks didn't need liquidity when QE started, it just doesn't make sense that you suggest that QE was a more discreet or under the radar way of getting liquidity to banks than the SLS was. The SLS was, despite its explicitly stated purpose & objectives, an almost anonymous and under the radar scheme that received next to no publicity in the media or on the left and is a name, abbreviation and concept that the vast majority of people would struggle to recognise let alone explain what it did. In contrast QE is like a publicity seeking celebrity, always in the limelight and while often misunderstood instantly recognisable. The idea that this would be a more preferable vehicle to discreetly get liquidity to the banks than the publicity shy SLS just doesn't stack up.

Also look around the world at the moment, Japan a few days ago announced they would double the money supply through a huge QE program, the US is doing QE at a rate of $85bn a month. The UK may well announce more QE in the future. Are you seriously saying that all three of these countries, despite having record and historical low real rates of interest, are in the midst of a liquidity crisis? And that QE exists primarily as a means of solving this liquidity crisis? They are all certainly in an economic crisis of varying degrees, and QE is being done as a fuckwitted response to it, but there is no liquidity crisis and QE was not and is not being done in response to any imaginary one.

The bank of england figures show £110 billion being added to the combined UK banks special deposit accounts with the bank of england through 2009, rising from £28.7 billion in February 2009 to £142 billion in december 2009.

I don't know how much more efficient a scheme could actually be in pumping liquidity into the banks - it was certainly a lot better at it than the previous SLS scheme.

For reference, the special deposit accounts of the banks were also where the SLS scheme money seems to have been deposited, peaking at nearly £80 billion in September 2008, but had dropped to £29 billion by Feb 2009 prior to QE starting.

If QE weren't a replacement for SLS, it's pretty odd that it had an immediate, bigger and more sustained impact on the exact same aspects of the banks liquidity as SLS did.

I'll have to look into those figures and understand what they include and what other activities impact on them them a bit more before commenting on them. For example during 2009 there was £200bn of QE done, yet those figures only show an increase of £110bn (as you've already pointed out, even if banks weren't the counterparty to the QE transaction, the bank of the party who was the counterparty to the QE transaction would receive the bank of england credit). So clearly there are other things impacting on those balances, which would need to be identified and understood before anything meaningful could be taken from them.

But as regards to the SLS, you're quite wrong in your description of it. SLS actually involved the swapping of illiquid mortgage backed securities on the banks books for highly liquid high quality treasury securities, then the banks used these treasury securities as collateral to obtain liquidity in the market. To the extent that they obtained that liquidity from non-central banks sources then you wouldn't see any increase in the aggregate balances of UK banks with the central bank. So to use those figures above as an indication of how much liquidity a bank was getting from month to month does not give the whole picture.

 

[free spirit]

You've been pretty clear about what you believe and I've been clear that I find the assertion unconvincing

Firstly - the graph you've posted is not a graph of 3M Libor as you state.It's a graph of the spread (difference) between 3M Libor and the General Collateral 3M Repo Rate, which is the rate that can be achieved in a 'repo' transaction (this involves temporarily selling high quality securities like gov debt to a counterparty and simultaneously agreeing to buy them back at a point in the future at a slightly higher price which reflects the interest cost - the point of doing this is to borrow money cheaper than in the straight LIBOR market as your are effectively borrowing secured, as opposed to LIBOR market which is unsecured).

ah. You've got me bang to rights there, not sure how that happened, I think I pulled the original graph from a BOE document after searching for libor graphs, and missed the repo rate section.

I'll withdraw that graph then, but still think my overall analysis stacks up without it.

The problem of lack of liquidity, and the risk of runs on the banks within the banking sector had only been temporarily solved via the previous SLS scheme, QE caused a massive increase in liquidity within the entire financial system, much of which filtered through to the banks and solved that aspect of the problems within the UK banking sector.

Now, I'd hazard a guess that before this thread started, you weren't aware that the SLS existed.

Really?

Further, i'd hazard a guess that most people's description of QE would be something along the lines of 'the govt printing money and giving it to the banks'

You may well be right, in which case it would give people generally some credit for being able to see through the government propaganda on the motivations behind the scheme.

I had written a longer post, but just lost half of it and it's too late to start rewriting it.