Citywire for Financial Professionals
Stay connected:

Citywire printed articles sponsored by:


View the article online at http://citywire.co.uk/money/article/a525082

Chart of the Day: how the Bank of England saved us

The Bank of England has graded itself on its efforts to pull the economy out of recession and it comes up trumps.

 

by Chris Marshall on Sep 19, 2011 at 12:57

The Bank of England has graded itself on its efforts to pull the economy out of recession and it comes up trumps.

In a detailed report replete with caveats, warnings of uncertainty, and dense economic assumptions, Bank staff conclude what other economists have largely found: quantitative easing (QE) was successful, in a sweeping, anything-was-better-than-nothing kind of way.

Although the report’s authors conclude that QE had a ‘significant’ impact, lifting real GDP by somewhere between 1½% and 2% and annual CPI inflation by between ¾ and 1½ percentage points, this success is not manifested in a manner that you can quantify accurately. And in drawing this conclusion, the Bank is making some big assumptions about cause and effect.  

The bank looks at the impact of the £200 billion scheme on several measures (shown in the chart below). On each of these it finds success. Or else it finds uncertainty but it assumes success. Or it says that its original aims were different anyway.

One example of QE’s more unmitigated successes, the paper implies, is ‘portfolio rebalancing’. The bank buys assets, pushing up prices and pushing down yields on gilts. People – both households and business – who can borrow for less and are wealthier (as a result of those higher asset prices) will spend more.

This runs roughshod over evidence of terribly weak consumer spending, but is right that asset prices – gilts, corporate bonds, equities – rose. It also ignores other impacts, such as the effect of depressed gilt yields on pension deficits. But as elsewhere the Bank is almost Machiavellian in its pursuit of the greater good. Perhaps, as Ross Walker of RBS commented recently: ‘to expect a blunt policy instrument such as QE (£200bn of gilt purchases) to bestow on policymakers the ability to micro-manage real-economy outcomes is akin to regarding a bulldozer as the most appropriate implement to sink a two-foot putt’.

The impact of confidence is an example of its other more questionable conclusions. While recognising that it is ‘very hard’ to disentangle the effect of QE from other factors, the report’s authors conclude, vaguely, that QE provided confidence. Therefore people are more willing to spend (evidence that economics is not a science if it were ever needed). To what extent this is true, they don't even hazard a guess.

Our final example is bank lending. The report says that the Bank expected QE to have little impact on bank lending, ‘given the strains in the financial system at the time and the resultant pressures on banks to reduce the size of their balance sheets’. This is confusing – wasn’t QE meant to encourage bank lending? Apparently the bank has tweaked its objectives: ‘The BOE did originally appear to hope that QE would stimulate more lending. In fact, when QE was first enacted, this was originally cited as a main reason behind the policy,' commented Howard Archer of IHS Global Insight. 'But as lending failed to pick up as hoped, it seemed the BOE increasingly focused on the other benefits of QE, notably boosting asset prices and bringing down long-term interest rates.’

For this reason, some economists are siding with suggestions from Monetary Policy Committee member Adam Posen for a new form of QE, one that buys more private-sector assets rather than government bonds, in order to more explicitly boost bank lending.

Overall, Archer and other economists say that the Bank’s analysis should be treated with caution. ‘I think it has had some overall beneficial impact and – of course – it is impossible to know how much worse the economy would have been had not QE been enacted,’ Archer said.

Ruth Lea, economic adviser to Arbuthnot Banking Group said: ‘I have no idea whether the numbers are right or wrong, but QE did give a great fillip to capital markets.’

Sign in / register to view full article on one page

24 comments so far. Why not have your say?

nickle

Sep 19, 2011 at 13:48

And their little diagram shows that they have successfully managed inflation at 2%?

Yeah - right.

report this

Anonymous 1 needed this 'off the record'

Sep 19, 2011 at 15:14

This report is nonsense.

report this

William Bishop

Sep 19, 2011 at 15:34

Tempting to agree with Anonymous 1 - QE probably did boost financial markets, but it does not seem possible to measure the effect on the economy of this, as opposed to other factors, unless it was to be very large and obvious, which clearly it has not been.

report this

merchant_adventurer

Sep 19, 2011 at 15:42

There is only one reliable output measure available in this elaborate Ponzi scheme and that is the size of Bankers bonuses!

report this

Jonathan

Sep 19, 2011 at 16:03

How does it know? You can't run two economic experiment at the same time so the really don't know. If there predictions on inflation rates are anything to go by I'd take their self-acclaim about the success of QE with a pinch of salt

report this

Pat

Sep 19, 2011 at 16:20

I tend to side with Adam Posen. However, selection of purchasing private assets is all important to make QE effective.

The govt guidelines would have to be specific. Investment in infrastructure generates employment as well as national asset, but not in green energy solely for the purpose for being green without taking wealth creation into consideration, e.g converting existing coal plants to carbon-capture

report this

snoekie

Sep 19, 2011 at 17:25

The report is to whitewash their total failure.

They are robbing those with assets, be they ever so small, and nissing it up against the nearest welfare will not work wall. Better they put their salaries and pensions and 'bonuses' up first and let those who were prudent enjoy what little they preserved.

report this

Alan Tonks

Sep 19, 2011 at 19:31

Who are they kidding, you would have to be a total moron if you believe any of this garbage.

report this

Roger Savage

Sep 19, 2011 at 20:13

The headline of this story (fairytale actually) makes me want to gag!!!

If I was a counterfeiter sitting in jail, incarcerated for my crimes, I'd be pretty annoyed that a once-respected body was doing exactly what I used to do, but legally. That is, counterfeiting on an infinitely larger scale with infinitely larger (negative) consequences and 'BETTER STILL', they're getting plaudits for their insane activities.

Talk about spreading propaganda to sell QE2 to the public to achieve what the BoE really wants - hyperinflation.

report this

Andrew Stevenson

Sep 19, 2011 at 20:47

Anybody else remember that the entire Bank of Enland employees pension fund was transferred into index linked gilts just before they started the printing presses for the first £200 billion ?

report this

Andrew Stevenson

Sep 19, 2011 at 20:48

Sorry - typo , Bank of England

report this

dd

Sep 19, 2011 at 23:24

Where did you get that from, Andrew?

report this

nickle

Sep 19, 2011 at 23:35

http://order-order.com/2009/03/31/bank-of-england-pension-fund-surges-betting-on-inflation/

report this

Rose G

Sep 20, 2011 at 08:48

All that QE achieved was to make sure bankers were not deprived of the million pound bonuses.

What I find nauseating is that some group would have been made probably in millions to put out that report.

Why can we not admit we know nothing of how to deal with the crisis except sit on arses, waiting it out for the markets to do as they please - free market my foot! There was nothing free about it except freedom for corrupt individuals like Fred to walk away from the bonfire, not one hair on his miserable head out of place!

Why do we trust people who are not interested in investing wisely, but are led by the huge amounts of testosterone needed to make reckless decisions?

report this

nickle

Sep 20, 2011 at 08:58

All that QE achieved was to make sure bankers were not deprived of the million pound bonuses.

============

That wasn't the point.

You have to ask, to whom was the QE money loaned?

Nick

PS - It was the government so it could carry on spending.

PPS - Given the government is insolvent, it doesn't bode well for the health of the banks.

report this

R.Linger

Sep 20, 2011 at 09:50

As the old saying goes "there are lies, dam lies, and statistics". If you believe that Q.E has improved improved the economy, you will believe anything!!!

report this

Rufus Dogg

Sep 20, 2011 at 09:57

I find it somewhere between funny, insulting and disturbing that so many commentators don't have a clue what QE is, yet still feel aggrieved, as though what is happening inside their head is just as valid as what is happening in the real world.

QE:

It was never intended to hold inflation at 2%.

It is not "printing money" or "counterfeiting" (despite what you might read in the idiot-press).

The money has not been loaned to the government.

Hyperinflation is not a goal.

QE gave money BACK to banks from the BoE - money they would have received back later anyway. Yes money was created, but extra money was not printed (in fact M3 has been falling - even with all the steps taken). The measure was intended to fight deflation, and it's done a pretty good job, so far.

Post credit glut the next step is credit squeeze, where banks hoard cash and refuse to lend. This gave banks capital to hoard without removing too much cash from circulation. So, instead of a mad scramble, like you'd get in musical chairs, banks have acted in a more sedate manner.

It was not only a bold move, it was a brilliant move. For anyone that can recall the kinds of debacle we have faced in the past (late 70s and 80s) it was a welcome relief, because this time we were facing complete economic annihilation. When banks fail, money disappears. Not because it has been stolen, but because it does not really exist (certainly not in cash form).

History will judge the BoE harshly for sleep walking into this mess, and for reacting badly to begin with, but QE was the right medicine administered at the right time. And all the UK has benefited from it. Even people that don't understand what happened or why.

report this

nickle

Sep 20, 2011 at 10:16

As the old saying goes "there are lies, dam lies, and statistics". If you believe that Q.E has improved improved the economy, you will believe anything!!!

=============

Perversely it has if you set your horizon to be short term. Long term, its made it worse.

Just as I can improve my immediate well being by going on a credit card splurge, I can show off the new clothes etc and appear wealthy and financially healthy.

However, under the hood, its dire. I'm in a worse position because I have the interest to pay on top.

With QE it's dire when it stops. It's even more dire when its unwound. My guess here is that they will make it permanent and write it off.

It's looking pretty dire now with rampant inflation as a direct result.

report this

Cautious Investor

Sep 20, 2011 at 11:34

An institution assessing itself? Only independent assessments carry any credibility.

report this

Andrew Stevenson

Sep 20, 2011 at 21:27

dd

Sep 19, 2011 at 23:24

Sorry for delay in replying -please follow link below ;

www.telegraph.co.uk/finance/personalfinance/investing/5130422/If-printing-money-sparks-inflation-are-index-linked-gilts-the-solution.html

report this

dd

Sep 20, 2011 at 22:46

Thanks for that. I also found Guido Fawkes article from Nickle (19/09/11 23:35) - http://order-order.com/2009/03/31/bank-of-england-pension-fund-surges-betting-on-inflation. Interesting.

report this

nickle

Sep 21, 2011 at 09:16

My view. It's an outrageous insider trading scam. They have the incentive to cause inflation, and low and behold, inflation is high.

It's one reason why politicians should be subject to a half the gain, double the pain law.

If they raise income tax 1%, they have to pay 2%. If they cut income tax by 1%, their tax only goes down by 0.5%

It will educate them on their impact.

Similarly we need a law that says everyone in the UK has the same privileges as any other citizen. So as the MPs have created a law that exempts them from tax inspections on their expenses, the same would apply automatically to all. When they vote a top up in their pensions, because the fund hasn't performed, everyone gets a top up.

report this

nickle

Sep 25, 2011 at 09:32

It was never intended to hold inflation at 2%.

It is not "printing money" or "counterfeiting" (despite what you might read in the idiot-press).

The money has not been loaned to the government.

====================

If it quacks like a duck, waddles like a duck, looks like a duck, its a duck.

The mechanism is repo transactions. The banks can offload their dodgy deals with the government. That gives them cash. Then the government ups the capital requirements, insisting that the money is held in gilts, so the banks loan it back to the government. Last point disproved.

Now the government has all this money that the banks have lent it. So they spend it. Exactly the same effect as printing the money and cutting the banks out of the loop.

Printing money is inflationary. Proof, 5%+ on inflation.

So the only bit that is correct, is that it doesn't hold inflation at 2%. It's inflationary. Doh!

report this

Steven22

Sep 25, 2011 at 09:39

@PatSep 19, 2011 at 16:20,

Yes - buying private asset is useful. Please QE and buy my house off me for a few millions and then I can go out and spend the money to help the economy...

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

More about this:

What others are saying

Archive

From the Forums

+ Start a new discussion
Sorry, this link is not
quite ready yet