The Great Debate UK

from UK News:

Too big to fail? Guerrilla central banking and the last resort

ukreuterscomDeciding it was safe to come clean because banks are now on a more even keel and the worst of the credit crisis is behind us, the Bank of England has told the nation that at the height of the turmoil it secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget.

Both banks faced the imminent closure of high street cash machines and the curtailment of normal banking operations across the country.

The Bank said "this was a dire emergency" and Downing Street called the secret lending of taxpayers' money in the Autumn of 2008 "a powerful reminder of how close the banking system came to near collapse."

In Westminster, some MPs were flabbergasted, even though the loans have now been repaid.

from Breakingviews:

Inflation’s gonna be OK, says Merv

Mervyn King, Governor of the Bank of England, sees a long, hard road back to the path we thought we were on before the financial crisis broke. Just how long is shown by  Chart 2 in Wednesday's Quarterly Inflation Report. The Bank's Monetary Policy Committee does not expect Britain's GDP to return to its peak, 2007, level until 2011, and there's an outside chance that even in 2012, the country's output will be no more than it was in 2006.

This "considerable period" of "sustained weakness of demand" is why the MPC's other fan chart, the "rivers of blood" projections of inflation, looks so benign. The best guess (sorry, "central projection") is plumb on the 2 percent target for the CPI in 2012. We all know, said the Governor, that inflation is going to jump in January, thanks to the combination of dearer fuel and rising VAT, but after that, it should slide gracefully back, wobbling around the target for the next three years.

Bank hedges bets with QE expansion

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BRITAIN-BANK/RATESWhen the Bank of England decided to expand its quantitative easing policy by 25 billion pounds to 200 billion on Thursday, it was essentially hedging its bets.

After Britain’s economy shrank unexpectedly in the third quarter, and with two thirds of the City expecting an expansion to the QE programme, simply shutting off the tap of government bond purchases would risk being more of a shock than the economy could bear.

from Commentaries:

Do banks really need to hoard liquidity?

That's the provocative question posed by Willem Buiter. His latest, characteristically lengthy, blog post tackles the regulatory vogue for forcing banks to hold much greater reserves of liquid assets - in practice, government bonds.

Buiter's missive follows new rules from Britain's Financial Services Authority, which will force banks to increase their reserves of government bonds by more than a third. The rules have been met with predictable bleating from the industry, which accuses the regulator of undermining Britain's competitiveness and promoting the fragmentation of the global financial system. Another concern is the FSA's handling of the transition.

Things just got a lot worse for inflation

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David Kuo- David Kuo is director at The Motley Fool. The opinions expressed are his own.-

What is the collective name for a crossing of fingers?

Because that seems to be what the Bank of England’s Monetary Policy Committee members are doing. They are collectively crossing their digits in the hope that they have done enough to steer the UK economy out of recession.

They have pumped billions into the UK economy and it doesn’t seem to be having much effect – yet. That is unless you are a banker looking to bolster your balance sheet with freshly minted notes. Banks are happy to swap their assets for the Bank of England’s cash but remain unwilling to lend. Additionally, there is still uncertaintyabout the ability of the economy to grow unaided if the central bank should stop printing money.

from Commentaries:

So that’s why the Bank buys all that government debt

I've found the answer to the monetary puzzle de nos jours. The ritual of the UK Treasury's DMO issuing new government debt one day, only to have the Bank of England buy similar amounts of almost identical stock the next, has puzzled me ever since Quantatitive Easing began.

How much simpler it would be for the Treasury to borrow directly from the Bank - the modern equivalent of running the printing press faster - to pay the government's bills.

Enjoy low inflation while it lasts

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david Kuo- David Kuo is director at the Motley Fool. The opinions expressed are his own.-

If you are not confused you are not paying attention. Those sage words from management guru Tom Peters can be applied to a wide number of economic issues today, but none more so that to the latest inflation figures.

Question is: do we have inflation, deflation or some mixture of the two?

The answer lies in which index you are looking at?

Inflation as measure by the Consumer Prices Index (CPI) has held firm at 1.8 percent. But according to the Retail Prices Index (RPI), which excludes mortgage costs, inflation for July came in at minus 1.4 percent – that’s up from minus 1.6 percent in June.

from The Great Debate:

BoE extends QE, fears 1930s re-run

John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

The Bank of England's decision to continue with its asset purchase programme, or quantitative easing (QE), at the rate of 50 billion pounds per quarter in Oct-Dec, unchanged from Jul-Sep, shows bank officials are more worried about ending support for the recovery too soon than about risking inflation by leaving it too late.

The problem with QE is that you have to keep buying the same amount of assets each month to maintain the same monetary stance. With interest rates, the Bank can cut them and they stay cut. If asset prices drop with QE, it represents a tightening of monetary policy.

One cheer for Darling’s reforms

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REUTERS– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Chancellor Alastair Darling has ignored the first rule of holes: if you’re in one, stop digging. He could have produced a few motherhood-and-apple pie reforms of the banking system, to give the impression of activity. Instead, he has dug in, proposing an upgrade of Britain’s failed “tripartite” system of regulation.

Hike in interest rates a step closer

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menashysmall2- Edward Menashy is chief economist at Charles Stanley. The opinions expressed are his own. -

The Monetary Policy Committee of the Bank of England has kept its key lending rate at a record low of 0.5 percent, last reduced in March 2009 when it indicated that conventional policy had reached its limit and unorthodox measures such as quantitative easing were to be used.

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