Quantitative easing: The latest windfall from us all to “country London”

RT @leftfootfwd Quantitative easing: The latest windfall from us all to “country London”: http://t.co/4NfdovLw writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

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Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: Ranjit Sidhu explains why a second rou… http://t.co/wFNBcD7v

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Quantitative easing: The latest windfall from us all to “country London” Lefr Foot Forward – http://t.co/wUDaCF3X

Quantitative easing: The latest windfall from us all to “country London” Lefr Foot Forward – http://t.co/wUDaCF3X

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

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Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

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Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

“@leftfootfwd: Quantitative easing: The latest windfall from us all to “country London”: http://t.co/TNmqL0XD writes @rssidhu” >> Hear Hear!

Property News: In the rest of the UK commercial property prices fall, but in “country London” commercial p… http://t.co/rHdz8pi1

Property News: In the rest of the UK commercial property prices fall, but in “country London” commercial p… http://t.co/akACRFtT

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Quantitative easing: The latest windfall from us all to “country London”: In the rest of the UK commercial prope… http://t.co/hayof6A5

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

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Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Quantitative easing: The latest windfall from us all to “country London”: http://t.co/wl1m6L5R writes @rssidhu

Nothing to do with Thatcher and Labour then thank god.

Is this website being guest-edited by Rick Perry today?

Read this:

http://krugman.blogs.nytimes.com/2011/10/07/way-off-base-2/

And think again.

And banks don’t get “an extra £275bn” for crying out loud, investors who owned, roughly, £275bn worth of government bonds and high grade corporate bonds swapped them for cash.

I’d like you to explain in some detail how this windfall works.

I’ll get you started. Some investment banks charge fees for arranging bond trades, so to the extent that QE freezers and increase in bond trading volumes, that’s income for those banks. Do you know how large the increase in volume is?

Now, you own a bond, before QE is announced. For simplicity, this bond will pay you £100 in one year’s time and is yielding 0.5% so currently trades at roughly £99.5. Then QE is announced and the BoE buys £75bn of such bonds. Please estimate the size of the windfall by looking at how bond prices have changed after QE was announced.

Further, if you think rising bond price are a windfall for banks, do you think falling bond prices hurt them?

Oh and while you are at it, please explain how QE could cost the government.

Freezers? Damn autocorrect. Causes an

Property News: In the rest of the UK commercial property prices fall, but in “country London” commercial p… http://t.co/rHdz8pi1

Left foot Foward seriously needs to improve its economic commentary. Almost every article I read is fundamentally flawed. The problem here is the connection between QE and rising property prices. The reason for rising prices has been foreign demand. London is one of the best cities in the world. The other problem is the usual perjoratives of “windfall profits”, banks don’t make a good return on capital…end of. The absolute profits they make are large because they are big businesses but relatively, they aren’t making much money. As the post above implies, you are also extremely vague about how QE benefits banks. I don’t see how you find out that banks are always long bonds or that this makes them money (the primary dealing market is notoriously competitive). Either way, this is why people think Labour isn’t economically competent.

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

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.

Quantitative easing: The latest windfall from us all to “country London” http://t.co/AH8Ar5GF

Quantitative easing: The latest windfall from us all to “country London” http://t.co/HVjZmorm

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

Quantitative easing: The latest windfall from us all to “country London” http://t.co/HVjZmorm

Quantitative easing: The latest windfall from us all to “country London”: By Ranjit Sidhu This morning when disc… http://t.co/VdDwx0pD

Quantitative easing: The latest windfall from us all to “country London”: In the rest of the UK commercial prope… http://t.co/rHXq3bEw

Dear Loius,

Can I make one point clear I am not in anyway making a statement whether QE works as a stimulus or not- that is another issue.

The extra is obvious . The government bonds and shares the BoE buys do not disappear they are still there held by the BoE. Pre QE:government bonds post QE : same government bonds held by BoE + £275 billion. The BoE cannot just print money and by up its bonds to non existence otherwise it would worse then RObert Mugabee and with less economic credit. So what happens to the finite gilts- don’t ask me, but the market after the QE announcement: – erm could this be considered also be considered a slight windfall for the holders of bonds? THAT IS THE WHOLE POINT OF QE – cash for the banking system !!!!!!!

You need to place your argument as to cheaper borrowing by QE for government to the private sector as well. It the cheap credit that lead to the huge investment in commodities etc… by the banks after QE1 that also lead to price spirals and another windfall for this hedging

You seem hellbent on making the argument as monetarist policies good or bad, I am not against monetarist policies to boost demand and the economy, however (and this is the crux of the article) I am against printing money, buying up bonds, then the banks using that cash and the cheap credit to speculate on commodities and other hedges to maximise profit. It is not the BoE job to do that.

If you think that BoE losing say 30% on the transactions long term is nothing then I am sorry you are totally wrong. The money it created does not just disappear, it could perhaps print less each year, BUT that money is there in the system. Bank sells bond for 100 then buys back bond for £70 the 30% doesn’t disappear someone has made a profit ! Now who could that be ?

To paraphrase One Mr Bogart: I don’t depise monetarist policies, but I do a cut price one.

my old pal, the only thing I am hellbent on is trying to get you to acknowledge the difference between “QE gives banks an extra £75bn” and “QE gives private sector investors £75bn cash and takes away £75bn bonds”. Oh, and also that it is quite wrong – Sarah Palin style wrong – to talk about printing base money as if it simply dilutes existing money. That is 1st year undergrad stuff.

I did mention, however, that should the BoE make a paper loss because QE has worked, the economy is boosted and interest rates start to rise, that would be cause for celebration. You have not explain why we should worry about BoE losses.

I don’t know where you got the idea this round of QE involves buying shares from, by the way, afaik it’s 100% gilts.

now, of course those bonds don’t disappear. They are held on the BoE balance sheet where, broadly speaking, three things can happen to them. They can be rolled over in perpetuity, which would constitute monetizing the government debt, something many on the left like the idea of. Or the government could run a surplus, and repay the bond, thus removing money from circulation. Or the BoE could sell then back to the private sector, thus removing money from circulation. I’m not sure what point you were trying to make by saying bonds don’t disappear.

Now, when the BoE buys a £100 bond for, say, £99.5, whether anybody made a profit on that depends on what they paid for it in the first place. They, should the price of a £100 bond fall to £90, so the BoE makes about a 10% loss on the transaction if it sells the bond it bought for £99.5, whether anybody makes a profit or not depends on what subsequently happens to bond prices after they have paid £90 to the BoE to buy it. You seem to suggest that if the BoE is losing 30%, somebody is profiting by 30%. You are right that in this example £99.5 of cash was injected into the system but only £90 of cash removed when the BoE resells the bond. Never fear, if the BoE wants to remove more cash than that, it can sell more of the bonds it holds on its balance sheet.

Finally, banks are quite capable of speculating on commodities whether or not the BoE is running an asset purchase program. Are you aware of the regulatory implications for banks involved in selling £Xbn of government gilts and spending the cash on commodity futures?

Quantitative easing: The latest windfall from us all to “country …: In the rest of the UK commercial property … http://t.co/NHrwjd5r

Quantitative easing: The latest windfall from us all to “country London”: By Ranjit Sidhu This morning when disc… http://t.co/JhUKnXtw

Ranjit, was hoping for a left-wing critique of QE. Instead it is some demented bank bashing that doesn’t make sense.

Pretty huge error of understanding. Try to grasp that £275 billion hasn’t been given to banks.

The most amazing thing I find about writing blogs is the comments. Thanks for your contributions. I will however say that I do find sometimes people read what they want to read rather than what is written.

Dear Guido Fawkes, at no point have a written that 275 billion was “given” to banks. I completely understand that QE is used to buy government bonds. I am simply saying that the QE means that the banks will benefit from this transaction in many different ways- this is widely accepted analysis, of QE 1. Please understand that and read the article before making what can be said is a rude comment- its just good manners. Thanks

Dear Louis, I feel you are are so concentrated on making your point that monetarist policy is something that should be taken up by the left you are not listening to my comments. I refer to my central point above.

This massive project of QE could have been used to better effect to boost the economy, in my view.

Time to move on – work, family and other issues to write about means I cannot reply again. Thanks again for all your comments.

Cheers

Ranjit

Ranjit,

you’re right – I don’t think you actually thought QE involved just giving money to banks, otherwise you’d hardly need to cite the NEF as evidence for it being a “windfall”; it would be self-evident.

But look at the words you used:

“why £275 billion was needed to be given so freely to the banks in an obligation free way”

“so that financial institutions could have an extra £275 billion pounds”

I don’t know how to put this without causing further offense, but I don’t think you expressed yourself terribly well there.

you also describe QE as “watering down every pound in our pockets”, and as I have tried to point out, this is both factually incorrect (re-read the Krugman post) and the rhetoric of the Republican Party.

I have also tried to point out that “throwing sacks of gold at London” isn’t quite the right way to characterize something that lowers the government’s cost of borrowing, to the benefit of taxpayers, and that worries about loses incurred by the BoE are misplaced.

My article in LFF on quantitative easing has caused a bit of a stir – direct emails etc… madness http://t.co/cIKlcw2g

[...] also: • Quantitative easing: The latest windfall from us all to “country London” – Ranjit Sidhu, October 8th [...]

You NOW say “at no point have a written that 275 billion was “given” to banks.”

In the text you query “…why £275 billion was needed to be given so freely to the banks in an obligation free way”

You also say “I do find sometimes people read what they want to read rather than what is written.” My conclusion is that you are an idiot.

rich people will get more richer by throuing 275 billion. It want creat any extra GDP. has government heard the word NATIONALIZE????
In the name of Nations sicurity.????

http://t.co/qwiOGVwN Terrible but true: how QE is benefitting the rich.

http://t.co/qwiOGVwN Terrible but true: how QE is benefitting the rich.

http://t.co/qwiOGVwN Terrible but true: how QE is benefitting the rich.

Sickening RT @RupertRead: http://t.co/i1GQbCbN Terrible but true: how QE is benefitting the rich.

[...] Quantitative easing: The latest windfall from us all to “country London” – Ranjit Sidhu, October 8th [...]