Printing Money

sabretoothtigger

The boe has been swapping highly rated mortgage debt from the banks and giving them bonds to cash in when they need the money.
If they had not done this the banks would be insolvent because no one wants to buy mortgage debt

purch

is the BBCs description of quantitative easing wrong?

Not exactly accurate.

Did you expect anything better from them ??

Generali

lethal0r wrote: »

is the BBCs description of quantitative easing wrong? (blue box at bottom).

http://news.bbc.co.uk/1/hi/business/7817453.stm



I thought the banks bought the bonds off the government so the government got the money? To me the BBC description reads the opposite.

There are two obvious ways to boost the money supply:

- Add extra cash to the Government's bank account (held at the Central Bank) which the Government then spends on whatever it fancies
- Add extra cash to the Central Bank's funds which it then uses to buy assets from banks (usually Government debt although in this instance you could see them buying mortgage backed securities)

The former is more usual I think. The latter may well be used this time.

lethal0r

Can you say if this is correct.

The goverment exchanges the banks mortgage debt for governments bond. They are basically just swapping debt. The government gets the banks riskier debt, and the bank gets risk-free government debt, making the banks look more secure.

Then later on the government buys the bonds back?

sabretoothtigger

Government bonds are a liquid market so the banks can sell them to buyers waiting and eventually the bond expires and returns the original capital to whoever still holds it then.

I think the government is left holding the mortgage debt till it expires, I wonder who handles defaults for them and is it any more serious to that debtor


I read fed bonds are some how so highly valued now that the return on them is negative I guess because everything else is so worthless

purch

The goverment exchanges the banks mortgage debt for governments bond. They are basically just swapping debt. The government gets the banks riskier debt, and the bank gets risk-free government debt, making the banks look more secure.

Then later on the government buys the bonds back?

Yes, and gives whatever is left as a performing asset back to the Banks.

The Hyper-Doom Mongers would have you believe that every single Mortgage Debt that the various Central Banks have swapped for Treasury Debt will default and be worthless, and that every penny/cent invested into the Banks and AIG et al will be worthless too.

Some of it will be, no doubt, but it how much of that investment that ultimately becomes a performing asset and is able to be sold back, that will determine how inflationary or not any money creation becomes.

StevieJ

purch wrote: »

Yes, and gives whatever is left as a performing asset back to the Banks.

The Hyper-Doom Mongers would have you believe that every single Mortgage Debt that the various Central Banks have swapped for Treasury Debt will default and be worthless, and that every penny/cent invested into the Banks and AIG et al will be worthless too.

Some of it will be, no doubt, but it how much of that investment that ultimately becomes a performing asset and is able to be sold back, that will determine how inflationary or not any money creation becomes.

One of the analysts interviewed on Bloomberg a while back said that banks had written down debt to 20% mark to market (because there was no market), but defaults were likely to be a great deal less than this. I have never quite got my head around this, are we likely to see bank write backs in the future?

chucky

StevieJ wrote: »

One of the analysts interviewed on Bloomberg a while back said that banks had written down debt to 20% mark to market (because there was no market), but defaults were likely to be a great deal less than this. I have never quite got my head around this, are we likely to see bank write backs in the future?

if there are write-backs they will be very tax efficient write-backs

purch

but defaults were likely to be a great deal less than this

I think there will be a huge amount that has been written down by too much, but also stuff that hasn't yet been marked down to a realistic level.

It will take more than a year or two to find out exactly what is performing, and has a value and what has to be totally written off.

sabretoothtigger

Thats the problem the banks using short term funding for long term debt, might have been ok otherwise