Fear of the unknown behind QE concerns

handful

While I think the Bank is doing the right thing by moving towards quantitative easing, it needs to offer more details of how the policy is meant to work. Those details should include clear intermediate objectives to indicate whether the inflation target is within reach (involving spreads and the pace of monetary expansion) and say more about how quantitative policy is deemed to operate in a world of deflation.

I think a lack of confidence bred by some of the incompetence of the current administration is what makes me very nervous about the effectiveness of the QE path that we are heading down. A point explained very well in this article.

http://www.independent.co.uk/news/business/comment/stephen-king/stephen-king-the-policy-to-print-money-is-right-but-we-must-be-told-how-it-works-1640290.html

amcluesent

That and history is pretty clear on what happens when useless, corrupt administrations decide to print money.

tricki1

There is a pretty good (if rather long winded) explanation about QE here
While some of his analysis about it may be open to interpretation, the amount of details missing from the government explanation of the policy are quite eye opening for such a radical policy.

From the article

1. The BoE has no obligation to report all of its activity
2. It would be difficult to describe the BoE as being independent of the Treasury
3. The Banking Bill has removed the necessity to publish how much money the BoE creates
4. The method for gilt auctions has just been reviewed, and included discussion of direct payment of guilts, which would suddenly allow direct purchases by the BoE (altering a 300 year old system)
5. The only published policy on QE does not make clear the method of purchase of gilts, thereby allowing for direct purchases of gilts
6. The total maximum amount of money to be printed is completely unclear, but it appears that journalists are getting off the record briefings and reporting them as hard fact. A reading of the letter from the BoE suggests that the total amount of money to be created is £150 bn.
7. No timescale is given for when the purchases will take place
8. There is no end strategy or time whatsoever

Not going to put my tin foil hat on and call it a cover up, but they defiantly are not making it easy for people to work out how this is going to work, and how we are supposed to work out how its effecting the economy. The only thing clearly written down in law is the banking bill - and the clause that is referred to above is one that takes away a previous law that said the BoE had to provide full details. Here (no 245)

Is it any wonder people are worrying about inflation - how can we tell if it will work if we don't have even the basic facts about it?

tricki1

Futher to my previous post, the person who wrote the blog I linked to has finally got some clear answers to his questions from the Bank of England on how the policy works. Here

It is not quite as transparent as he and I would prefer, but at least we now have an idea about how it will work in practice.

Edit: Here is an article from the BBC about the policy.

purch

Fear of the unknown behind QE concerns

Unfortunately the 'UNKNOWN' part doesn't seem to deter all and sundry venting their vague guesses as to the ultimate outcome of the QE as facts !!!!

StevieJ

I think the worry may be the fact that the possible required reversal of QE may coincide with a General Election campaign, and may not be politically expedient at the time.

Generali

StevieJ wrote: »

I think the worry may be the fact that the possible required reversal of QE may coincide with a General Election campaign, and may not be politically expedient at the time.

The biggest problem with printing the money is destroying it again. It ain't gonna happen under Tory or Labour.

Radiantsoul

I really can't see that destroying it is likely to be such a big problem.

The BoE balance sheet will shrink as asset purchased are sold and the associated revenue is extinguished. I suspect that banks might find that the purchasing the bonds reduces their liquidity, but presumably this can be done at the top of the next lending cycle.

I am also not sure that leaving the BoE with a larger balance sheet is necessarily a bad thing. I suppose it increases counterparty risk.

Generali

Radiantsoul wrote: »

I really can't see that destroying it is likely to be such a big problem.

The BoE balance sheet will shrink as asset purchased are sold and the associated revenue is extinguished. I suspect that banks might find that the purchasing the bonds reduces their liquidity, but presumably this can be done at the top of the next lending cycle.

I am also not sure that leaving the BoE with a larger balance sheet is necessarily a bad thing. I suppose it increases counterparty risk.

Who do you think will be buying these CDOs etc? Would you because I sure as hell wouldn't?

Radiantsoul

Generali wrote: »

Who do you think will be buying these CDOs etc? Would you because I sure as hell wouldn't?

Perhaps, but at the moment the government is only buying medium dated gilts. It does depend on the asset classes, but the current plan seems to be to buy safe assets from pension funds. Riskier assets would be problematic as they would increase the default risk of the BoE and probably have a bad effect on borrowing costs for the national debt.

chucky

Generali wrote: »

Who do you think will be buying these CDOs etc? Would you because I sure as hell wouldn't?

with all the stuff that Govt is buying they do settle - quarterly, six monthly or annually, that is some sort of return and cash for the banks. that's not even counting that trades that actualy mature over the coming years that are no longer a liability.

most of the type of toxic debt that the banks had was nothing more than 5 year maturity - i can't see anyone trading more than 7 years anyway.