MSE News: Pensions and savers hit as Bank prints more money

bigadaj

This has been a debatable point for some time. Many people have thought that rather than qe simply buying gilts and offering the banks an opportunity for arbitrage, the money could be better employed by buying real debt in the form of company loans from banks, lowering their risks and exposure with the proviso that the money generated would then be lent back out to companies.

This has the benefit that it would actually increase lending opportunities and so provide more of a kick start to the economy, however the political spin on qe, the fact that it is subsidising the banks, keeping interest rates down, increasing inflation etc means that qe is favoured.

The problem is that like many things the initial hit is noticeable, the more often you do it, ie straight qe, the less benefit that accrues.

veganline

bigadaj wrote: »

I don't understand why so many people still deal with the big four.

For savers who are prepared to log-on and check every month or so, http://www.p2pmoney.co.uk/compare/lend.htm is worth a look and if more people used the services, more would set-up.

Only catch is that the government has not worked-out how to tax the things yet: some people end-up paying tax on losses through a contortion of logic that should be sorted-out.

By the way, if the bank of england really wants to get money back into the economy, why not put some in Funding Circle and Thincats who lend to business rather than the big banks which used to lend to business? I hope they read this page.

MoneySaverLog

veganline wrote: »

By the way, if the bank of england really wants to get money back into the economy, why not put some in Funding Circle and Thincats who lend to business rather than the big banks which used to lend to business? I hope they read this page.

Or give people vouchers to spend in the shops, at the petrol forecourts, in the parking meters and on trains. Will never happen though will it, the money has to go to the banks for it to go into a black hole.

SallyG

http://www.bankofengland.co.uk/markets/Documents/money/publications/redbookqe.pdf
Extract from the Red Book
1: The Bank’s current operations in the sterling money markets
Quantitative Easing
60 The objective of Quantitative Easing is to boost the money supply through large-scale asset purchases and, in doing so, to bring about a level of nominal demand consistent with meeting the inflation target in the medium term.
Under this policy approach, the MPC uses the quantity of reserves (as well as the rate earned on them at the Bank) directly as a tool of monetary policy. The MPC sets a target for the stock of asset purchases financed by the creation of reserves. This target is achieved by purchasing or, in the event that the
target is reduced, selling assets through the Bank’s ‘Asset Purchase Facility’, which, because of the risks posed to the Bank’s balance sheet, is indemnified by HM Treasury.
61 The Bank purchases these assets predominantly from non-banks, but banks act as intermediaries in the process. The Bank pays for the assets purchased by creating central bank reserves and crediting the accounts of the banks that act as intermediaries. Those banks will in turn credit the accounts of the non-banks
from whom they obtained the assets. They will either spend the money on goods and services, which directly adds to overall spending, or purchase other assets, which will tend to boost the prices, and hence lower the yields, of those assets more broadly. In the event of asset sales, in response to a reduction in the target, the Bank would debit the accounts of the institutions it sells the assets to, reducing the stimulus to nominal demand."

SallyG

http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/default.aspx
"This policy of asset purchases is often known as 'Quantitative Easing'. It does not involve printing more banknotes. Furthermore, the asset purchase programme is not about giving money to banks. Rather, the policy is designed to circumvent the banking system. The Bank of England electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies. These investors typically do not want to hold on to this money, because it yields a low return. So they tend to use it to purchase other assets, such as corporate bonds and shares. That lowers longer-term borrowing costs and encourages the issuance of new equities and bonds."
Baffled.
Why do all sorts of well-informed people believe the QE cash is staying in the banks but the Bank of England says it's going through the banks to pension funds and being invested by pension companies in/kickstarting the economy by buying corporate bonds and shares?

bigadaj

Because the boe need to have that excuse. It patently isn't flowing into the wider economy.

The problem with their statement is that insurers and the like are actually committed to buying more gilts to reduce risk in many of their ventures, so buying gilts by using qe just restricts their availability, pushing down prices, yields up and meaning that the insurers and their clients get a continuing lower return.

Your earlier quote actually is hilarious, they are saying that they are buying gilts independently, but the treasury/government is guaranteeing it, that is eh treasury are buying back their own bonds/ gilts but using the boe as an intermediary. Also they admit that tis provides a significant and risk free arbitrage for the banks in handling these assets.

It's all spin, but then what isn't.

Thrugelmir

bigadaj wrote: »

It patently isn't flowing into the wider economy.

Isn't that reflected by the fact that the recession could be much much deeper.

You'd hardly know there is one at the moment.

talexuser

Look at the banks cash balances and lack of lending, and if it was working why has every growth and inflation forecast from the coalition been widely wrong (private sector growth replacing cuts in public etc) and we are now back in recession? Just because they put something on a website does not necessarily make it the truth. The real policy is obviously to reduce external debt by as much inflation as the electorate will let them get away with.

Thrugelmir

talexuser wrote: »

Look at the banks cash balances and lack of lending

Lend to who?

Lending by itself does not create profit for business. Without profit there is no incentive to borrow.

bigadaj

Thrugelmir wrote: »

Lend to who?

Lending by itself does not create profit for business. Without profit there is no incentive to borrow.

If only the banks had followed that rule through the middle of the last decade e current mess wouldn't have happened. Banks had sales targets like clothes shops, and took about as much notice of people's financial standing as them as well.