Monday, 8 June 2009

The Bank of England is out of control

The Bank of England has stopped being a central bank, it is now an adjunct of the goverment, trying to prop up economic activity by printing cash.

The disconnect between reality and its previous central banking activities was amply demonstrated by a press release issued today:

The Bank is today publishing a consultative paper setting out proposed extensions to its Asset Purchase Facility (APF). It intends to introduce in the near future a Secured Commercial Paper Facility to support the provision of working capital to a broad population of companies. The facility will be designed to contribute to the APF’s objectives of improving liquidity in credit markets that are not functioning normally.

Think about that for a moment. The Bank of England is going to introduce a new cash creation operation to support the "provision of working capital to a broad population of companies". The central bank will begin to feed liquidity straight into companies, bypassing the banking sector directly.

Central banks are supposed to ensure price stability. They shouldn't be trying to replace commercial banks and supporting industry directly.

This is madness.


fajensen said...

Haha - Be careful what you wish for; You will get it eventually - or -"Price Stability" begets Price Instability:

When prices are stable, a speculator must take on ever larger bets to make a profit. Volatility-based risk-models will show low risks, and since interest rates are a function of the risk of loss rates will also be low giving added incentive to gear harder.

As the speculators push more and more money around creating fluctuations in the market, the central bank must compensate more and more to keep prices stable.

Eventually, speculators or the bank runs out of decimal points, someone slips up and the whole mess collapses with huge collateral damage to society.

The choice stands between "a little chaos every day" or a lot of chaos "once in a while". The amount of chaos integrated over time is constant - i.e. it follows a Power Law.

"Price Stability" goes for the Big Bang Mess every 30 years ...

Mark Wadsworth said...

"This is madness"??

The whole thing is madness, our country has been run by madmen (and madwomen) for centuries, this lot may be worse than most of the others (the idiots who took us into WW1, for example), but it's nothing new.

dearieme said...

"the idiots who took us into WW1": Asquith and Lloyd George - done, according to Niall Ferguson, for the high motive of 'dishing the Tories'.

boiling frog said...

What they mean is the banks aren't lending to commercial organisations. In the USA Ben has been buying up commercial paper which has been reasonably successful in creating investor appetite. The UK market is too small and full of risk (eg currency risk) for that to be a viable proposition. Thus they think that government should step in and be the lender. Of course that dumps the risk of commercial lending in the taxpayer's lap. We are liable for bank failures already and now we will be liable for business failures. Given the need to issue more treasury debt, I can see interest rates ratcheting up. Another dip in house prices, and more pain for business. Oh, and more losses for the taxpayer.
I agree, they are meddling too much, but have gone beyond the point of having an exit strategy.

Anonymous said...

In how far is "
This [is] madness. "??? The central bank is feeding money directly into the economy. Why? Because this is possible nowadays. We actually have competitive markets to provide financing. That is the reason why medium - large companies where able to issue corporate bonds in the past and that is the reason the BOE is able to currently buy them up. "bypassing the banking sector directly." well congratulations for the first intelligent action so far.(If you want to increase liquidity in the economy, do you a)buy up assets held by investment bank(that are worth 80% of their face value)with the bank holding these assets being insolvent. Or do you b) buy up commercial paper "to support the provision of working capital to a broad population of companies"?

This would of course help the economy directly. But given the fact, that "They shouldn't be trying to replace commercial banks" especially given the fact, that these institutions have never cost us a penny in the past and are in no danger of ever negatively impacting the tax payer, "supporting industry directly." would be a grave mistake. After all, any success of such an endeavour could seriously put into question the necessity of fractional reserve banking. Being the elite of the US/UK (Ivy League/Russel Group) we would surely hate to share the fate of those lowly journalists at the "Financial Times" or "Wall Street Journal" who actually have to cope with deregulation, new entrants to their field of business and actual competion.
Good job, that our CEO´s can still predict, 25% returnns on capital, without anyone questioning whether there actually is any competiton in our sector or whether the barriers to entry should be lowered.
Yes indeed, meddiling in the business of providing money to business and the public, who do they think they are, these guys from the BOE. It´s a sovereign right! Leave it to the private banks! Anything else will lead to a credit freeze, danger to the financial system and will necessitate a huge bailout by the government!