interestrateripoff

The Bank Of England Clueless Thread

2,569 posts in this topic

4 minutes ago, Bland Unsight said:

I'm a bit puzzled as to why you're discouraged by that.

I am under the impression of the DTI is high as most people are deep in debt. But the people surveyed were unmoved or unaware of the brewing storm of Brexit. Another statement that puzzled me was the renters or the rental increases doesn't pose risk to banks. Does it mean that the BoE is well aware of the fact the rental increases are inevitable?

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On 12/16/2016 at 0:05 PM, darkmarket said:

I once believed in the myth of central bank omnipotence, and I still don't underestimate their influence in delaying the inevitable at unreasonable costs. What changed my mind is the inability of competing economies to maintain their precarious balance in concert, given the interests in misalignments. For the UK, it's simply not possible. A prolonged period of mild decline is unprecedented and would defy all the forces the decline represents. Endless denial of recession is impossible. There won't be a gentle solution - that's been the aim since 2001, and that's what's now under pressure. The only possible outcome is a major rebalancing of the domestic economy.

I think the issue is how we define "Recession". If we define it purely in terms of GDP, then we have not had a recession for a while. But the rise of the JAMs (just about managing) class suggests in real terms, people are experiencing a recession (insecure jobs, low paying jobs, zero hour contracts, and the need to take on debt to stay afloat). It all depends on your point of view.

Here are some further points I will add as to why I don't think we will see a hpc:

- Central banks on their own are not omnipotent, but they are extremely powerful institutions. They are also fully supported by the governing elite in politics (infact, they are largely the same people). You mentioned Obsourne granted more autonomy to the B of E, but the government retains the right to hire and fire the governor, and Obsourne appointed Carney because he thought the economy needed a "nice little housing boom" and Carney would give him that

- Furthermore, the central bank class is a global class. They do not identify with their individual countries, but with their own people - the elite. It is in the elite's interest to maintain "the precarious interests" of their host countries economies in concert. Hence the massive bank bailouts - which were undertaken on a global level

- Hence, whenever there is trouble on the horizon, central banks will work with governments to bail out the financial sector, which by definition means bailing out housing. That's why negative interest rates, more HTB, and never-ending QE is the next stage in our sorry saga. If Carney disagrees with negative interest rates, then he will be on the first flight back to Canada, and someone who does agree with them will be appointed. Unfortunately this policy will be accepted as the most active voting block in the country are home owners who do not want to see a hpc

If there is an endgame, it will be in the form of some popular rising. Brexit was not it (Brexit was the resolution of a long-standing issue in that Britain is not actually a European country). That rising will be by the young, as they compare their lives with that of their parents (massive student debt, no permanent well paying jobs, an inability to get-on-in-life vs home ownership, nice long retirement, holidays in the sun). I think this is what Labour under Corbyn is banking on.

I suppose the point I'm making is that markets do not always correct; they can be prevented from correcting, and that leads to social conflict, and all manner of evils like war. 

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2 hours ago, thisisthisitmaybe said:

Central banks on their own are not omnipotent, but they are extremely powerful institutions. They are also fully supported by the governing elite in politics (infact, they are largely the same people). You mentioned Obsourne granted more autonomy to the B of E, but the government retains the right to hire and fire the governor, and Obsourne appointed Carney because he thought the economy needed a "nice little housing boom" and Carney would give him that

Your argument on this point is made in defiance of the facts. Osborne stoked his own little boom with the Help to Buy scheme, entirely separate to the conduct of the Bank of England. There is plenty of suggestive evidence that a lot of the money inflating the post-2012 inflation in London was foreign money, buy-to-let and a little bit of Help to Buy.

Carney implemented the Mortgage Market Review pretty much in full (and certainly much more stringently than any of us had hoped) in April 2014, used macro-pru to put in the soft-cap on mortgage lending to owner-occupiers (July 2014), lobbied determinedly for powers of direction over buy-to-let throughout 2014-2016 and in the end pushed through the PRA review of buy-to-let underwriting and a supervisory statement before the Treasury granted powers of direction. The Bank of England has also materially pushed up the amount of capital the banks must employ in funding their lending. Earlier this month the FT were reporting how the lenders were telling them that the PRA had dropped round for a meeting to tell them to stop BTL lending.

In fact the entire case for Carney as an Osborne-appointed housing boom monkey rests on the level of interest rates. It might have escaped your notice, but the MPC's main remit is price stability of consumer prices. Perhaps in your world technocrats 'free-style' and chase down asset bubbles like Zorro chasing bad guys, but back in the real world technocrats do what they are appointed to do. Central banks everywhere have screwed policy rates to the floor. How exactly in your imagination did Osborne get the ECB, BoJ and Fed to go along with his plan?

(I also think that your analysis of the timing is wrong. Carney's appointment was announced in November 2012, and thus must have been lined up in mid-2012, latest. In January 2013 Cameron was talking about housing and finance as two of the four "unstable pillars" on which New Labour has constructed an auto-destruct economy. Help to Buy is announced in the March 2013 budget. The evidence has always lined up with the idea that Treasury policy pivots in early 2013 when Osborne starts to worry that austerity is not going to bring growth and that he'll be fighting the 2015 GE in the face or aftermath of a recession. It is a dangerous error of reasoning to ever and always see all the organs of state as a unified whole; the Treasury and the Bank do not always see eye-to-eye. They sometimes pursue conflicting policies in a separate pursuit of mutually incompatible ends. If Osborne wanted a lapdog, he picked the wrong man.)

(Also, it's Osborne, not "Obsourne".)

Edited by Bland Unsight

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1 hour ago, thisisthisitmaybe said:

I think the issue is how we define "Recession". If we define it purely in terms of GDP, then we have not had a recession for a while. But the rise of the JAMs (just about managing) class suggests in real terms, people are experiencing a recession (insecure jobs, low paying jobs, zero hour contracts, and the need to take on debt to stay afloat). It all depends on your point of view.

I think it's relatively simple if we stick to the agreed definition of recession, and avoid PR communications jargon.

1 hour ago, thisisthisitmaybe said:

Here are some further points I will add as to why I don't think we will see a hpc:

- Central banks on their own are not omnipotent, but they are extremely powerful institutions. They are also fully supported by the governing elite in politics (infact, they are largely the same people). You mentioned Obsourne granted more autonomy to the B of E, but the government retains the right to hire and fire the governor, and Obsourne appointed Carney because he thought the economy needed a "nice little housing boom" and Carney would give him that

I see, so the way to avoid a crash is to create a bubble?

1 hour ago, thisisthisitmaybe said:

Furthermore, the central bank class is a global class. They do not identify with their individual countries, but with their own people - the elite. It is in the elite's interest to maintain "the precarious interests" of their host countries economies in concert. Hence the massive bank bailouts - which were undertaken on a global level

The global central banks are represented by the BIS. You can do your own research to see how BIS positions align with BoE positions.

1 hour ago, thisisthisitmaybe said:

Hence, whenever there is trouble on the horizon, central banks will work with governments to bail out the financial sector, which by definition means bailing out housing. That's why negative interest rates, more HTB, and never-ending QE is the next stage in our sorry saga. If Carney disagrees with negative interest rates, then he will be on the first flight back to Canada, and someone who does agree with them will be appointed.

Yes, central banks will continue to try to prop up the economy. The point is the return on these investments is diminishing to the point where they are ceasing to be effective. Look at the uptake of the recently introduced ISA, look at the marginal propensity to consume mentioned in the report posted here yesterday, look at the London market's response to a quarter trillion of stimulus post-referendum. The problem is the absence of an effective response.

1 hour ago, thisisthisitmaybe said:

If there is an endgame, it will be in the form of some popular rising. Brexit was not it (Brexit was the resolution of a long-standing issue in that Britain is not actually a European country). That rising will be by the young, as they compare their lives with that of their parents (massive student debt, no permanent well paying jobs, an inability to get-on-in-life vs home ownership, nice long retirement, holidays in the sun). I think this is what Labour under Corbyn is banking on.

This remains purely speculative. It's barely worth discussing in the absence of any sign of protest other than the referendum vote and orderly conflict resolution via trade unions.

It seems that you're disagreeing for the sake of it now, your arguments are self-contradictory and contain the other logical errors outlined by Bland Unsight above.

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On 17/12/2016 at 0:36 PM, hi5lo5 said:

I am under the impression of the DTI is high as most people are deep in debt. But the people surveyed were unmoved or unaware of the brewing storm of Brexit. Another statement that puzzled me was the renters or the rental increases doesn't pose risk to banks. Does it mean that the BoE is well aware of the fact the rental increases are inevitable?

Just my take on things, so happy to have others pick holes in the following.

I think that the inference you're making from the para on p.191 is unwarranted.

Quote

The fact that rents tend to account for a higher proportion of incomes than mortgage payments does not necessarily translate into bigger risks to financial stability. Renters do not pose direct credit risk to banks if they struggle to pay their rent, although indirectly, rental arrears may impact on landlords’ ability to service buy-to-let mortgages.

As best I understand matters the Bank of England sees two separate channels through which the housing market can be a threat to financial stability.

In the first, if house prices fall and households are also unable to service their mortgages then mortgage lending generates losses. These losses reduce a bank's capital. Banks fund their lending by borrowing from others but also by employing their shareholders' equity. The balance of the two represents the bank's leverage. If a bank's capital is reduced by losses on mortgage lending then if it is to maintain a certain (prudent) level of leverage it must reduce its lending. Thus you have a credit crunch mechanism wherein banks sell off repossessed homes into a falling market. They book losses and cut lending, prompting more selling, weaker prices and further losses on subsequent sales. (In lots of ways consent-to-let and then buy-to-let were a solution to this problem from the banks' point of view. When the owner-occupier is unable to service their mortgage then the house is refinanced and moved into the PRS.)

In the second, when house prices fall some owner-occupiers end up in negative equity will cut their spending in order to pay down their debt and restore some equity. This is the mechanism explored at length in Mian and Sufi's House of Debt. If the price fall was due to an economic shock then this mechanism has a tendency to amplify economic shocks (because a contraction in demand which leads to a reappraisal of house prices then sets off a further contraction of demand).

Renters play no role in the second channel. In the first channel if the rented accommodation is unleveraged then again, renters are irrelevant because the house is not linked to a loan. Hence you are just left with that portion of the PRS that is leveraged. Much of the leveraged PRS is relatively low leverage and the lenders thus have the equity in the BTL and the BTLers separate net assets to eat through before they are booking losses. Hence the Bank is not so worried about the way the PRS behaves.

As to the separate point about rents going up, I thought that the survey data (and the way in which the Bank have modified the survey) was very bearish, particularly the introduction of a rental service ratio (RSR).

In terms of bubble mechanics, DTIs are less important that DSRs. Take the owner-occupier mortgage prisoners with their bonkers interest-only mortgages. Their DTIs are probably insane, but their DSRs are low. They are not going to blow up. If they keep their jobs they can probably ride quite a big rise in interest rates (not that anybody should expect one absent a currency crisis, which is a long-shot).

It's really interesting to see that renters comprise 36% of all households and mortgagors only 30%. The Bank is now collecting data on RSRs and they are grim. The Bank is also gathering data on the stimulative effect of cutting mortgage rates and saying it's damn near zero.

I'd argue that the subtext is that private renters are already tapped out, so you can forget rent rises, and that if you want to stimulate the economy via the housing market what you need to do is stop renting households having to spend so much of their income on rent (and you can forget mortgaged owner-occupiers, because if you cut their mortgage costs then they'll save the difference, not spend it). 

Edited by Bland Unsight

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Just to add, the first channel mentioned above when it runs to hard for too long in a system with highly-leveraged banks (e.g. the UK in 2008) is the real threat to financial stability, because in due course it blows up the banks.

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7 hours ago, darkmarket said:

It seems that you're disagreeing for the sake of it now, your arguments are self-contradictory and contain the other logical errors outlined by Bland Unsight above.

Not at all. As I said before, I hope you and the others on here arguing for a hpc are right, and that I'm wrong.

I'm interested, though, when the economy crashed in 2008, did you anticipate the policy response from the central banks, or did you assume then that there would be a HPC?

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59 minutes ago, thisisthisitmaybe said:

I'm interested, though, when the economy crashed in 2008, did you anticipate the policy response from the central banks, or did you assume then that there would be a HPC?

What's your point?

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1 hour ago, thisisthisitmaybe said:

Not at all. As I said before, I hope you and the others on here arguing for a hpc are right, and that I'm wrong.

How can you contend that you might be wrong? We've already walked you carefully through exactly how you are wrong.

You are wrong.

I've been around this particular mulberry bush before. You are trying to argue with an abstract and non-existent opponent, HPC - the forum that said house prices will crash. You cannot argue with that opponent, because it is abstract and does not post.

You have the option to argue with whichever posters turn up, and you can argue with them issue by issue.

We are not "arguing for an hpc" (well I'm not). To do so would be asinine and childish. The economy will do what it will do. If it could be foretold then we'd be playing a different game. If it could be forced to turn one way and not another because of the potency of a line of argument then the streets would have lemonade rivers and chocolate fountains.

Am I right in thinking that in your estimation you will be right if house prices inflate away from earnings forever? How do you propose that might happen? Or do you just think it will happen? I am all ears.

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11 hours ago, thisisthisitmaybe said:

Not at all. As I said before, I hope you and the others on here arguing for a hpc are right, and that I'm wrong.

I'm interested, though, when the economy crashed in 2008, did you anticipate the policy response from the central banks, or did you assume then that there would be a HPC?

There was. 50% in nominal or real terms in most of the country.  

Our assumptions were and are correct.

Printing money and dishing out sub-sub-prime loans just means the the rich establishment managed to get out with their shirts....

 

Arithmetic is fundamental

Investors are f**king-mental

Edited by TheCountOfNowhere

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9 hours ago, Bland Unsight said:

How can you contend that you might be wrong? We've already walked you carefully through exactly how you are wrong.

You are wrong.

In fairness, I don't think you can say I am wrong unless house prices start to drop in a meaningful way for a sustained period of time. Until that happens, I might be wrong. 

The last time I checked, this was a forum, which involves the exchange of opinion and ideas. I've learnt some new things from the process, in "being walked carefully through exactly" how I am wrong, as you so eloquently put it, and have tried to be polite and non-antagonistic.

As someone once said, it's hard to make predictions, especially about the future. I'm not arguing that house price inflation is going to continue, I think the most likely situation is that house prices will meander along at the current levels. Luxury London is indeed crashing, but I'm not convinced that it will spread outwards. We will see.

 

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54 minutes ago, thisisthisitmaybe said:

In fairness, I don't think you can say I am wrong unless house prices start to drop in a meaningful way for a sustained period of time. Until that happens, I might be wrong. 

To be clear, your argument was that "a house price crash is virtually impossible, as interest rates will remain at historic lows, QE will be ramped up, and we will remain in a deflationary environment for many years yet."

You're now refusing to defend your original argument and switching to non-sequitur and idle speculation. You were wrong for all the reasons detailed above.

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On 18/12/2016 at 0:28 PM, thisisthisitmaybe said:

Here are some further points I will add as to why I don't think we will see a hpc:

- Central banks on their own are not omnipotent, but they are extremely powerful institutions. They are also fully supported by the governing elite in politics (infact, they are largely the same people). You mentioned Obsourne granted more autonomy to the B of E, but the government retains the right to hire and fire the governor, and Obsourne appointed Carney because he thought the economy needed a "nice little housing boom" and Carney would give him that

 

11 hours ago, thisisthisitmaybe said:

In fairness, I don't think you can say I am wrong unless house prices start to drop in a meaningful way for a sustained period of time. Until that happens, I might be wrong. 

The last time I checked, this was a forum, which involves the exchange of opinion and ideas. I've learnt some new things from the process, in "being walked carefully through exactly" how I am wrong, as you so eloquently put it, and have tried to be polite and non-antagonistic.

The problem with the argument you are making is that it has the following structure.

  • You put forward your view about the path of prices
  • You map out how that view rests on certain premises
  • You then argue that you can't be said to be wrong about any of the particular premises unless your conclusion is rendered false by future events.

That is simply an error of reasoning.

Your premises could be correct but events not pan out in line with your prediction if you argument was invalid. Your conclusion could end up tallying with reality even though one of your premises was false because the level of prices is not mechanically linked to and determined by a single simple driver (like, for example, the way the central bank is leaning on a given asset bubble).

You made assertions about Carney as a tool by which Osborne pumped his bubble. The facts simply don't stack up behind that argument. How many MPC votes have there been for rate hikes in the last seven years - as in individual votes by individual MPC members at particular MPC meetings? I'd bet my own money that if Carney had never taken the post the base rate would be right where it is today anyway.

I'm not saying that you're wrong about the path of prices, I'm saying that you are wrong about the past conduct of the Bank of England.

I think that there are a great many people who have faith in a Carney put, but it's b0llocks. It's in the interest of desperate Chancellors to pump house prices, but the writing has been on the wall for five years now regarding the appetite that the Bank of England has for secured lending growth. As they've documented repeatedly, almost all post-crisis lending growth has come from the BTL sector and the Bank are working hard to shut that down. (I trust you're familiar with Don Kohn's safety valve that isn't safe remarks?)

You want to consider the counter-factual. If Osborne appointed Carney to pump a bubble, why get rid of self-cert and interest-only with the MMR in April 2014, why not just let 'em rip? Why require lenders to assess affordability at anything other than ultra-low pay rates? Why put in the soft-cap on high-LTI lending? Why mess with BTL at all, much less start banging on about it as one of the key sources of financial instability?

Your assertions on Carney and the Bank are not just wrong, they are ludicrously determinedly wrong, so much so that it is pretty clear that I am the one who is being polite and non-antagonistic. I think that language a great deal less diplomatic than "ludicrously wrong" is totally justifiable.

Edited by Bland Unsight

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On 18/12/2016 at 2:51 PM, Bland Unsight said:

Just my take on things, so happy to have others pick holes in the following.

I think that the inference you're making from the para on p.191 is unwarranted.

As best I understand matters the Bank of England sees two separate channels through which the housing market can be a threat to financial stability.

In the first, if house prices fall and households are also unable to service their mortgages then mortgage lending generates losses. These losses reduce a bank's capital. Banks fund their lending by borrowing from others but also by employing their shareholders' equity. The balance of the two represents the bank's leverage. If a bank's capital is reduced by losses on mortgage lending then if it is to maintain a certain (prudent) level of leverage it must reduce its lending. Thus you have a credit crunch mechanism wherein banks sell off repossessed homes into a falling market. They book losses and cut lending, prompting more selling, weaker prices and further losses on subsequent sales. (In lots of ways consent-to-let and then buy-to-let were a solution to this problem from the banks' point of view. When the owner-occupier is unable to service their mortgage then the house is refinanced and moved into the PRS.)

In the second, when house prices fall some owner-occupiers end up in negative equity will cut their spending in order to pay down their debt and restore some equity. This is the mechanism explored at length in Mian and Sufi's House of Debt. If the price fall was due to an economic shock then this mechanism has a tendency to amplify economic shocks (because a contraction in demand which leads to a reappraisal of house prices then sets off a further contraction of demand).

Renters play no role in the second channel. In the first channel if the rented accommodation is unleveraged then again, renters are irrelevant because the house is not linked to a loan. Hence you are just left with that portion of the PRS that is leveraged. Much of the leveraged PRS is relatively low leverage and the lenders thus have the equity in the BTL and the BTLers separate net assets to eat through before they are booking losses. Hence the Bank is not so worried about the way the PRS behaves.

As to the separate point about rents going up, I thought that the survey data (and the way in which the Bank have modified the survey) was very bearish, particularly the introduction of a rental service ratio (RSR).

In terms of bubble mechanics, DTIs are less important that DSRs. Take the owner-occupier mortgage prisoners with their bonkers interest-only mortgages. Their DTIs are probably insane, but their DSRs are low. They are not going to blow up. If they keep their jobs they can probably ride quite a big rise in interest rates (not that anybody should expect one absent a currency crisis, which is a long-shot).

It's really interesting to see that renters comprise 36% of all households and mortgagors only 30%. The Bank is now collecting data on RSRs and they are grim. The Bank is also gathering data on the stimulative effect of cutting mortgage rates and saying it's damn near zero.

I'd argue that the subtext is that private renters are already tapped out, so you can forget rent rises, and that if you want to stimulate the economy via the housing market what you need to do is stop renting households having to spend so much of their income on rent (and you can forget mortgaged owner-occupiers, because if you cut their mortgage costs then they'll save the difference, not spend it). 

Many Thanks. Out of curiosity how many families are mortgage prisoners? (OO io mortgages & the tenure) 

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2 hours ago, hi5lo5 said:

Many Thanks. Out of curiosity how many families are mortgage prisoners? (OO io mortgages & the tenure) 

Quite a lot of information from the CML here. It's a big number. There are ballpark 20m households and 10m mortgages. About 20% of all mortgages are BTL, maybe 5%-ish consent-to-let (nobody knows), leaving the 2 million pure interest-only and part interest-only mortgages in the market as something like 25% of the mortgaged owner-occupied stock. Not all of them will be kippered, but a guess of 1 in 5 being kippered won't be miles off, possibly more like 1 in 4 if we have a crash and debt, demographics and deflation hold prices down over a protracted period. This is calculations scrawled down on the back of a fag packet type stuff, so DYOR.

Edited by Bland Unsight

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I see Lloyd's has taken over MBNA's credit card services based on cheap lending from the BoE that will last for another four years.

Guardian Business has a relevant quote:

"The run up to the last financial crisis was marked by hubristic mergers and acquisitions. Too big to fail rules make it impossible for big banks to join up these days but Lloyds has found a way to expand nonetheless."

Found a way indeed.

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19 minutes ago, Errol said:

As long as there's no bailout the next time.

The rich have had their bailout....the poor wont get one.


The trouble with investment scams is...very few get out with their shirts in tact.

 

 

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'Committee chairman Andrew Tyrie explains why MPs are now taking action:

Interest rates are stuck near zero, the Bank of England has used increasingly unconventional forms of quantitative easing, and inflation has been below the two per cent target for three years.

“The efficacy of monetary policy or otherwise, its unintended consequences, and its prospects, need careful examination.

“The Treasury Committee will continue to act as a safeguard on the operational independence of the Bank. The Treasury indemnity, which underpins parts of the Bank’s monetary policy, could all too easily encourage the Treasury, or politicians, to put undue pressure on the Bank. The Committee will examine the risks of that, too.”'

 

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15 minutes ago, darkmarket said:

'Committee chairman Andrew Tyrie explains why MPs are now taking action:

Interest rates are stuck near zero, the Bank of England has used increasingly unconventional forms of quantitative easing, and inflation has been below the two per cent target for three years.

“The efficacy of monetary policy or otherwise, its unintended consequences, and its prospects, need careful examination.

“The Treasury Committee will continue to act as a safeguard on the operational independence of the Bank. The Treasury indemnity, which underpins parts of the Bank’s monetary policy, could all too easily encourage the Treasury, or politicians, to put undue pressure on the Bank. The Committee will examine the risks of that, too.”'

 

The police should be examining it.

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9 minutes ago, TheCountOfNowhere said:

The police should be examining it.

They wouldn't have come up with as good a set of questions though.

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7 minutes ago, darkmarket said:

They wouldn't have come up with as good a set of questions though.

i.e. Why is the UK still borrowing >10% of GDP/year (£100bn via Carney, £80-100bn via Hammond) eight years on the from GFC??

 

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8 minutes ago, zugzwang said:

i.e. Why is the UK still borrowing >10% of GDP/year (£100bn via Carney, £80-100bn via Hammond) eight years on the from GFC??

 

Because they can.  No one stopped them.  The out of control bankers were bailed out and given more.  To say this is madness/criminal/fraud is an understatement.

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2 hours ago, darkmarket said:

'Committee chairman Andrew Tyrie explains why MPs are now taking action:

Interest rates are stuck near zero, the Bank of England has used increasingly unconventional forms of quantitative easing, and inflation has been below the two per cent target for three years.

“The efficacy of monetary policy or otherwise, its unintended consequences, and its prospects, need careful examination.

“The Treasury Committee will continue to act as a safeguard on the operational independence of the Bank. The Treasury indemnity, which underpins parts of the Bank’s monetary policy, could all too easily encourage the Treasury, or politicians, to put undue pressure on the Bank. The Committee will examine the risks of that, too.”'

 

 

Another Treasury Select Committee is fine but they'll have to be careful to guard against being fobbed off yet again by yet another pack of bare faced lies.

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We can make written submissions.  This is a good opportunity to get our points across as the listed questions cover the essential pillars of our argument.  Get writing or we can do it as a coordinated set if submissions. 

Edited by BlackSwan
Typo

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