Monday, June 8, 2009
Keep trying, that’s the spirit!
Bank broadens £125bn scheme to help business
The Bank of England today moved to appease critics protesting that its massive multi-billion pound purchases of government and corporate IOUs under its radical quantitative easing strategy have failed to ease the financial stress afflicting Britain's companies. In an apparent concession to critics, the Bank said it would expand its Asset Purchase Facility, under which it is buying £125 billion in corporate and government bonds so that it could purchase a wider range of commercial paper — short-term corporate debts — with a view to easing the supply of working capital finance to businesses
Posted by devo @ 01:26 PM (1361 views)
15 thoughts on “Keep trying, that’s the spirit!”
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paul says:
We should remind ourselves that before quantitative easing was introduced, it was labelled ‘the nuclear option’ by both The Times and The Telegraph – with good reason too.
matt_the_hat says:
I thought it takes months if not years for macro economic policies to take effect – BOE always telling us that IR have to go down because deflation will happen in 9 months otherwise – now they are trying to turn the oil tanker in milliseconds – GOLD here I come!!!!
51ck-6-51x says:
“In an apparent concession to critics” – I think not, the BoE have already said it is too early to tell, and if they mean those who are saying, “This ain’t working, we obviously need to print more”, I don’t think there are many of those “critics” and would you really want to appease them? This move would seem to be a more targeted approach, the target being, perhaps(?), the books of Lloyds-UK PLC et al.
dbc reed says:
There used to be loads of people on this site saying the private banks were creating credit and charging interest on it: why did n’t government institutions create credit and cut the banks out of it? Now the Gov is doing just that .Where are all the conventionalists who used to write in and solemnly argue that the banks did n’t create credit out of thin air so there was no point in the Guv talking this role over?.
More to the point, when the recession is over, who’s going to issue the credit?
icarus says:
Look at the first sentence of Devo’s article summary. Was it just the purchase of government and corporate bonds that was supposed to ease the financial stress on companies? I thought all the bank bailouts were for that purpose too. Weren’t these bailouts made in order to get credit flowing to companies as well as consumers and house buyers? And why are the results so miserable?
Consumers are deleveraging because of the damage to house prices and the ‘wealth effect’, builders and developers aren’t borrowing, and big companies can generally borrow long- or short-term at low rates anyway, so they’re generally not starved of capital. That doesn’t leave much other than small/medium businesses, which can be risky propositions in a recession. The “get credit flowing” justification for the bailouts comes down to how much these companies are investing in r&d, software and equipment – answer: not a lot compared with the sums involved.
And the measures reported in this article will benefit mainly larger companies – even the suppliers of large companies are generally large companies.
refusetobuy says:
Banks cannot create money out of thin air … unless they are a central bank.
doggett says:
@refusetobuy
“Banks cannot create money out of thin air … unless they are a central bank.”
They can, and they do. It’s called Fractional Reserve banking. Have a look at;
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
There are also many videos available; search for “Money as debt” on google or youtube.
refusetobuy says:
@doggett
There are videos and websites, but they are wrong. If banking worked how the videos imply, then you or I could set up a bank and print money.
51ck-6-51x says:
It seems some people think that monetary leverage is the same thing as monetary expansion.
FRB is where a bank takes deposits, keeps some on reserve and lends out the rest. This does not create any money (as printing cash does [even fraudulently – at least temporally], or creating capital at the central bank does), it creates risk and gears the money by using it more than once.
Just because there is new risk, does not mean there is new money. Think about it.
[Working here from computer software design philosophy as originally inspired by moral philosophy as aired by Spike Lee…]
The fact that I am arguing this point does not imply I necessarily think FRB is The Right Thing, although we must remember also that sometimes, Worse Is Better and usually Good Enough Is Best – and I am not up for another huge debate on this, it seems some people just don’t fathom, or maybe really do not want to.
dbc reed says:
Encyclopaedia Britannica Vol12 p357 (ed.1981)
” In the course of issuing money the commercial banks actually create it by expanding their deposits,but they are not at liberty to create all they may wish whenever they wish for the total is limited by the volume of bank reserves and by the prevailing ratio between these reserves and bank deposits- a ratio that is set by law,regulation and custom.”(Actually Thatcher got rid of set bank reserve ratios)
H.M Treasury 5th Aug 2008 Kitty Ussher (Economic Sec to the Treasury) to Greg Clark MP
“Your constituent asked some questions about the way in which credit is created and the causes of the current crisis in the banking system.By far the far the largest role in creating money is played by the banking system itself…When banks make loans they at the same time create a new deposit for those that have borrowed the money….The banks ability to accept new deposits and to lend them again when they are returned to the banking system leads to an ongoing process of credit creation.There is nothing at all new in this process of credit creation… operates much the same way the world over..goes back centuries.”
So looks like the Treasury and the Britannica have got it all wrong and such establishment institutions are fessing up to the creation of credit by “lending” Customer A’s money to customer B while not closing A’s account,for no reason ,other than sheer joie de vie and the certainty that the public does n’t want to believe it.
51ck-6-51x says:
dbc –
I am disappointed with Britannica if that extract is true, but then again it’s not well known as a financial reference is it?!
I am not at all surprised by the Treasury (although do note that the question was posed correctly.)
The way in which the confusion occurs is simple:
1)
Credit is created by FRB.
2)
a)
Money is only created once that debt is repaid, at which point the creator is the work done.
b)
However, if the debtor defaults money is destroyed by this process (the bank tries to recover as much as they can in an attempt to have enough to repay the depositors).
I really can’t be any clearer than that, it’s pretty clear to me that there is a difference between credit and money, although I will concede that FRB increases the money in circulation between (1) and (2) regardless of the state of (2) – this will lead to temporal expansion, as per fraudulent printing*. Hence why I said I didn’t necessarily think it was The Right Thing.
* Hence why FRB is thought to be a fraudulent practice by many, albeit one in which the state has some form of control.
51ck-6-51x says:
Oh, and to answer your original question “More to the point, when the recession is over, who’s going to issue the credit?”
I’m pretty sure that the banks will be very keen to lend to certain sectors before the recession is over and to many once it is! As bankers would say “The recovery trade is on”.
doggett says:
@9. 51ck-6-51x said;
“It seems some people think that monetary leverage is the same thing as monetary expansion.”
If by ‘monetary expansion’ you mean an increase in the base (fiat) money supply, then clearly they’re not the same. However, “FRB is where a bank takes deposits, keeps some on reserve and lends out the rest. This does not create any money.”
In fact, it creates ‘credit money’ (or, alternatively, ‘debt money’) which can and, almost certainly will, be spent. In which case it will create further deposits in the banking system, creating further opportunities for fractional reserve lending. And so on.
@10. dbc reed pointed out that both the Encyclopaedia Britannica and the Treasury state that banks create money by extending deposits. I’d have thought that both would employ people who have a reasonable understanding of the financial system; you appear to disagree.
@11. “It’s pretty clear to me that there is a difference between credit and money, although I will concede that FRB increases the money in circulation between (1) and (2) regardless of the state of (2) – this will lead to temporal[?] expansion, as per fraudulent printing”.
In other words extending credit does increase the money supply and therefore does create money, albeit not fiat money?
“2(a) Money is only created once that debt is repaid, at which point the creator is the work done.”
Credit money is in fact destroyed when the loan is repaid or defaulted on. It’s true that wealth may well have been created using the loan, and it will have a monetary value, but that’s not money. And the bank’s loss, if any, will depend on the value of the asset(s) against which the loan was made.
51ck-6-51x says:
“In other words extending credit does increase the money supply and therefore does create money, albeit not fiat money?”
Yes, exactly. When people say money is created it implies it’s the same as printing by the central bank, which it is not.
Sorry, 2(a) was indeed wrong, you are correct.
Wealth is created not money. In both cases there is no net change to the money supply.
Certainly FRB affects the economy – it allows excess production over base during periods in which bankers decide it makes sense to invest in projects that are percieved to be worthwhile and hence increases risk; that in itself is not necessarily bad, but it can be, of course (that comes down to how well the bankers [and politicians, unfortunately] do their job [s] – not that well recently, eh? [!!]).
As I pointed out previously I do not advocate FRB but I also do not think it is inherently wrong, just that it requires oversight – usually Good Enough Is Best, and I for one do not want to get rid of the business cycle, I think it’s pros outweigh it’s cons – I think it would be much more beneficial to society to aim for minimising the distortions of free markets by the state.
51ck-6-51x says:
( oh, by “temporal” I meant “limited by time”, maybe I should have said “a temporary” in order to be more lucid. )