Posted by: cjenscook | 10/14/2009

I’m Forever Blowing Bubbles….

Charlie Bean, the Bank’s deputy governor for monetary policy, has just made a speech entitled “Quantitative easing: An interim report”.

Now here was me thinking that QE was a misguided attempt to get banks lending again. Not a bit of it apparently (my bold):

Fortunately, increased bank lending is not necessary for Quantitative Easing to work. Indeed, it was precisely because the Monetary Policy Committee expected the additional monetary injection not to stimulate bank lending directly at the current juncture, that the Asset Purchase Facility’s purchases were targeted at assets held primarily by the non-bank private sector.

So if the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money. As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds.

Thus not only does the price of gilts rise as a consequence of the Asset Purchase Facility’s initial purchases, but also the prices of a whole spectrum of other assets. That in turn lowers the cost of non-bank finance and encourages increased corporate issuance. Also the rise in asset prices increases wealth and improves balance sheets. In this way, Quantitative Easing helps to work around the blockage created by a banking system that is still undergoing a process of balance sheet repair.

This is quite one of the most extraordinary and cynical admissions I have ever seen.

“…the rise in asset prices increases wealth…”

Mr Bean conforms precisely to Oscar Wilde’s definition of a cynic: he knows the price of everything, and the value of nothing. Have the earnings from these assets gone up? …errrr….no…. Has the price of these assets been indirectly bid up by credit manufactured out of thin air? ….errrr…. yes. As an exercise in post-rationalisation of a failed policy this really takes some beating.

Firstly, it is an implicit admission by Bean that the original QE policy – which was widely understood to be getting banks to lend – is an abject failure. Anyone who understands the parlous financial position of the average UK individual and business knew it would be, and he states that the MPC knew all along, but obviously failed to share this fact with anyone else.

Secondly, he admits not only that there is a bubble in financial assets but that to create one is the actual intention of the Bank of England – and presumably (?) – the Treasury.

As for … a banking system that is still undergoing a process of balance sheet repair…

“…pouring in virtually free money to the banking system while allowing Banks to ration credit by price at ludicrously inflated margins and associated costs.”

Maybe it will begin to dawn on someone capable of making decisions that this deficit-based monetary and fiscal system of ours is fundamentally and irretrievably broken, and that only systemic reform can fix it.


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