Coppola Comment

Why did the Bank of England intervene in the gilt market this week? The answer that has been doing the rounds is that it was protecting the solvency of pension funds. But this doesn't make sense to me. The Bank doesn't have any mandate to prevent pension funds going bust. And anyway, the type of pension fund that got into trouble isn't at meaningful risk of insolvency. There was never any risk to people's pensions.  I don't think the Bank was concerned about pension funds at all. I think it had a totally different type of financial institution in its sights.  Let's recap the sequence of events from a market perspective. This was, on the face of it, a classic market freeze. Pension funds sold assets, mainly long-dated gilts, to raise cash to meet margin calls on interest rate swaps (of which more shortly). The sudden influx of long gilts on to a market already spooked by an extremely foolish government policy announcement caused their price to crash. I am told th...

"Britain nearly went bust in March, says Bank of England", reads a headline in the Guardian . In similar vein, the Telegraph's Business section reports "UK finances were close to collapse, says Governor": Eh, what? The Governor of the Bank of England says the UK nearly turned into Venezuela? Well, that's what the Telegraph seems to think:  The Bank of England was forced to save the Government from potential financial collapse as markets seized up at the height of the coronavirus crisis, Governor Andrew Bailey has said. In his most explicit comments yet on the country's precarious position in mid-March, Mr Bailey said 'serious disorder' broke out after panicking investors sold UK government bonds in a desperate hunt for cash. It left Britain at risk of failing to auction off the gilts needed to fund crucial spending - and Threadneedle Street had to pump £200bn into markets to restore a semblance of order. Reading this, you would think that the UK...

Last week I attended a workshop entitled "Enhancing the Bank of England Toolkit," hosted by the Progressive Economy Forum. Presented at the workshop, and underpinning most of the debate, was this report from GFC Economics and Clearpoint Advisers, which was written for the Labour Party and first issued last June. The report was widely criticised at the time, as one of its authors ruefully observed in the introduction to the presentation. Nonetheless, the authors presented it unamended. The report recommends setting a productivity target for the Bank of England in addition to its existing inflation target: An additional target will be introduced: productivity growth of 3% per annum. The Bank of England will be required to explain how its policies are impacting upon productivity and, therefore, the potential growth path of the economy. This target is extremely challenging. A footnote in the report notes that labour productivity growth since 1950 has averaged 2.4%, and ...

Since I wrote my post about the Bank of England's alleged manipulation of Libor before and during the financial crisis, something of a witch hunt seems to have developed. Certain people with axes to grind have jumped on the bandwagon set in motion by the BBC's Andy Verity and are aggressively promoting their view that the Bank of England's behaviour was fraudulent. Their argument is that the Bank of England has no business attempting to influence market rates, that those at the Bank who did this should be brought to justice just as traders who rigged Libor  have been, and that businesses, households and public sector bodies that lost money when the Bank of England "talked down" Libor should be compensated. This is arrant nonsense. Influencing market rates is what central banks do . It is called monetary policy, and it is the means by which they control inflation. If central banks could not legally influence market rates, monetary policy as we know it would ...

Nearly five years ago, the former CEO of Barclays Bank, Bob Diamond, defended himself against accusations that on his watch, Barclays had deliberately falsified Libor submissions. To no avail: after widespread adverse press coverage, Diamond resigned. Was this at the instigation of the Governor of the Bank of England and the head of the FSA? We will probably never know. But events yesterday make not only Diamond's resignation, but also the prosecution and jailing of traders and Libor submitters from Barclays and other banks, look distinctly odd. The BBC's Andy Verity has revealed the existence of a recording which appears to indicate that the Bank of England and the Treasury pressured banks to "lowball" their Libor submissions during the financial crisis. According to Verity, the conversation, between a junior Libor submitter (who was subsequently jailed) and his manager, ran like this: In the recording, a senior Barclays manager, Mark Dearlove, instructs Libor...

There is growing speculation that the Governor of the Bank of England, Mark Carney, will not extend his term. Carney originally agreed to a five-year term, which would end in 2018, but it had been thought he might extend to the more usual eight years for a Bank of England governor. This is now looking increasingly unlikely. Carney has come under fire from pro-Brexit politicians for warning that Brexit is likely to increase inflation and unemployment and reduce economic growth. They accuse him of "talking down" the UK. This is some chutzpah, from politicians whose incompetence and arrogance has stunned the world. If anyone is "talking down" the UK, it is the Three Clowns currently running the Brexit project, and their baying packs of supporters. I have been severely critical of Bank of England policies. I don't like the over-reliance on QE: I think it is a useful crisis tool, but far too much has been expected of it. I think that the independence of the ...

Guest post by Paddy Carter. Jeremy Corbyn’s People’s QE offers the alluring prospect of spending more without borrowing more . Which is just the ticket, if you want to replace austerity with largesse, and cut the deficit to boot. Sadly, this appealing miracle cure is pure snake oil (although there is, perhaps, a version of the idea which might be helpful, if substantially less miraculous). The basic idea behind People’s QE is to finance public spending by printing money. This is actually something that happens all the time, and it is by understanding how, and why, that we shall see why People’s QE, as sold, is an empty promise. As the real economy grows, the money supply has to keep up. Suppose we wanted zero inflation then, as a first approximation, we would expect the money supply to grow at the same rate as the real economy. If the economy grows at 2 per cent a year and base money (reserves and bank notes) grows at the same rate as the broad money supply (debit accoun...