FT letter denouncing Corbynomics

Here’s the letter, organized by Paul Levine and myself, to appear in the FT tomorrow, and here’s Chris Giles’ story about the letter.

Thanks to those who signed, [dubbed by Danny Blanchflower ‘mindless theorists and right wing nut-jobs’], and the many who were supportive but whose positions don’t allow them to make potentially political interventions like this.

Needless to say, our motivation wasn’t political.   It was ire that the mantle of ‘mainstream’ was being offered by the ‘letter of 41’ and claimed by Jeremy Corbyn.  Who Labour elects as its leader is the business of its broadly defined ‘members’.   But we and our signatories don’t wish to have the median economist position misrepresented.

Small point.  The ‘targets’ sentence in the letter is losing people a bit.  This is to be read as ‘renationalising will probably make companies worse not better’.  [The ‘target’ is the target of the renationalisation, ie a company.  Sorry.  Terrible drafting by me in this case].

Post script:  Ethan Ilzetzki at the London School of Economics, and Duncan Melville, Chief Economist, Inclusion [signing in a personal capacity only, and not on behalf of his employer], also wished to sign, but we got this message too late for the FT deadline.

Anyone else who is supportive or not is free to comment below.

Post-post script.  The Guardian, which ignored Paul Levine’s initial letter [reproduced in an earlier post below], ran a sceptical opinion piece about our letter in Commentisfree, by Tom Clark.  This was pretty dirty:  the first ‘economists’ letter was reported uncritically as from ‘economists’, and their views were not questioned.  Our letter, signed by people, unlike with the first letter, all of whom were economists, gets criticised for being written by hide-bound…. economists.  [Plus the usual rubbish showing no understanding of what PQE/QE is, or what money is, etc, etc…].  To respond to this, we penned a letter in response, which they did publish, and here it is if you want to read it.

Advertisements
This entry was posted in Uncategorized. Bookmark the permalink.

109 Responses to FT letter denouncing Corbynomics

  1. Lyn Eynon says:

    Good to see debt/GDP described as tolerable with support for extending public investment. This would seem to confirm that – whether funded conventionally or through PQE – anti-austerity has broad support within the economics profession.

    On the missing taxation, Richard Murphy now seems to be suggesting that – whatever the total might be – perhaps £20 billion a year is recoverable, which is a more credible number but still enough to build 100,000 homes.

  2. donald says:

    It is political.

    “His OPPOSITION TO AUSTERITY is actually mainstream economics, even backed by the conservative IMF. He aims to boost growth and prosperity. He voted against the shameful £12bn in cuts in the welfare bill.”

    You seem to acknowledge this, at least to some extent, by suggesting investment would be sensible now, BUT this won’t be clear to the lay reader. Or lay watcher/listner when this is discussed on the news.

    An objective non political letter would have been very clear on the difference between 1. opposition to austerity 2. Corbyn’s current vague plans for stopping austerity.

  3. Rhys says:

    Seems very strange, your response to the thinking in the current government was a blog post https://longandvariable.wordpress.com/2015/06/05/austerity-crowding-out-and-peston/ , yet your response to a labour mp who up until now has had very little influence is to write a letter to the ft to try and make the front page. This appears ideological and political

  4. Sam says:

    I’m very much a supporter- but whilst I’m an economist, I wasn’t sure I was enough of an economist to meet your stringent criteria!

  5. Harry Vimes says:

    Several questions arise which the signatories of this letter need to address because it’s not just badly phrased it is all over the place.

    Firstly, it appears that there is an agreement amongst the signatories that there is a crying need for investment. Although it would be useful to actually put more detail on that. Because it is not just investment in necessary and vital public infrastructure, a long list which includes such things as affordable housing (where billions of pounds of taxpayers money is currently proping up parasitic rentiers in the BTL sector – an effective nationalisation of housing to the detriment of the taxpayer, why no criticism of this form of nationalisation?), flood defences, education (as opposed to the schooling system we currently suffer from which treats young people like tins of peas on a production line), the NHS, transport and broadband. There is also a desperate need for long term investment in innovation, which I will come back to.

    The line taken in this letter seems to suggest this investment can and should come from borrowing. Yet at present the whole context of policy and the framework of debate is on balancing the budget and simplistic austerity economics. One wonders just how many of the signatories of this letter now and in the past have argued for and supported this line and thus materially brought about this position. Without a clear statement that this is not the case it makes the signatories appear to be arguing for something they know is not on the table and would not want on the table if it were put there. Because, as we have seen too often in the past the minute any Labour Party in Government or in opposition announce they would borrow along the lines argued in this letter umpteen “economists” suddenly appear all over the media to denounce the very idea. And you can bet what’s left of your pension that at least a good proportion would be signatories to this letter who seem to believe that the general public were born yesterday.

    And that borrowing for investment just is not going to happen. The private sector clearly has no interest in long term investment in innovation because there is, unlike in the four previous up swings in the cycle, no incentive, wage levels compared to profit levels having plummetted (which might well be a useful clue as to why inflation -see below- has not taken off as employment has picked up). There is no fifth upswing in the cycle in site because we now occupy a rentier economy.

    The UK pumped over £300 billion into the private sector in QE up to 2012 and all the private sector has done is fuelled and inflated another short term asset bubble, our third in fifteen years, in pursuit of short term three monthly balance sheet values which are not underpinned by fundamental and sound factors. Many globalised companies are buying up their own stock to drive the prices up which suits the management and activist shareholders drunk on the maxim indulgence today, investment tomorrow, if at all. That bubble is about to burst and, unlike in 2008, there will be no money, real or fiat, left in the pot now or in the future because even further and deeper austerity to waste on this nationalisation of the private sector rentiers and socialism for the well off is not a realistic option. Again, it would refreshing to hear some critique from the usual suspects about this form of nationalisation and waste of taxpayers money rather than the constant refrain which merely seeks to excuse it and prop it up with the kind of faux intellectualism embodied in this letter.

    Consequently, like first world war generals fighting a modern war using the strategy and tactics of the Crimean war, you simply make yourselves look out of touch with reality on this point. The borrowing “solution” offered up is not going to happen because that is no longer where we are. And where we are is partly the responsibility of many economists who support the current failed neo liberal dead end consensus.

    It would also be useful (if that is not an oxymoron when talking about economists) if instead of carping from the sidelines like a bunch of Cassandras time was more usefully spent considering why it is, after substantial sums of QE have been pumped into economies in recent years that inflation, which the conventional model says should take off, has not occurred? Particularly in places where the economy has picked up and employment has risen. Why is the standard conventional model not doing what the combined wisdom of economic academia says it should be doing? Could it be that it is no longer describing reality? That it is not the end of history? That certain people need to spend a lot more time at the coalface instead of pretending they have all the answers.? Come out of the comfort zone and test the paradigm against the real world.

    • Luis Enrique says:

      “The UK pumped over £300 billion into the private sector in QE”

      no, the BoE swapped £300bn of cash for £300bn of bonds and sooner or later is going to swap it back again. That really is a very different thing.

    • Luis Enrique says:

      “inflation, which the conventional model says should take off”

      what, you mean this one: https://longandvariable.wordpress.com/2015/06/01/feldstein-money-inflation-and-the-zero-bound/

      • mrkemail2 says:

        Tim:
        “market interest rates begin to rise generally, Murphy is now stuck between either accepting that a near-market floating rate of interest paid on the PQE borrowing could end up costing more than just funding PQE with bond borrowing (at historically low yields) in the market without involving the BoE, or saying that a significantly less-than-market rate of interest would paid on reserves even as market interest rates rose, which would make the reserves funding PQE the archetypal inflationary hot potato. Which is it?”
        You seem confused.
        Govt spending creates excess reserves, this then drives down interest rates as banks try to lend out the excess but cannot.
        Because govt spending drives down interest rates gilts need to be issued to drain the excess reserves and push interest rates up.

      • Tim Young says:

        @mrkemail2 on September 3, 2015 at 10:48 pm (hopefully this reply will appear below the comment I refer to).

        You are right. Selling gilts (or even selling back the National Investment Bank bonds that PQE envisages the BoE buying) would be another way to mop up zero interest reserves to avoid inflation. In which case, the PQE investment would become effectively gilts funded.

        So why not just fund the investments from gilts issuance in the first place? Perhaps because PQE is attempting to play some trick by which the borrowing does not appear as part of the national debt – not that economic statisticians or gilts investors would be fooled by that. Or perhaps because the supporters of PQE believe that they think that long-term interest rates are presently too high, and they can save interest costs by borrowing at a floating rate (ie the BoE repo rate) now and switching into a fixed rate (ie the yield at which the reserves-absorbing gilts are sold) when market interest rates rise.

        Basically, PQE is a convoluted mess, I suspect because Richard Murphy did not understand central bank / public finance when he was initially pushing PQE, and is too arrogant to acknowledge his misconceptions and to tidy it up now (and if he did it would probably look unnecessary anyway), while Corbyn was not going to look the apparent gift horse of cost-free investment stimulus in the mouth. I believe Murphy is right that we need more infrastructure investment and not to cut public expenditure that amounts to investment, like education and even prison spending, but in my opinion (I am a member of the UK Green Party, so I am not apolitical myself), the right way to fund that is by good old honest tax, preferably by broadening the tax base to include wealth-related taxes like LVT.

    • Tim Young says:

      PQE is effectively funded by borrowing, in the form of reserves held in commercial banks’ current accounts at the BoE, and under current practice, interest would be payable at the BoE repo rate on that borrowing, as I think I managed to force Richard Murphy to accept, before he blocked me from commenting on his blog, here: http://www.taxresearch.org.uk/Blog/2015/08/25/the-bank-of-englands-already-been-authorised-to-do-peoples-quantitative-easing/comment-page-1/#comment-733137 Certainly, Murphy seems to have changed his point of view from his exchanges with myself and others early in August (when he apparently believed that PQE could be somehow be funded by the BoE for free), without a trace of contrition, let alone recognition.

      So now, having admitted that PQE is reserves-funded, assuming that PQE is successful at restoring full employment as intended and market interest rates begin to rise generally, Murphy is now stuck between either accepting that a near-market floating rate of interest paid on the PQE borrowing could end up costing more than just funding PQE with bond borrowing (at historically low yields) in the market without involving the BoE, or saying that a significantly less-than-market rate of interest would paid on reserves even as market interest rates rose, which would make the reserves funding PQE the archetypal inflationary hot potato. Which is it?

      Finally I have to say that Murphy comes across in these discussions as a rather crass person, on his own blog refusing to go into detail, evading or misrepresenting points put to him, fobbing off criticism with imprecise references, dismissive remarks and finally censorship, while feeling free himself to accuse others of libel, posting emails sent to him without asking the sender, and today, outing a previously anonymous blogger. If Murphy is a key adviser to Corbyn, we had better hope that he never gets anywhere near any public office where he might put Corbynomics into practice.

      • Tony Yates says:

        Hi Tim. Thanks for your commments.
        Richard seems to be doing his monetary economics on the hoof, without having swatted up beforehand. An interesting contradiction in his writings is on the one hand the view that ‘[government] debt is money’, and not anything to worry about, and on the other, something to be minimised, hence PQE.
        He also seems to be inconsistent about the question of whether it would be done to support or subvert the BoE’s mandate, or authority to decide what is needed to hit the mandate.
        On the face of it Richard seems to live by the internet sword, but wants not to die by it. But then, who doesn’t feel like that?!

      • mrkemail2 says:

        This explains it better than I could.
        http://bilbo.economicoutlook.net/blog/?p=381
        “This is Part 3 in Deficits 101, which is a series I am writing to help explain why we should not fear deficits. In this blog we consider the impacts on budget deficits on the banking system to dispel the recurring myths that deficits increase the borrowing requirements of government and that they drive interest rates up. The two arguments are related. The important conclusions are: (a) deficits introduce dynamics which put downward pressure on interest rates; and (b) debt issuance by government does not “finance” its spending. Rather debt is issued to support monetary policy which is expressed as the desire by the RBA (ADDED: RBA is central bank of Australia) to maintain a target interest rate.”
        “At the end of each day commercial banks have to appraise the status of their reserve accounts. Those that are in deficit can borrow the required funds from the central bank at the discount rate. Alternatively banks with excess reserves are faced with earning the support rate which is below the current market rate of interest on overnight funds if they do nothing. Clearly it is profitable for banks with excess funds to lend to banks with deficits at market rates. Competition between banks with excess reserves for custom puts downward pressure on the short-term interest rate (overnight funds rate) and depending on the state of overall liquidity may drive the interbank rate down below the operational target interest rate. When the system is in surplus overall this competition would drive the rate down to the support rate.
        The demand for short-term funds in the money market is a negative function of the interbank interest rate since at a higher rate less banks are willing to borrow some of their expected shortages from other banks, compared to risk that at the end of the day they will have to borrow money from the central bank to cover any mistaken expectations of their reserve position.
        The main instrument of this liquidity management is through open market operations, that is, buying and selling government debt. When the competitive pressures in the overnight funds market drives the interbank rate below the desired target rate, the central bank drains liquidity by selling government debt. This open market intervention therefore will result in a higher value for the overnight rate. Importantly, we characterise the debt-issuance as a monetary policy operation designed to provide interest-rate maintenance. This is in stark contrast to orthodox theory which asserts that debt-issuance is an aspect of fiscal policy and is required to finance deficit spending.
        The significant point for this discussion which we build on next is to expose the myth of crowding out (ADDED by MrK, referring to FINANCIAL crowding out, govt spend cost is real resources) is that net government spending (deficits) which is not taken into account by the central bank in its liquidity decision, will manifest as excess reserves (cash supplies) in the clearing balances (bank reserves) of the commercial banks at the central bank. We call this a system-wide surplus. In these circumstances, the commercial banks will be faced with earning the lower support rate return on surplus reserve funds if they do not seek profitable trades with other banks, who may be deficient of reserve funds. The ensuing competition to offload the excess reserves puts downward pressure on the overnight rate. However, because these are horizontal transactions and necessarily net to zero, the interbank trading cannot clear the system-wide surplus. Accordingly, if the central bank desires to maintain the current target overnight rate, then it must drain this surplus liquidity by selling government debt, a vertical transaction.”

      • @Tim Young

        I just read the threat between you and Richard Murphy, which is lenghty and detailed.

        An additional points, if I may, about your concern that the National Investment Bank would need to pay interest on the money it gets from the Bank of England, which will buy its bonds

        Both National Investment Bank and Bank of England will be different agencies of the government. So no matter what interest rates will be doing, going up or down, the cost of the borrowing will only mean that interest cost/income will be distributed differently between BoE and NIB. It will have no effect of the real cost of the investment funded by the National Investment Bank, which will be in effect free.

      • @Tony Yates

        I think you are misrepresenting Richard Murphy’s views. Why is [government] in square brackets?

        But more interesting would be your views on these issues:

        “his writings is on the one hand the view that ‘[government] debt is money’, and not anything to worry about, and on the other, something to be minimised, hence PQE.”

        What do you think?

        “He also seems to be inconsistent about the question of whether it would be done to support or subvert the BoE’s mandate, or authority to decide what is needed to hit the mandate.”

        Under which conditions do you think could PQE be introduced to support the BoE’s mandate, and when and under which conditions would PQE subvert the BoE mandate to keep inflation at 2%?

      • Tim Young says:

        @mrkemail2 on September 3, 2015 at 10:58 pm

        That is why I find MMT vacuous. They insist on the fallacy that governments spend without raising revenue first, but they say that the government must raise tax or issue bonds to manage the resulting stock of reserves to control inflation, which seems to me likely to end up in the same place as the conventional story. I note that, as far as I know, MMT has no supporters who have worked in central bank market operations or government debt management.

        MMT seems to me like postulating that the carriages drive the locomotive in a train. Your reasoning might be wrong, but for most purposes it does not matter, because it all gets to the same destination anyway!

      • Tim Young says:

        @Matt Usselmann on September 4, 2015 at 8:46 am

        You seem to be sharing Richard Murphy’s initial misunderstanding.

        Let’s assume that the NIB has sold its bonds into the market to fund its investments, and these are now held by the private sector (briefly, I think was Richard Murphy’s plan).

        When the NIB bonds are bought by the BoE, the BoE pays for them in reserves, which assuming the bond seller is a non-bank, are held by the seller’s bank against the seller’s deposit at their bank. Interest is paid on these reserves by the BoE, which, depending on the state of the deposit market, may be more or less passed on to the seller by their bank. Anyway, the net result is that the BoE is holding NIB bonds, on which fixed interest is paid, and has reserves liabilities on which a floating rate – the BoE repo rate – is paid. That is, the state, in the form of the state-owned BoE, is paying out a floating rate of interest to the private sector.

        Meanwhile, depending on the form of its investments, the state-owned NIB should be receiving something like fixed interest returns from its investments, drawn ultimately from the private sector – eg in the form of road tolls – and paying fixed interest on its bonds to the BoE.

        So consolidating the BoE and the NIB, the state gets fixedish revenue from the private sector and is paying out floating rate interest to the private sector. The government owns both the NIB and the BoE and will therefore (eventually) receive their profits in the form of a shareholder dividends, so long fixedish and short floating is effectively the position of the government via its PQE programme.

        Note that whether or not the BoE cancels the NIB debt as Murphy originally suggested, it makes no difference. if the BoE cancels the NIB debt, the government simply gets more income from the NIB and less from the BoE (conceivably to the point of having to pay money to the BoE to cover its losses).

        Hopefully all is now clear.

      • @Tim Young
        “Hopefully all is now clear”

        I do not think it is anything like as complicated as that, and there is no private sector involved.

        The National Investment Bank raises money from a bond sale to the Bank of England. The accounts of the NIB will record a liability (size of bond) and a corresponding increase in reserves (assets).

        The accounts of the BoE will record an asset (NIB bond) and a corresponding liability (reserves due to the NIB)

        In terms of interest, the NIB will have to pay interest on its bonds, at the coupon rate is which is decided (fixed or floating, does not really matter), the reserves are deposited at the Bank of England at 0 basis points.

        The bonds must be able to be sold to the private sector, so they have to have an attractive coupon. They could be sold as perpetual notes, as the old war bonds (consols) because they, conveniently, apparently do not need to be included in government debt calculations.

      • mrkemail2 says:

        Tim,
        “That is why I find MMT vacuous. They insist on the fallacy that governments spend without raising revenue first, but they say that the government must raise tax or issue bonds to manage the resulting stock of reserves to control inflation, which seems to me likely to end up in the same place as the conventional story.”
        MMT says the cost and limit to govt spending is real resources. There are no financial constraints.
        Remember, banning useless things and cutting bank lending free up real resources.
        Remember the Economy is Real People doing Stuff. The Economy is not a God.

      • Tim Young says:

        @Matt Usselmann on September 4, 2015 at 5:31 pm

        According to Murphy, the National Investment Bank bonds cannot be sold directly to the BoE under EU law, so that is why the private sector has to be involved, if only transiently for form’s sake. However, I can accept that the NIB bonds are sold direct to the BoE for the sake of simplifying the discussion.

        That said, you seem to be confused. Why do you think the NIB sells bonds to the BoE? To acquire base money to spend, that’s why. So almost immediately, the reserves are paid out, to the private sector, say as the NIB signs a contract with a bridge-builder like Cleveland, being transferred to the bank at which Cleveland banks, against a deposit created in Cleveland’s name. That means that the NIB’s asset becomes not reserves, but a bridge contract, while its liabilities remain NIB bonds. And these reserves are then gradually paid out to the banks of Cleveland’s suppliers, workers, sub-contractors etc, to be spent by them, and so on, to be distributed across the banking system. Of course, whichever bank owns the reserves, the reserves remain a liability of the BoE.

        These reserves must have value, otherwise the NIB cannot buy anything with them, and that means that, depending on market interest rates, the reserves may have to bear interest. Reserves pay the BoE repo rate, at present ½%, not zero as you seem to believe. There is some demand for non-interest-bearing base money, as the roughly £70bn stock of banknotes attests, but that could not be significantly increased to fund PQE.

        If the BoE sets, or is directed by a Corbyn government to set, the rate of interest paid on reserves to be zero, their value would be less, and the NIB would have to pay out more of them to make its investments. And, naturally, the higher market interest rates are, the less zero-interest-rate reserves would be worth. Since reserves are base money, that means inflation.

        Hopefully, that explains why PQE with zero-interest-rate reserves can become inflationary if, as PQE is intended to achieve, the economy recovers and market interest rates rise.

        So let’s suppose that a market rate of interest, in the form of the BoE repo rate, is paid on reserves. In that case, as market interest rates rise, the BoE’s interest outlay on the extra reserves created to pay for PQE rises, while its income from its holding of NIB bonds (which I assume are fixed-interest) remains the same, meaning that the BoE makes less profit, and conceivably even a loss. And since the government owns the BoE, and hence the BoE’s profits are remitted to the government, PQE becomes increasingly costly if market interest rates rise.

  6. Tony,

    you will probably agree that all these professors would have failed an exam asking to discuss benefits and drawbacks of the Corbyn proposals, set out alternatives, and discuss their potential political acceptability, if your letter is all what they had written.

    Also, if you start entering the debate, please do so professionally.

    That is what we pay you guys for, from the public purse, to be “experts”, So let us have some detailed analysis, which can stand up to scrutiny, based on theories or experience.

    So if you have a view, a DETAILED view, let us hear it. Please write a dissertation each on the subject and publish it.

    If you just want to tell us you do not agree with some policies and you do not consider these policies mainstream, we are not really that interested, as the general public.

    In fact, worse than that, you all come across as a bunch of over-privileged moaning minnies making a minor point, instead of entering a serious debate WITH ACADEMIC RIGOUR about the feasability of some of the ideas discussed by a potential leader of the opposition.

    • Tony’s written quite extensively on the policy proposals in question, here for example.

      • This is a nice selection of things we could also do, but no evaluation how realistic they are, or how feasible. There is no discussion by Tony engaging with others why they would or would not work, although others have written in and said they would not.

        (Anybody any ideas, eg, how we can increase inflation rate to 4% when we cannot even hit 2%??? )

        But that is not what I meant, I would like to see from academics a more thorough analysis, beyond blog post standard. That blog post you quote would also fail an exam if that was to be the answer in an exam asking for alternative economic proposals.

        Where is the text book which says that PQE is not possible, where is the text book it says it is inflationary, where is the paper which says it does impede Central Bank independence, when we could regard it as a fiscal policy like increasing government debt?

        Where is the discussion on nationalising industries, like railways and power companies?

        IF it is so easy to increase government debt, if that is the preferred option, (as the letter writers point out) where is the condemnation for the current government which does exactly the opposite?

      • Luis Enrique says:

        Matt

        I am not sure if you are doubting the existence of academic work on, for example, what determines the size of the central bank balance sheet (PQE boils down to expanding it) or merely asking econ bloggers to write thoroughly referenced essays on these topics for your benefit, but this stuff is all well known. Try
        https://www.imf.org/external/pubs/ft/wp/2001/wp01149.pdf
        http://www.bankofengland.co.uk/education/Documents/ccbs/handbooks/pdf/ccbshb32.pdf

      • mrkemail2 says:

        “PQE is effectively funded by borrowing, in the form of reserves held in commercial banks’ current accounts at the BoE, and under current practice,”
        It depends. It is not counted as part of the “national debt.”
        There is no need to pay interest on reserves.
        Another view – all govt spending is effectively via money creation (crediting bank accounts.)
        So you agree swapping bank reserves and gilts is not inflationary and “money printing” and “borrowing” are equivalent?

      • mrkemail2 says:

        “(Anybody any ideas, eg, how we can increase inflation rate to 4% when we cannot even hit 2%??? )”
        Very easy. Use expansionary fiscal policy. A guaranteed alternative job offer at the living wage and cuts in VAT and NI to start.
        Any thoughts on this?

      • Tim Young says:

        Now here is where I shall disagree with Tony.

        I am strongly against raising the inflation target to 4%; if anything I would reduce it towards zero, now that inflation expectations are very low and indexing activity has died away and that Japan has shown us that, contrary to the economic establishment’s fretting, deflation does not generate a downward “spiral”.

        Having an inflation target of 4% to allow real interest rates to be cut to more negative levels to stimulate the economy is I think the wrong approach. I struggle to believe that the natural rate of interest in a well-functioning economy would ever be significantly negative (eg just buying farmland and leaving it fallow should give a near-zero rate of return). If it appears that the natural real rate of interest is negative, such that the demand for even zero-interest base money is huge, I would suggest that the economy has a real problem, not a monetary problem.

        My explanation for the failure of QE to stimulate economic activity, is that, by forestalling an incipient fall in asset prices, easy monetary policy is the CAUSE of the economic weakness. People are reluctant to make long term commitments when they feel the presence of an overhanging asset price correction. As additional evidence, I would cite the fact that labour productivity is especially poor in countries with flexible labour markets like the UK and US, because that makes it easier for “short duration” business to arise, involving the use of more easily shed labour and less capital.

        I saw this coming before the financial crisis, and events have pretty much panned out as I expected: http://www.ft.com/cms/s/0/d4f6438a-ebb6-11db-b290-000b5df10621.html

        But of course, my solution, of managed “liquidation”, would involve disappointing many people who like high risky asset prices, from house owners, through establishment academics and economic commentators comfortable with real estate and stock wealth, to financial institutions that make money either by holding risky assets paid for with other peoples’ money or by trading them with big spreads, not to mention indebted governments. Of course, in theory an independent central bank should be able to resist such pressure, but in recent years, we have seen that central banks can be subverted by governments through their choice of the members of central bank monetary policy committees (selecting doves, assuming that the government expects to remain in office for a significant fraction of their term). Which is why I expect 4% Tony to be invited to join the MPC at some point in the future, while I continue to write frustrated blog comments like this!

      • @Mrkemail2
        “Very easy. Use expansionary fiscal policy. A guaranteed alternative job offer at the living wage and cuts in VAT and NI to start.
        Any thoughts on this?”

        It would reduce unemployment, and increase consumer spending, but not do anything to inflation. It might increase wage inflation at the bottom of the wage scale, as workers opted for guaranteed alternative jobs, instead of horrendous minimum wage jobs, making the living wage the new real minimum wage. That would decrease corporate profitability (and at the margin decrease existing minimum wage jobs) but only or existing minimum wage employers.

        But it is along the right tracks. We could have a law saying that the top 10% of earners in any company should reduce their salaries by 5%, to be redistributed to the bottom 30% of earners. That should happen every 3 months, until we have 4% inflation.

        Alternatively, we could just change the definition of inflation to include asset prices, that would quickly get it to 4%.

        I wonder whether they are the solutions which Tony had in mind?

      • mrkemail2 says:

        “But it is along the right tracks. We could have a law saying that the top 10% of earners in any company should reduce their salaries by 5%, to be redistributed to the bottom 30% of earners. That should happen every 3 months, until we have 4% inflation.”
        Savings function as Voluntary Taxation
        Nothing is being “redistributed” as such. New value and output is being created.
        The output
        Govt should target price stability I.e. stable asset prices, especially land prices (100% Land Value Tax)

  7. Theremustbeanotherway says:

    Tony

    Harry Vimes comments hit the bullseye on the target!

    With regard to failed neoclassical (neoliberal) economic models, do they still exclude those important actors called “banks”? I assume the reasoning parallels that used by so called “scientific” climate models that exclude that important actor called “the sun”.

    Lastly, despite scraping a C pass through both English Language and English Literature “O” levels, I can appreciate that the letter is of a poor standard and you should be ashamed of your efforts.

    • mrkemail2 says:

      “despite scraping a C pass through both English Language and English Literature “O” levels, I can appreciate that the letter is of a poor standard and you should be ashamed of your efforts.”
      Why should it matter as long as you understand what they are saying? Should not things be in plain English?

  8. @Louis Enrique
    “I am not sure if you are doubting the existence of academic work on, for example, what determines the size of the central bank balance sheet (PQE boils down to expanding it)…”

    I do not doubt the academic work of the writers of the letters at all.

    But they are moving out of the academic world into the political sphere, Now, in more detail…

    The letter says: ““People’s QE” would be a highly damaging threat to fiscal credibility,…”

    Now, none of the papers you quote make that clear. In fact the Bank of England paper seems to suggest nothing of the sort. “Fiscal credibility” seems to mean the credibility to keep inflation at bay, and on page 26 the paper is quite clear…

    “Reis (2013) argues that a central bank does face a constraint
    on the extent to which it can expand its liabilities to meet
    policy objectives as its liabilities can stop being a liquid and
    trusted method for settlement. This relates to the need for
    the central bank to be able to exchange reserves for banknotes
    on demand”

    With a £400bn Bank of England balance sheet, a little bit of additional PQE will not make any difference at all. More than a little was not envisaged by Corbyn, but the exact amount is to be decided upon.

    As with the previous expansion of the balance sheet after 2008, fiscal credibility will be equally unaffected, I suggest.

    So, a precedence has been set, the “fiscal credibility” was not damaged before, now a little bit of additional PQE will not make a difference either.

    Now, I cannot see a restriction of Bank of England independence, beyond the level which was already impeded by QE. And, inflation has often come down before countries have established “independent” central banks, and even independence does not guarantee no inflation, as this paper argues, among other things. So there is not direct and automatic link between central bank independence and inflation.

    http://www1.wiwi.uni-muenster.de/cqe/forschung/workshops/previousworkshops/budapest/HayoHefeker.pdf

    Which then would suggest, that the statement that there is a damaging threat to fiscal credibility by PQE is, frankly, incorrect.

    • Luis Enrique says:

      That 400bn balance sheet is the cumulative total after centuries of seigniorage so you should not be thinking about how much difference xbn will make as a one off but the implied rate of change from repeated use of PQE.

      The point of those paper was to explain what determines size of balance sheet under inflation targeting. Fiscal credibility is intact after QE because we still have inflation targeting. Of course if we abandoned that we could say to CB “we command you to raise rate of seigniorage by PQE amount over and above rate you would have been doing anyway” and there goes your fiscal credibility because you have just told CB it cannot let balance sheet shrink if it needs to. On the otherhand if you retain inflation targeting you cannot force CB to add permanently PQe amount to its balance sheet, because its balance sheet is a residual implied by its inflation target and policy operations. As those papers explain.

      • Well, the £400bn BoE balance sheet did not grow organically over centuries, but quintupled after 2008 in the space of 2 or 3 years due the QE of £375bn. No inflation pressures arose then.

        I am not suggesting PQE do anything as rash as that, but finance a small amount of investment spending in the economy, such as 10bn a year, for the term of the next parliament. (That would be my personal view, but an exact policy about this would need to be determined.)

        I do not think it would impede the BoE to do anything else. If it wanted to reduce its 375bn of QE it could do so. The impact on the real economy would be minute, but might reduce asset price inflation. As that is not consumer price inflation, which is the mandate of the BoE, the BoE would not need to worry about reducing asset price inflation and could sell the £375bn of gilts it holds when necessary.

        Now 10bn PQE a year will pay for 80 new hospitals a year, or 50,000 new homes a year, at least.

        Whereas 10bn of QE gives us no real assets in the economy, but only inflated financial asset prices.

        In short, there is no risk to fiscal credibility at all from PQE.

      • Luis Enrique says:

        come on, we know why 375bn QE didn’t have impact on inflation, it’s in standard model, see post I link to in response to Harry above, QE did not increase nominal demand by 375bn, just swapped cash for bonds, whereas Xbn of PQE is there to increase demand by Xbn (and then whatever multiplier you envisage). QE is supposed to be reversed, PQE *cannot* be reversed if it is going to do what is claimed for it. We could have a version of PQE that could be reversed, if it was a counter cyclical tool used under inflation targeting, and if Murphy was capable of listening to those trying to explain things to him, he could be articulating a vision of PQE as a more powerful countercyclical instrument that boost investment during recessions but which *does not* promise “spending without borrowing* because there would be no commitment to one for one permanent monetary expansion.

      • The fund managers and banks who sold 375bn worth of gilts in the original QE were free to do with the proceeds to do what they wanted.

        They could have used/lent the money on for productive GDP producing investments (which would have created lots of jobs), or they could have used the funding to invest/lend in shares and existing property. Nobody knew what was going to happen when QE was introduced.

        But, surprise, surprise, they preferrred to create another asset bubble, instead of building new houses and create new jobs.

        With hindsight, that is what happened. Nobody knew that beforehand.

        Then, I would think Richard Murphy is well aware that a countercyclical PQE would have the greatest effect (use it when there is a recession), and the question is really when it should be used, and to what extent. I do not think anybody has decided that at all, nor would it be clear that a decision now taken could not be reversed or changed in the next five years, depending on the circumstances.

        I would propose to use it (at a small amount, say 10bn a year) to bring forward spending, almost no matter what. If there is a huge housing crisis by 2020 it would make ultimate sense to use it to build housing, even if there is inflation in the economy (that is my opinion).

        So it would be an experiment, what happens if we have it, does the world fall in, does the UK lose its financial credibility or not, etc?

        Ultimately, and that is really addressed to all those who think that we could always run a deficit and borrow more, like all the signatories of this letter. The problem with that is that it actually is a lot more expensive. If you will build a railway line for 10bn, it will cost you 300 million in interest for ever and ever (assuming a bond yield of 3%) if you issued gilts. the railway line will have fallen into disuse, perhaps 50 years from now, but you will still be paying 300million of interest on it. Each year. As government debt is never repaid.

        That is the real crux of it. In exchange for the potential, by no means certain, undefined concept of “fiscal responsibility”, I would rather have the £300 million of interest savings a year. I cannot see how technically “fiscal responsibility” can be lost by financing about 1/2% of GDP by PQE. On the other hand PQE will, over 50 years save £15bn in nominal savings.

        To completely disregard makes the “analysis” by the letter writers critcising PQE less than complete.

      • Tim Young says:

        @Matt Usselmann on September 4, 2015 at 3:14 pm

        You seem to be labouring under the misapprehension that PQE is free. It is not. The reserves funding for PQE bears interest at the BoE repo rate, so if interest rates rise, and the authorities do not want the reserves funding PQE to be an inflationary hot potato, the reserves must pay a near market rate, in which case, instead of the 3% on your £10bn of PQE that you could have locked in as a fixed interest rate when the project began, you find yourself maybe paying more than that in floating rate interest. Basically PQE is a huge fixed interest rate short position, the kind of spivvy financial market gamble that lefty politicians like Corbyn usually disparage.

        As for your remark that the pension funds, insurance companies etc that sold gilts to the BoE created an asset price bubble, what would you expect? They sold a long-term financial asset, so what would you expect them to replace it with? Is it them that creates an asset price bubble when they reinvest the proceeds of the long-term financial asset they sold to the central bank, or the central bank which entered the market for long-term financial assets in the first place? It was QE that created asset price inflation (in my opinion QE should have been a temporary measure to provide liquidity at the height of the financial market crisis, and should have been reversed by now).

      • Luis Enrique says:

        Matt

        money managers were already free to sell bonds and invest in houses or whatever, QE did not change much. QE is suppose to push rates down which implies asset prices up. That’s what lower interest rates do. Beyond that, what asset bubble are you referring to? Pension funds (who provided most of the bonds sold in QE) are not buy to let investors.

        you still seem to be holding on to the idea that PQE will manage to deliver permanent monetary expansion, all your arguments about it being cheaper etc. make no sense without that. But I am not getting anywhere convincing you that you’d need to abandon inflation targeting to do that. Lets see how “fiscal credibility” holds up if we abandon inflation targeting and put control of the money supply in the hands of politicians.

      • mrkemail2 says:

        “Lets see how “fiscal credibility” holds up if we abandon inflation targeting and put control of the money supply in the hands of politicians.”
        It is often said democracy is the worst system, except for all the others.

  9. Ah, I finally found the author of the letter, (he seems to have been hiding at the Guardian) – he turns up in the Guardian letter pages:

    Tom Clark, writing (Opinion, 4 September) in response to our letter to the FT, misses our main point in saying that Corbynomics “feels subversive but maybe not for long”. We were responding to the Observer letter that claimed Corbyn’s policies were not subversive, but mainstream. It is true that “anti-austerity” does enjoy widespread support from economists, but not his simple, apparently painless, solution (for most), based solely on taxing the rich, effectively raising corporation tax and incredible estimates of preventable tax avoidance/evasion levels. What has become the mainstream position is for a slower reduction of debt than that of Osborne, involving some combination of spending and tax adjustments that would depend on the growth of the economy and tax revenues. This is sometimes denounced as “austerity-lite”.

    Clark’s article says a lot about people’s quantitative easing (PQE), but in fact is largely a case for QE as practised by central banks already. PQE would allow the government to instruct the Bank of England to print money to finance its programmes and would seriously endanger the independence of the central bank. Surely Tom Clark does not want to dismiss one of Labour’s best achievements – establishing central bank independence and entrenching the inflation target – as a mere “detail”?
    Professor Paul Levine School of economics, University of Surrey
    Professor Tony Yates Department of economics, University of Birmingham

    Now, in case anybody missed the discussion in the Guardian, here it is:

    http://www.theguardian.com/commentisfree/2015/sep/04/corbynomics-radical-mainstream-economic-orthodoxy

  10. @Tony Yates from the above letter:
    “Surely Tom Clark does not want to dismiss one of Labour’s best achievements – establishing central bank independence and entrenching the inflation target – as a mere “detail”?”

    It is a tiny detail of the central bank’s job, which the Bank of England outsources to economists in its Monetary Policy Committee. So it is not even doing it itself, and if need be the regulations could be quickly changed to override the interest rate decision.

    The central bank has a supervisory role (previously shared with the financial services authority then), and a role as lender of last resort.

    Arguably it failed to spot anything in the run-up to the disaster of 2008.

    It could not spot any Libor rate manipulations, could not spot a credit bubble, could not prevent Northern Rock from failing spectacularly, has failed to spot FX manipulations, etc.

    Since then it has failed to make the banking system safer by running a regime which allows American banks to do their trading here, because here in the UK the rules are not that strict; and failed to split the casino banking system in a manner which would make it impossible for a repeat of the 2008 disaster, by splitting investment banking from retail banking in a decisive manner.

    The capital requirements are a little bit higher than previously, but still completely inadequate, should a new crisis hit, Capital cannot be increased any higher, because high bonuses have to be paid to its managers, who continue with the socially useless activities (mainly derivatives betting) which does not have any economic value whatsoever, but keeps the nation fully liable for any disaster which might strike.

    Any institution like that would be declared not fit for purpose and shut down, but here Tony Yates defends it as holding up “fiscal responsiblitly” and the Bank of England must not be endangered, even though its inability to spot an unsustainable credit bubble let to the greatest recession since the thirties in the UK.

    I have previously said that £300milion per year in interest could be saved per 10bn of quantitative easing, leading to an incredible £1.5bn worth of savings every year when £50bn of PQE are issued after a five year Labour government.

    That is a high cost for an incompetent institution holding up some imaginary value like “fiscal responsibility” which is in any case the responsibility of the government – they make the fiscal policy. And fiscal responsibility will not be definitely undermined, Tony Yates himself says that their is only a risk of that. That risk insurance premium of £1.5bn a year for some possible danger is something which Yates says we should all pay, and 55 economists sign. That is a rip-off.

    If 55 economists cannot spot that we are being had, there is something wrong with economics, as far as I am concerned.

    • mrkemail2 says:

      “The capital requirements are a little bit higher than previously, but still completely inadequate, should a new crisis hit,”
      Capital requirements is not the way to go. You have to regulate what banks lend *for* and hard:
      http://www.3spoken.co.uk/2013/05/making-banks-work.html?m=1
      Re “fiscal responsibility” MMT says the goal of government is to maximise the number of transactions creating real wealth. Full employment and price stability are also goals and the government should introduce a alternative transition job offer open to everyone to serve as the minimum wage, conditions, etc (Job Guarantee) as an alternative to NAIRU. It would utilise *transferrable* skills.
      Look up “Job Guarantee” into Google.

  11. Tim Young says:

    “PQE will actually allow the UK government to finance expenditure for free. The National Investment Bank would have to pay interest on the bonds to the Bank of England, but both are government agencies, and therefore the financing of any investment would be free.”

    This is wrong, as I hope you will understand from reading my reply to one of your comments above: https://longandvariable.wordpress.com/2015/09/02/ft-letter-denouncing-corbynomics/comment-page-1/#comment-3485

    There is, I believe, an urgent need to tackle and dispel this myth head on, lest people vote for Corbyn in the Labour leadership election, or worse as a potential PM of a Labour government, on the basis of misinformation. Murphy’s refusal to seriously discuss, or even allow unrestricted criticism of his claims, on his blog, to which those interested in the seductive prospect of “free” investment finance might be attracted, is shameful. I don’t know whether Tony is still reading these comments, and what he thinks, but I believe that it would be useful to have a meeting somewhere like a university, suitable for interactive discussion and drawing balance sheets etc, to settle this. If so, I would be glad to attend and try to explain my argument.

    • Tim Young says:

      PS: I don’t understand what the Mosler challenge actually is, but I claim the car anyway for taking the trouble to try to sort you out!

      • I admit I have difficulty following your train of thought, and I guess so has everyone else. Nobody knows where all these reserves end up, and whether or not interest is paid on them. I believe something completely different from you, so let us forget all that.

        But the principle holds, the National Investment Bank gets money to pay for its infrastructure investments from the Bank of England, to which it sells its Bonds.

        So, I suggest the following, the NIB sells the bonds to the BoE, and in return gets cash. £50 Pound notes from the BoE, so that there is no confusion. That way we deal with real money which everybody can understand.

        So we know there is no interest to pay at all, cash money does not earn interest. The NIB puts the cash in its safe, and if has a contractor bill to pay, it gets out wads of cash and pays.

        End of story, dead simple.

        In the end up it will end up with
        assets: (roads/hospitals/social housing) and the remainder of cash in its safe as assets, and
        liabilities: bonds issued to the Bank of England

        both balancing each other out.

      • Tim Young says:

        I do not see why you are having difficulty following this – if you can identify a specific question, please ask.

        But look, in part these are issues of fact, not what you believe. It is a fact that reserves are the means of settling transactions between banks, which are mostly generated by payment instructions from banks’ customers, such that reserves will be spread around the banks by transactions (of course the BoE knows where the reserves go, because reserves are the balances in commercial banks current accounts at the BoE, but the BoE does not publish these balances, as your bank does not publish your bank balance). And is a fact that BoE reserves pay interest at the BoE repo rate: see paragraph 4 here: http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf

        Your idea of the NIB paid in banknotes is useful, and it should show you why PQE could be inflationary. I am not quite sure how much PQE Murphy advocates, but I would have thought that it was in the order of tens of billions of pounds. Well, the present stock of banknotes amounts to £66bn, so you can see how much more currency there might have to be in circulation if the activity of the NIB is to be economically significant. For example, if the stock of PQE was just a fifth of the size of QE, the value of banknotes in circulation would double. Do you really believe that the value of currency in circulation could be doubled without causing inflation?

      • mrkemail2 says:

        “Do you really believe that the value of currency in circulation could be doubled without causing inflation?”

        We issued £84bn of Gilts last year without any problems with inflation. At a higher interest rate = more income

        Unless you believe Gilts have magic powers, there is demonstrably no problem.

        The problem here is the ‘in circulation’ belief. The problem is that money is not going to be in circulation. It will be saved, because if it isn’t saved it will be spent, there will be more taxation, more activity *and the £66bn net spend will not happen* because there will be a surplus of taxation.

      • Tim Young says:

        Gilts are interest-bearing, so even if they could be passed on directly in transactions, there would be no particular incentive to do so; currency bears no interest, so unless you cannot find any better investment in terms of return vs risk, people will try to pass currency on and its value will fall – ie inflation. You cannot compare the stock of interest-bearing gilts with the stock of non-interest-bearing currency.

        I agree that, at that point taxes could be increased to mop up the excess currency to prevent inflation, but I don’t think that is what Murphy has in mind.

      • mrkemail2 says:

        “I agree that, at that point taxes could be increased to mop up the excess currency to prevent inflation, but I don’t think that is what Murphy has in mind.”
        You are Assuming we are at Full Capacity. We are not.
        “Taxes could be increased” now what do you mean by that.
        There is no need for tax RATES to increase.
        Collected Taxes increase automatically when people spend, because they have to pay taxes!

  12. fmcoppola says:

    Dear oh dear.

    @mrkemail2: gilt issuance is neutral from a money supply perspective, so it is hardly surprising that £84bn of gilts issued last year had no effect on inflation. The wonder is rather that anyone ever thought it would.

    I am also of the opinion that £84bn of new reserves used entirely to buy existing gilts has zero impact on inflation.

    Tim Young, Matt Usselman and others: comparing the purposes to which QE money has been put with the purposes to which PQE money might be put is comparing apples & oranges. The correct comparison is between the purpose of PQE money and the purpose to which the money raised from the original gilt issuance was put. Correct me if I’m wrong, but it strikes me as not significantly different. After all, government investment is currently financed with gilts. What was subsequently done with QE money is entirely spurious.

    All: I get a bit tired of the “government doesn’t need to issue debt” stuff. Technically it is true: politically it is not. Political trumps technical every time. End of discussion.

    • Tim Young says:

      No matter whether you are tired of hearing it or not, Frances, the government does need to issue debt, both for technical and political reasons.

      To be glib, I could say reserves are debt; the point is moot; end of discussion.

      To be more reasonable, reserves can become inflationary if and when the demand for money as a safe asset declines and economic sustainability means more viable savings projects arise than lending money to the central bank at near-zero interest. At that point, the technical issue is that the central bank either starts paying interest on reserves, in which case the state may as well have borrowed the money by issuing interest-bearing bonds in the first place, or it accepts inflation. Both debt, especially the cost of it, and inflation are political issues, and that is why the government does need to issue debt.

      I get a bit tired of over-opinionated and under-informed commentators making fanciful claims about central bank and government finances. End of discussion.

      • mrkemail2 says:

        Tim,
        The hot potato argument has been debunked *thoroughly* by the empirical evidence. Denmark and the Eurozone have *negative deposit rates* and yet there is no potato movement.
        And even if did result in additional spending, then so what? The effect would be negligible.
        It would just be a boost in private spending such as say, an increase in export revenue.
        At the moment the economy is well below capacity and the extra spending will create jobs for people!
        Remember spending generates taxation revenue, including 20% VAT. We have auto stabilisers in place. The potato is sliced pretty quickly until it is gone as it is passed around.
        “That point, the technical issue is that the central bank either starts paying interest on reserves, in which case the state may as well have borrowed the money by issuing interest-bearing bonds in the first place, or it accepts inflation. Both debt, especially the cost of it, and inflation are political issues, and that is why the government does need to issue debt.”
        The conclusion does not follow from the premise.
        The govt still has the same access to real goods and services that make up its fiscal space. There is no *structural* magical increase in inflation.
        If people decide to save less and spend more, so what?
        Fiscal policy adjusts to the increased private spending.
        It is perfectly possible to design a political system where interest rates are at zero.

      • Tim Young says:

        @mrkemail2 on September 10, 2015 at 4:28 pm

        See my reply to you on this point below: https://longandvariable.wordpress.com/2015/09/02/ft-letter-denouncing-corbynomics/comment-page-1/#comment-3568

        VAT will attenuate the inflationary effect of excess reserves, but not eliminate it. The stock of money can bid up prices without actually changing hands.

      • mrkemail2 says:

        “VAT will attenuate the inflationary effect of excess reserves, but not eliminate it. The stock of money can bid up prices without actually changing hands.”
        This is confused.
        Inflation is a function of the *flow* of money.
        The financial circuit is unrelated to but induces real goods and services.
        If I put £2 billion in a bank account and just leave it there then there is *no* impact on inflation.

      • Tim Young says:

        If I put £2 billion in a bank account and just leave it there then there is *no* impact on inflation.

        Maybe, but if you spent a million of it on something, you would have a lot more impact on the price than if someone with a million pounds spent all their money on the same thing. Prices are determined by more than just flow.

      • mrkemail2 says:

        “Maybe, but if you spent a million of it on something, you would have a lot more impact on the price than if someone with a million pounds spent all their money on the same thing. Prices are determined by more than just flow.”
        That is the flow.
        I just used that as an example.
        Inflation is determined by the *flow*

      • Tim Young says:

        “Inflation is determined by the *flow*”

        I believe that most would say that the stock matters to some degree. That, by the way, was one of the debates around QE when it started. If I recall correctly, the BoE considered that it was the stock of QE that mattered, while the Fed said the flow.

    • mrkemail2 says:

      “I get a bit tired of the “government doesn’t need to issue debt” stuff. Technically it is true: politically it is not. Political trumps technical every time. End of discussion.”
      There are very good political reasons for not issuing bonds – the fact that over half of them are going overseas! You’ll find the same people calling for bonds are also the same people who moan about the size of the current account deficit. Yet they appear very happy to pay foreigners to save??

  13. @Frances Copolla
    “@mrkemail2: gilt issuance is neutral from a money supply perspective, so it is hardly surprising that £84bn of gilts issued last year had no effect on inflation. The wonder is rather that anyone ever thought it would.”

    So if he government doubled the issue of gilts, from £84 to £168bn, with a view of using the additional money for building social houses no matter what, then that would certainly have an effect on inflation, as the scramble for resources in the construction industry would create inflation there, which would spill over into the rest of the economy.

    The effect of the money supply which you say is neutral for £84bn, would presumably be also neutral for £168bn.

    “All: I get a bit tired of the “government doesn’t need to issue debt” stuff. Technically it is true: politically it is not. ”

    It is not a political issue,.It is an issue about economic efficiency. Any economist would recommend using a FREE resource if is available, rather than one had to borrow to pay for it. (Or are you the only economist who would actually decline the offer of a free Mosler car, if it was available. See my latest blog post on radicaleconomicthought.wordpress.com )

    Now King John I managed to see that tally sticks was an economicaly efficient way to pay for government spending 1,000 years ago, as it was FREE to the government, why not do something equally clever in the year 2015 with PQE?

    So I think people would like to reframe it as a political issue, but it really is one of economic efficiencies.

    (I would also value your opinion on the relative powers of bond markets and central banks when setting interest rates over the whole of the spectrum of the gilt curve. That is currently awaiting moderation by Tony Yates as it has a lot of links which seem to have got it stuck in the moderation queue.)

  14. “Do you really believe that the value of currency in circulation could be doubled without causing inflation?”

    The amount of currency in circulation would not double. If the National Investment Bank paid for its new investments in cash by handing it over to the building companies, the first thing the building company would do is to take it to a bank, say Barclays, and pay it in. Then the building company would pay its contractors and employees in turn through its normal channels, which would be bank transfers.

    The cash would be handed back to the Bank of England by the bank where it was paid in, (Barclays) as it is surplus to requirements for the banking system. If it was inthe bankof England in its vaults, it would not be inflationary.

    I have advocated 10bn a year of additional investments through PQE over a 5 year Labour government, that would not be inflationary in a £1,800bn a year economy. Tiny risk of inflation, but enormous impact on social welfare through 50bn of additional free infrastructure.

    • Tim Young says:

      You don’t seem to understand how this works. If banknotes are paid in to the BoE, the BoE credits the reserves account of the payer bank, which would normally be expected to bear interest at the BoE repo rate. At that point, it does not matter whether the banknotes are held in the BoE vaults or not (most of those banknotes are actually held, pending re-issue, in private banks’ vaults under the “Bond” scheme even when technically paid back to the BoE, to save transporting notes to and from the BoE).

      So if you don’t pay interest on reserves, at the end of your £50bn PQE scheme, you have almost doubled the outstanding stock of non-interest-bearing base money, and that is the source of the threat to price stability.

  15. Lyn Eynon says:

    It is worth remembering both that the Bank of England and the Federal Reserve have only paid interest on reserves since 2009. The change in policy was intended to provide a lower bound for commercial interest rates in the context of rapidly expanding reserves. Raising the rate paid could indeed support an objective of higher interest rates as and when that was thought desirable to curb inflationary pressures.

    But it is not the only method available to do this. Regulatory measures to curb excessive growth in private lending would have a similar effect. Rather than paying interest on reserves we could instead tax other bank assets (loans) if these were increasing more rapidly than desired. We should avoid narrowing our options by seeing certain recent policy choices as ‘normal’.

    • Tim Young says:

      Incorrect. The BoE began to pay interest on reserves from May 18 2006 for interest rate management reasons, and the Fed probably would have done so earlier too, had they been able to convince sceptical congressmen that interest-bearing reserves are advantageous.

      The BoE experience should give PQE fans pause for thought, because it shows how the demand for reserves balances went from a tiny amount of less than £1bn to about £20bn on the day that interest began to be paid, at 4¾% instead of zero. The implication is that holding the interest on reserves to zero when market short-term interest rates were at a significantly higher level would reduce the demand for reserves to almost nothing, suggesting that if the BoE did not sell assets to reabsorb zero-interest reserves, they would become inflationary as market interest rates recovered. In other words, if the economy recovers under PQE, and market interest rates rise, PQE is either not free or it is inflationary.

      • Lyn Eynon says:

        Apologies if I got the exact date wrong for the BoE but as the Bank goes back to 1694 my point that this is a recent policy choce rather than ‘normal’ still holds.

        Your claim that QE (the P is not relevant here) ‘is either not free or it is inflationary’ holds only because you have not considered alternatives. If instead of paying banks for holding assets as reserves, we tax them for creating loans/deposits when the rate of money creation exceeds a level considered appropriate for desired NGDP growth, the counter-inflationary effect would be similar. The difference would be on the public purse as instead of subsidising banks we would recover some of the seignorage from money creation that is today appropriated by private finance.

        For clarity, I am not claiming here that QE should be extended without limits.

      • Tim Young says:

        Agreed. You could raise reserve requirements to force the banks to hold the outstanding stock of reserves at zero interest. But then that would amount to a tax on the banks.

        No doubt the lefties would cheer that, but the stress on the banking system would need to be considered, and if you were going to tax banks to fund infrastructure investment, why not just do that overtly?

        Note that none of raising interest on reserves, accommodating a higher level of zero-interest base money by allowing the price level to rise, or raising reserve requirements would “end” PQE. PQE hangs around until the associated investment projects have paid down the reserves (or any other form of debt) that is funding them. This is something which Murphy does not seem to allow for. He seems to think that stopping adding new projects ends PQE. It does not. You carry on paying interest, living with an elevated price level or taxing banks until the PQE borrowing is paid off.

        As I say, I would welcome a meeting to thrash this kind of issue out. As far as I can tell, Murphy seems to avoid discussions with people who can expose his misinformation, in the presence of a neutral and public audience.

  16. spatchcock says:

    Lots of talk here about government investment funded by money creation (rather than bond issuance) causing inflation. And some suggest this represents a hindrance to the BoE’s role (in controlling inflation).

    Wouldn’t something causing inflation be a help rather than a hindrance to the BoE right now? They are 2% below their target.

    • Tim Young says:

      I hope you were out in front of a mob baying for tighter monetary policy when the inflation was more than 3% over the BoE’s inflation target in 2008 and 2011.

      Or do you accept that monetary policy can only significantly affect inflation some time ahead? Breakeven inflation rates from gilts suggest that CPI (allowing for an average ¾% gap between RPI and CPI) will rise above the BoE target in about four years. Long term implied inflation rates are near the top of the acceptable band of 1-3%. In my opinion, the BoE should be tightening monetary policy a bit right now – by unwinding QE rather than by raising interest rates.

    • mrkemail2 says:

      Govt spending is always funded by money creation. It is always “money financed.” It works by crediting bank accounts.

      • Tim Young says:

        That is true by definition, since money borrowed by the government and held in its wholesale accounts at the BoE (ie the Exchequer Pyramid) is not defined as reserves, meaning that that money becomes reserves as it is paid out to the non-government sector. But don’t let any MMT nutter tell you that the government does not have to borrow or tax BEFORE (or, strictly, before close of business on the day that) it spends.

  17. @Tim Young
    “You don’t seem to understand how this works.”

    Well, Let us go back to first principles. Reserves are money either deposited by banks at the Central Bank, or borrowed from the banks at the central bank.

    The distinction is important. If banks deposit money, they receive 0 interest form the Central Bank.

    If banks borrow money from the central Bank, they pay currently 0.5% to the Central Bank.

    Before we go any further, can we just agree on that. The Central Bank is just like any other bank, it takes in deposits and makes loans. (which, to confuse the Dickens out of everybody, are both called reserves for the central bank) The central Bank pays less interest on deposits than it charges on loans. As all banks do. As otherwise the Central Bank would not be a bank, but some kind of spending department of the government.

    The only clients of a central bank are commercial banks. I go to Barclays for my banking, I have a deposit account there it is called deposits. I have a loan there it is called a loan.

    Barclays Bank goes to the Central Bank for its banking. Barclays has a deposit account there, it is called reserves. And Barclays has a loan account there , it is also called reserves. (No kidding, that is what they call it, although it really is a deposit account and the other one is a loan account)

    So if Barclays has surplus notes (cash) and deposits it with the central bank, the Central Bank takes the excess cash and and credits the deposit account of Barclays with the Central bank which pays no interest. The Central Bank paid no interest on the cash. After Barclays exchanged the cash for a deposit account, the deposit account pays no interest either

    As Barclays cannot force anybody at all to take the cash somebody deposited, it cannot create inflation. Same with the money which Barclays has in its deposit account with the central bank. It cannot create inflation either.

    So there is no risk to inflation, just because somebody deposited some cash – that is the most ridiculous thing I have ever heard.

    Now, I strongly suspect you understand all that and are just trolling! Any relation to Toby Young, by any chance?

    • Tim Young says:

      Yes, you don’t understand. Reserves are strictly liabilities of the BoE. They are positive balances in commercial banks current accounts at the BoE. And yes, they pay interest at the “Bank rate” (aka the BoE repo rate), presently ½% (see http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook140116.pdf paragraph 4).

      Banks can borrow from the BoE, in which case the BoE pays the loan amount into their reserves accounts, but these loans (ie BoE assets) are not described as “reserves”.

      At the moment, there is no need for the BoE to lend to banks because the banks are flush with reserves from QE. The banks are happy to hold those reserves, since they get the ½% interest and there are not many good alternative investment opportunities out there. But if the economy picked up, there might well be loan demand at interest rates sufficiently far above ½% to compensate for the extra risk of lending to the private sector, so then banks could be expected to try to pass on their reserves by lending – ie using their reserves to buy loan assets. Then the borrowers use the loans to buy other items, thus instructing their banks to settle the associated payments, which the banks do by transferring reserves from the payer’s bank to the payee’s bank, and so on, with the reserves passing round like a hot potato, driving up the price level until the price level is high enough that the banks are happy to hold the fixed stock of reserves relative to other assets. The lower the interest paid on reserves, the hotter the potato, and the higher the price level is bid up.

      That is why reserves which pay a far below market rate of interest are inflationary.

      Hopefully you now understand how this works, and why people who do criticise Richard Murphy for “selling snake oil”.

      • Lyn Eynon says:

        Tim, I would describe the process differently, although reaching a similar conclusion. Rather than saying banks use reserves to buy loan assets, I would say that in providing loans banks create deposits and thereby increase the broad money supply, in so far as the rate of new loan provision exceeds the rate of old loan redemption.

        The rate of loan creation depends on various factors, including general economic conditions and regulatory controls, but for this discussion let’s focus on the interest rate. Here I think we both agree that banks require an interest rate on new loans that includes a risk and liquidity premium over the rate paid on reserves which are superior assets in both these respects. Increasing the reserve rate would therefore push up market rates and restrain growth in demand for new loans. This, I believe, is how the Fed sees the process when it explains how the reserve rate provides a floor for interest rates.

        Without such restraint, the additional expenditure enabled by expanded deposits would tend to push up prices for any commodities, services or assets for which supply is less than infinitely elastic. I think it’s better to focus on this than on the circulation of reserves amongst banks. Certainly experience shows that high levels of reserves are not a necessary condition for inflationary pressures.

        So although I disagree with aspects of your description of the process, I agree that failing to increase the rate paid on reserves could be inflationary – but only if no other measures are taken to restrain the growth of loans/deposits.

        In an earlier response I suggested a ‘tax’ on loan creation when this exceeded a prudent rate of growth, although it would be more accurate to describe this as a licence fee for the privilege of creating legal tender. This could be seen as adding an additional premium to the minimum interest rate required by a bank above that paid on reserves and hence as having a similar effect on the growth of loan/deposit creation as raising the reserve rate. As I argued previously this approach would have the benefit of reducing the subsidy paid to banks by taxpayers.

      • Tim Young says:

        @Lyn Eynon on September 9, 2015 at 10:18 pm

        I am glad that you agree about the conclusion. That is the main issue, but I would mention a couple of other minor ones. I sense that your view is coloured by a monetary reformers idea of the money creation process and a bit of prejudice against banks.

        (1) Banks both create money by lending and by taking deposits (that QB article http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf that was seized upon by monetary reformers to suggest that the BoE agrees with them was misjudged. But it does not say banks do NOT lend deposits. They most certainly do.). In this case, the deposits that the banks would be lending were created without lending, by the purchase of PQE bonds by the BoE. The deposits already exist. Indeed, the bidding up of prices process I described could be led by the depositors no longer content to hold deposits at near-zero interest rates, rather than the banks lending. In that case, if the BoE paid higher interest on reserves, that would allow the banks to pass this on to depositors in an attempt to hold onto their deposits.

        (2) Pedantic quibble. Bank deposits are not legal tender, and private banks cannot create legal tender. I believe only BoE notes are legal tender, and then only in England. But legal tender has negligible significance in supporting demand for base money anyway (in fact, the BoE has historically not wanted its banknotes to be declared legal tender), as does taxation in my opinion (but I can imagine that you will disagree with that!).

      • mrkemail2 says:

        The hot potato argument has been debunked thoroughly by the empirical evidence. Denmark and the Eurozone have *negative deposit rates* and yet there is no potato movement.

        There is lots of QE going on already and there has been negligible potato activity. (Remember that current QE is functionally the same as *not issuing the Gilts/bonds in the first place*).

      • Tim Young says:

        @mrkemail2 on September 10, 2015 at 1:52 pm

        It depends what alternative uses for the reserves / bank deposits are available. You would not expect a hot potato effect if holding reserves pending other opportunities arising is the best option. This is what I think is worrying about QE. It may well be the case that QE has become the problem, in that it has driven asset prices up so much that reserves / bank deposits are being held even at negative interest rates because people think there is a good chance of another financial crisis making risky financial assets (like shares) much cheaper.

        I should also mention that I think that there is more going on than just the hot potato effect. I also consider that the backing theory, as advocated by Mike Sproul, has something to offer, and suspect that the truth lies between the quantity and backing theories. But any quantity theory component makes below-market-interest reserves an inflation risk.

      • mrkemail2 says:

        QE:
        “The sellers of that government debt don’t want to sit on idle cash, so they lend it out, stimulating spending and boosting the real economy. ”

        No they don’t. The sellers of government debt are selling because they want to buy something else. Otherwise why are they selling? Their behaviour is *unaltered* by the government offering bids into the market. They were selling anyway.

        So by definition QE has no effect on the sell side of government securities. They are being sold because a pensioner needs an income this week, or whatever.

        The effect that QE has is on the *buy* side of government securities. Somebody who wanted a nice safe security was outbid by the government. So they are going to go to the next safest option – which is put the money on deposit. They are not going to lend their money to anybody else – because they already rejected that option. That’s why they were bidding in the government debt market.

        So it stays on deposit. (Because the bank with the reserves was outbid as well, so the reserves stay on deposit at the central bank). And as we all know that is where money goes to die.

        There is no increase in lending. Lending is borrower driven.

        QE alters asset prices back to what they would have been if the bond issue hadn’t happened. It is messing around with trying to persuade people to borrow money.

      • Tim Young says:

        “The sellers of government debt are selling because they want to buy something else. Otherwise why are they selling? Their behaviour is *unaltered* by the government offering bids into the market. They were selling anyway.”

        They are selling because they can get what they perceive to be a good deal, that’s why. The BoE offers them whatever price is necessary to induce them to sell. What the sellers replace the gilts with is hard to say, but in the first instance, if they are non-bank, they get a deposit, on which they can typically get a bit of interest. What worries me about QE is that part of the “good deal” is that the gilt sellers expect asset prices to collapse at some point, and therefore accept the expectedly short-term low return on cash. QE may be just a monstrous game of chicken between the economic authorities and the markets.

        If however, their conjectures change or an even better deal comes along, either the bank holding the reserves or the non-bank holder of the deposit can mobilise the extra money created by QE. Subject to liquidity regulations, the bank can use the reserves to buy a better asset to held against the gilt seller’s deposit, or the gilt seller can use their deposit, and hence instruct their bank to transfer reserves, to buy a better asset.

  18. @Tim Young
    For the benefit of everybody, just let us go a back one step again.

    I think we agree that what I described above (relationship customer-commercial bank vs. relationship commercial bank-Bank of England) is more or less correct BEFORE 2009. The Bank of England lent money out at a higher rate (the official bank rate) than it paid on its deposits.

    That was until 2009. After 2009 everything was different. The UK started Quantitative Easing, which resulted in £375bn of extra money in the banks, which the banks did not know what to do with, as you say.

    Now, for some reason, the BoE started indeed paying 0.5% interest on this money. The Bank of England therefore changed from a bank into a spending department of the government. It does not have any interest income from the commercial banks (nobody is borrowing from the BoE as all banks have enough cash and only small demand for loans), but pays a deposit interest rate on the deposits (reserves) of commercial banks at the Bank of England.

    The BoE does not spend the money on you or me, but specifically gives 0.5% interest per year to commercial private sector banks. That is the interest it pays on the money deposited with it by commercial banks. It is therefore an industry subsidy to the banks, Which resulted over the 5+ years we have had it at perhaps a £9bn subsidy to the banking industry.

    Now, I have never heard anybody mention this anywhere, but the facts are clear. The BoE did not need to pay interest, but it chose to do so and therefore SUBSIDISES the banking sector to the tune of around £1.5bn a year.

    The reasons we have to have this interest rate subsidy to banks (we are told by the high priests of this cult called monetary policy) is because to prevent rates from falling further, as you rightly say, repeating the official line. (You say it might prevent inflation, but the whole official point of QE was of course to create a bit of inflation). But that could be much easier achieved a lot cheaper. The BoE could say: Banks have to lend money at a minimum rate of 0.5%, and not below, and that would also put a floor under the rate. A monetary policy by edict, rather than to fiddle around with “monetary operations” in the “interest rate market”. Lyn Eynon makes similar points above, citing other alternatives to straight subsidies.

    Nobody, of course, calls “interest payments on commercial banks deposits (reserves) at the BoE” a subsidy to the banking sector, as nobody calls the initial QE a subsidy either. But QE provided profits, (and liquidity) to the financial sector. If we assume a 10% profit of the £375bn to the financial sector, we now have a total cost of this “monetary policy” since 2009 of £37.5bn for QE and £9bn for interest rate subsidies since then, resulting in almost £50bn from the public purse to the financial sector. with a further 1.5bn added each year. Deposits at the bank of England by commercial banks (reserves) are still over £315bn five years after starting QE.

    So, in summary, you are defending a regime which subsidises the private sector banking industry to receive a total of£50bn.

    In addition another ongoing £1.5bn subsidy a year, when for this £1.5bn we could build at least five new 500 bed hospitals Each year.

    Are you mad?

  19. Tim Young says:

    You are not reading other comments, which is discourteous. As I mentioned in a reply to Lyn, the BoE has paid interest on reserves since 2006: https://longandvariable.wordpress.com/2015/09/02/ft-letter-denouncing-corbynomics/comment-page-1/#comment-3537

    There is no pleasing prejudiced ignorant lefties. Most of them are outranged because they wrongly believe that the BoE is subsidising banks by lending to them at what they consider a derisory rate of ½%, but when the banks are paid that rate by the BoE you consider it a subsidy. The fact is that paying Bank rate on reserves is just the monetary policy regime that has existed, for interest rate management reasons, since 2006.

    • mrkemail2 says:

      “There is no pleasing prejudiced ignorant lefties.”
      A back rub would help :b

    • @Tim Young
      “As I mentioned in a reply to Lyn, the BoE has paid interest on reserves since 2006:”

      Well, if that is the only thing I got wrong, that is truely shocking. My apologies.

      Because that means, that I am right with the conclusion that £1.5bn of taxpayer’s money is being wasted in subsidies to commercial private sector banks, whose management then pays that money to itself in huge salaries and bonuses.

      “There is no pleasing prejudiced ignorant lefties. ”

      I guess about 99.9% of the population are ignorant. And all of them would be shocked by that fact of £1.5bn waste organised by the bank of England.

      They are fobbed off with “Sorry, that is monetary policy, love, if we do not pay 0.5% on reserves, then we will have inflation”. Which, frankly, is incompetent nonsense. Or worse, fraud. The government is paying interest to the commercial private sector banks for money which the government arranged to give to them, through the £375bn QE programme in the first place. In return it gets nothing.

      Do we know anybody else, or any other company, which gets money given to it by the government, and then gets interest on top? For doing absolutely nothing? But the private sector commercial banks will.

      Now, why do we have a completely inefficient system to set interest rates, when a declaration of “The bank rate is 0.5%” would do the job just as well.

      In fact, it would not only be £1.5bn a year cheaper, it would be also more efficient if no interest was paid to banks. The idea was for QE to be used to fund real economic activity, through increased lending. Well, paying 0.5 interest will STOP the banks lending money. Why should they lend, as they have a nice, risk-free little earner? they would be stupid to lend it to start-up companies and other risky investments.

      Now, in any other walk of life you would be sacked for gross incompetence, but it seems that in the Bank of England you are richly rewarded.

      http://www.cityam.com/blog/1403005369/more-330-bank-england-staffers-are-paid-100k-or-more-heres-how-their-salaries-break

      Is it time to close this not fit for purpose institution such as the Bank of England. They really need a big cull, it seems to me.

      We are always looking for productivity improvements, the financial sector is a prime target. We could start at the top, with the Bank of England.

      • Tim Young says:

        The reason why the date matters is that it shows that paying interest on reserves was not some subsidy to banks to bail them out from the financial crisis, as is sometimes alleged.

        Why do you think any entity pays a return on its liabilities? Do you think that it is to subsidise the holders of those liabilities?

    • Lyn Eynon says:

      It is possible to consider as subsidies both BoE lending to banks at 0.5% and paying 0.5% on reserves, without inconsistency. What counts is not the absolute rate but how that rate compares to the market rate that would otherwise be available. As banks could certainly not borrow the sums required on the market at 0.5% the gap between that rate and the market rate must be considered a subsidy. Whether or not current circumstances justify this is another matter.

      The position on interest paid on reserves is more complex. I agree that the these payments facilitate interest rate management but the choice of this method over alternatives has consequences and one of those is financial transfer from the public sector to banks. This is currently worth around £1.6bn pa but has the potential to rise sharply if the bank continues to rely on this policy when rates rise. If using alternative methods instead of or alongside reserve interest payments would eliminate or reduce this transfer, then all or some of it could be indeed be seen as an avoidable subsidy.

      (Note: correction above accepted on my use of the term ‘legal tender’ but the point still holds if I substitute ‘money’ in the case for licence fees.)

      • Tim Young says:

        “it would be more accurate to describe this as a licence fee for the privilege of creating legal tender.”

        Whether bank deposit money is legal tender or not, it is a LIABILITY of the bank. Why is it a “privilege” for banks to create a liability for themselves?

  20. @Tim Young
    “The reason why the date matters is that it shows that paying interest on reserves was not some subsidy to banks to bail them out from the financial crisis, as is sometimes alleged.”

    Well, if it is true that the BoE already paid interest on deposits we could go back to 2006 and find out whether that was justified, or whether the BoE were equally incompetent then, as it is now

    “Why do you think any entity pays a return on its liabilities? Do you think that it is to subsidise the holders of those liabilities?”

    You do understand the difference between Tim Young lending me £100, and Tim Young Bank plc lending me £100?

    To illustrate:

    If you lend me £100 and I pay you back £110 in a year’s time, the £10 will be compensation for you not having the money to spend, while I can, and also to compensate you for the credit risk that I might not pay the money back. But you can only lend me £100 if you actually have the money. Not so with banks.

    Now, if Tim Young Bank plc lends me money, it can do so even though all the deposits it has are already lent out. It will just go to the Bank of England and will get the money and that is what is meant by “Loans create deposits” , It is as simple is that. Money created out of thin air.

    So previously the TY Bank balance sheet looks like

    Assets: £1,000
    Liabilities £1,000

    after the loan to MU

    Assets £1,100
    Liabilities £1,100

    That is how things worked until, say, 2008. the balance sheets of the banks increasing through higher lending.

    In 2009 that stopped. Nobody wanted to borrow, nobody wanted to lend, big depression. The Bank of England created QE, buying gilts from anybody who wanted to sell them.

    The £1,000 Assets in detail of TY Bank plc looked before QE like:

    Loans outstanding: £600
    Notes and Coins £100
    Gilts: £300

    Now in 2009 TY Bank plc decides out of its own free will to participate in the QE programme. It wants to sell its gilts, for whatever reason, even though they pay 5% interest and seem to be a good safe investment, when to its depositors it only pays 2%. Money for old rope, would be the colloquial expression.

    Now, TY Bank plc bank decides to sell the gilts. TY Bank plc gets the market value of the gilts, and uses that money to deposits at the Bank of England.

    So the Balance Sheet of TY Bank plc looks like after QE:

    Loans outstanding: £600
    Notes and Coins £100
    Money deposited at the BoE: £300

    So, the Bank receives no interest on the notes and coins it holds. Nobody does, even though it is a liability of the BoE.

    It receives 0.5% interest on the money deposited at the BoE. Now, this is entirely at the discretion of the BoE. The gilts were sold by TY Bank plc to the BoE and swapped for a deposit account entirely voluntarily, even though the gilts payed a higher interest rate (5%, which is fixed) and the deposit account paid a much lower one (0.5% at the discretion of the BoE).

    Now if I went to the TY Bank plc and borrowed £100 from it, say, through my credit card accout with the bank, then TY Bank plc would charge me a whopping 25% interest (or more!), and I would have to pay £125 back in a years time.

    The Balance Sheet would look as follows:

    Loans outstanding: £600
    Notes and Coins £100
    Money deposited at the BoE: £200
    Credit cards outstanding: £100

    So total assets of TY Bank plc would not have increased, they are still £1,000.

    But, more importantly, whether the BoE paid 0.5% interest on the “Money deposited at the BoE” or not, me borrowing from TY Bank plc via my credit card would not have been influenced by the 0.5% official bank rate at all. Neither would have any other decision in the UK economy. It is worth saying that again: Whether or not the BoE pays interest on “Money deposited at the BoE” does not make one bit of difference to the progression or health of the UK economy. It is a pure industry subsidy!

    The BoE could decide tomorrow to stop subsidising banks, and abolish the 0.5% rate it pays on Money deposited there from banks. It could treat “Money deposited at the BoE” just as it treats other liabilities “Notes and Coins” on which it does not pay any interest either. Nothing would change, other than the profitibility of the UK banks, which would be lowered by £1.5bn a year.

    Now, Tim, you not think the public should be told about this scandal, and how would you suggest it is best publicised, that instead of building 5 new hospitals a year, the government decides to give the money to private sector banks!

    For nothing in return whatsoever.

    • Tim Young says:

      You seem to be confused, perhaps hopelessly.

      If TY bank sells a gilt paying 5% to the BoE for reserves paying ½% that’s great for the public sector isn’t it? So why would a bank do it? You ought to think – beyond “for whatever reason” – about that, because it might explain to you why lowering the interest paid on reserves to 0% is not necessarily the advantage to the public that you think.

      And then you turn to routine bank lending, which you could have raised independently of QE. There, you seem to regard the increase in credit card lending as exogenous, without any relationship to funding cost whatsoever. What do you think determines the stock of credit card lending? Do you not think the bank might encourage their customers to do a bit more of it if the interest on reserves was decreased? Like by lowering the credit card interest rate to 24.5% perhaps?

      • mrkemail2 says:

        “Do you not think the bank might encourage their customers to do a bit more of it if the interest on reserves was decreased? Like by lowering the credit card interest rate to 24.5% perhaps?”
        No.

      • mrkemail2 says:

        You have forgotten that the biggest cost of any loan *is paying the principal back*. Which is why people don’t take out 0% loans in infinite amounts.

        Plus if a bank has just had its income cut on one loan (the reserve/gilt payment), why do you think the bank will then cut the income on its other loans? Banks endeavour to put their rates *up*. It’s only competition for customers that keeps them *down*.

        Bank reserves are not ‘funding’. I certainly hope not given they are a bank asset. (essentially a loan to the central bank).

        The funding comes from deposits and capital bonds on the other side of the balance sheet. The base rate, the width of the discount window and the competition from National Savings determines how much of their loan income they have to pay out the other side to maintain funding.

        Once you go to ZIRP and infinite overdraft at central bank, they don’t have to pay anything at the other side and deposit income becomes solely a matter of what National Savings will pay. At that point loan rates are just the marginal cost the bank can get away with charging, which is kept in check by customer competition.

    • Tim Young says:

      Why would you want to pay a loan back if the interest is 0%? I thought that was key to Corbynomics – the idea that we can stimulate economic activity for free, because we can pay for it with zero interest unredeemable debt – ie BoE reserves (which Murphy initially assumed paid zero interest, because his arrogance outreached his knowledge).

      In the case under discussion, in which the bank runs down reserves assets to make credit card loans, the “funding” is effectively reserves, and the interest rate difference between the two alternative bank assets is one consideration in the bank’s business decision whether to switch. Clearly, if the interest rate on reserves is reduced, the opportunity cost of continuing to hold reserves rises.

      25% interest on credit card lending may seem out of all proportion to a return of ½%, but remember that much of the high interest on credit card loans reflects the high cost of administering such small and variable loans, and the high rate of credit losses on those loans.

      • Tim Young says:

        Fair enough, but I think that involving the BoE is smoke and mirrors, and effectively funds the National Investment Bank at floating rates (ie the BoE repo rate) when long-term fixed rates are historically low. I would rather that, if there is to be an NIB, it was funded straightforwardly by selling fixed rate NIB bonds into the market.

  21. Lyn Eynon says:

    @Tim Young
    “Whether bank deposit money is legal tender or not, it is a LIABILITY of the bank. Why is it a “privilege” for banks to create a liability for themselves?”

    Quite simply because it enables banks to expand their balance sheets and the corresponding assets (loans) are profitable.

    • Tim Young says:

      The same argument applies to non-banks. Should it be a taxable “privilege” for a business to borrow money to invest in assets like, say, machinery, in the expectation of that balance sheet expansion being profitable? Or do you just have it in for banks?

      • Lyn Eynon says:

        You’re missing the essential difference. A non-bank does need to borrow to expand its balance sheet but a bank does not. It can create money by providing a loan with a corresponding deposit.

      • mrkemail2 says:

        Tim, that is roughly correct. Anyone can create their own liabilities. You can cut out this comment and I will give you £5, there done.
        That’s Endogenous Money.
        Bank deposits are protected by deposit insurance and they have access to central bank reserves via the discount window.
        This makes them “as good as” govt IOUs.
        “Should it be a taxable “privilege” for a business to borrow money to invest in assets like, say, machinery, in the expectation of that balance sheet expansion being profitable? Or do you just have it in for banks?”
        No.
        Mosler, a former small bank owner, points out banks are not ordinary businesses but public-private partnerships.
        The problem is the government, which doesn’t understand banking and can’t regulate them to serve Public Purpose.

  22. @Tim Young
    “If TY bank sells a gilt paying 5% to the BoE for reserves paying ½% that’s great for the public sector isn’t it? So why would a bank do it? You ought to think – beyond “for whatever reason” – about that, because it might explain to you why lowering the interest paid on reserves to 0% is not necessarily the advantage to the public that you think.”

    The sale of something to the government is a sale to the government. You usually get paid, that is the consideration for the sale, and that is it.

    If I am in the street-sign business, and I sell a sign to the government, which it wants, I get paid. that is it. I do not get paid, and then, in addition, the government pays me each year 0.5% on top. For ever and ever, with the lame excuse, that this is “monetary policy”. That trick seems to only work with banks.

    For commercial, private sector banks that is exactly how it works. The government bought something which it thought it wanted (gilts), the commercial bank sells it and gets paid. That should be the end of it. But no: Then it seems to get paid 0.5% for ever and ever on top each year.

    So that the banks continue to cream off 0.5% for themselves from the public purse. FOR NO REASON!!!

    Do you not think it would be better spend on hospitals? 2,500 beds in hospitals could be provided in spanking new hospitals, up and down the country, but no, it has to go to the City.

    Do you not see the problem here?

    “Do you not think the bank might encourage their customers to do a bit more of it if the interest on reserves was decreased? Like by lowering the credit card interest rate to 24.5% perhaps?”

    I think the new credit card debt would be completely independent from whether the BoE pays the banks 0.5% interest or not. And punters who pay with credit card debt are completely oblivious whether the rate is 25% or 24.5%. As, of course, you know.

    They would use their credit card in exactly the same way. It is usurious lending practices, to charge that much interest, as far as I am concerned.

    As I said before, paying 0.5% interest on its deposits PREVENTS the banks from lending these deposits out to borrowers, as banks rather sit back and get things for nothing, rather then lending it out to me at, say, 0.5%

  23. @mrkemail2
    “Mosler, a former small bank owner, points out banks are not ordinary businesses but public-private partnerships.
    The problem is the government, which doesn’t understand banking and can’t regulate them to serve Public Purpose.”

    They are, but banks are special because the government allows them to borrow an enormous amount of money, from the government, at the lowest rate possible, against a very small equity stake by the owner. If the banks want to encourage betting with it, they can. No problem. Everything which is not outright illegal, is allowed.

    That is a very, very different public-private partnership from anything else which exists. Which has a specific purpose for the public good, such as a PPP to build a road or a school.

    There is not many businesses which can lend money to someone, which is then used to increase the equity stake of the business. Banks can, it is illegal, but a certain bank is alleged to have done so.

    There are also not many other businesses which, as a matter of routine almost, pay fines to regulators which amount to tens of billions because they have not adhered to the rules of their business.

    There are also not many businesses which are regulated by a body which allegedly has more than 300 people, to whom it pays at least 100k a year, and which is singularly unable to stop the banks regularly falling foul of the regulations.

    Finally, and crucially, the banks can decide what is an asset. If they decide that the future price of anything is an asset, they can make it so, as long as it can be traded. That of course, opens the door to all kinds of abuse. But, these kind of invented assets make up more htan half of the balance sheet of each bank, and all of that is ok.

    That betting on things which don’t exist, also called derivatives trading, does not actually contribute anything to society, or has anybody ever said. “I really was treated well in this hospital, I bet it is because all of the derivatives traded in the City.”

    And, of course, the US congress and arguably the British government is completely in pay to the banking sector, the most powerful lobby organisation everywhere.

    But otherwise, banking is just like ordinary businesses, yep.

    • mrkemail2 says:

      Yes, I agree. The problem is with the govt, which does not understand banking.
      http://www.3spoken.co.uk/2013/05/making-banks-work.html?m=1
      See bank reform.

    • Tim Young says:

      “banks are special because the government allows them to borrow an enormous amount of money, from the government, at the lowest rate possible”

      Where do you get these ideas from?

      You seem to driven by ear-to-ear prejudice against anything financial, with little regard to the facts.

      • mrkemail2 says:

        See Funding for Lending Tim.

      • Tim Young says:

        Fair enough; I had forgotten FLS because the banks strictly borrow treasury bills rather than money, but it is true that they can obtain cheap money by on-lending the bills to the private sector. FLS is only about one sixth of the size of the QE programme though (ie banks are still net lenders to the state), and is conditional on the banks lending to specified types of borrower.

      • mrkemail2 says:

        Tim, I didn’t make the comment above.
        But I do think banks are special and should be regulated.
        Obviously we disagree here.
        I would say deposit insurance means bank IOUs are similar to govt IOUs.

      • Tim Young says:

        I know; you cannot always reply below the comment you are referring to.

        I agree that banks are special, because they have a large balance sheet for very little capital, so relatively tight regulation seems in order. I just think that they have become pariahs to an unjustified extent, partly because exaggerated stories about what banks did before the financial crisis and the response of the authorities get passed around those who are inclined to be hostile to finance generally, many of whom don’t know the difference between a commercial and investment bank, or even between them and fund managers, and partly because it suits the authorities to use banks as scapegoats to distract attention from their own failures.

        Don’t forget deposit insurance is only supposed to apply to deposits or part of deposits up to a certain size – about €100,000 in the EU – and that that is paid for by the banking industry itself.

  24. I forgot something, of course,

    When I trade with Tesco, say to buy a new TV, the government gets 20% of my money.

    When Harry, the hedgy trades his money with a bank, for a derivative, he pays 0% taxes.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s