In a news release, Bank of England Announces Gilt Market Operation.
The Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets.
This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.
In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.
To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.
On 28 September, the Bank of England’s Financial Policy Committee noted the risks to UK financial stability from dysfunction in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace.
These purchases will be strictly time limited. They are intended to tackle a specific problem in the long-dated government bond market. Auctions will take place from today until 14 October. The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.
Temporary? How Temporary?
It will be interesting to see how temporary these “strictly time limited” actions turn out to be and also how fast the bond buys will be unwound.
This post originated at MishTalk.Com
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Mish
effect this outcome. The operation will be fully indemnified by HM
Treasury.”
Acting as lender of last resort.
Interest, as our common
sense tells us, is the price of obtaining *loan- funds*, not the price of
*money*. The price of money is the inverse of the price level. If the price of
goods and services rises, the “price” of money falls.
Take, for example, the housing crisis of 1966. In Dec. 1964, the monetary authorities raised
interest ceilings on consumer savings accounts in all insured commercial banks
from 4.5 to 5.5 percent. During the next
seven months-January 1966-July 1966 time deposits in CBs increased by 10.1
billion, compared with an increase of less than 500,000 dollars in the savings
accounts of savings and loan associations. Housing starts decreased by almost 50 percent and for a time it was
almost impossible to obtain financing for the sale and purchase of existing
houses.
A housing crisis existed, and the Federal Reserve
authorities diagnosed the cause as disintermediation. But instead of raising interest ceilings, as
others would suggest, the ceilings were lowered to 5 percent in July 1966. The effect of this reduction in interest
ceilings on commercial bank held savings accounts was to sharply reduce the
volume of “saved” demand deposits being shifted into time deposits.
Instead, these deposits were transferred through the savings
and loan associations-and consequently became available for the financing of
the housing industry (representing a noninflationary increase in the supply of loanable funds, but no increase in the money stock). During the
August-December 1966 time period, time deposits in CBs increased only 2
billion, and savings accounts in S&Ls increased 3.1 billion. There was thus an immediate increase in the
volume of loan-funds available to the housing industry, and the industry
gradually recovered.
In the hope of forestalling similar future crises, the
Federal Reserve authorities collaborate with the Federal Home Loan Bank Board to
have interest ceilings imposed on S&Ls as well as the CBs. The ceilings become effective September 1966
with the proviso that the rates for S&Ls would be one-half of a percentage
point higher-later reduced to one-quarter of a percentage point-than the ceiling
rates imposed on CBs.
It is obvious from those data that the CBs suffered no
disintermediation in the January-July 1966 period but the S&Ls did, even
though they were not subject to any interest rate ceilings. Why this seeming contradiction?
Disintermediation occurred in the S&Ls because their
loan inventory was mostly made up of 4 to 5 percent long-term mortgages, and
they simply could not compete when most of the CBs chose to go to the 5.5
percent ceiling. The CBs suffered no
disintermediation before or after the ceilings were lowered for the simple
reason that the CBs disintermediation is not predicated on interest rate
ceilings.
See: Dr. Philip George’s theory: “The Riddle of Money Finally
Solved”:
#1 “The velocity of money is a function of interest rates”
from hand to hand but are entirely the result of movements between demand
deposits and other kinds of deposits.”
This is because there is no incentive to move their accumulated savings out of
demand deposits.”
problem is falling consumption.”
It’s stock vs. flow. The DFIs pay for their new earning
assets with new money – not existing deposits, saved or otherwise. Why do you
think Japan’s economy sunk? They save more, keep more of their savings in
banks.
system, are un-used and un-spent, lost to both consumption and investment. They
are frozen, suspended in time.
It is obvious that bank deposits that have been saved,
cannot be beneficial to the economy unless they are invested. As long as
savings are held in the commercial banks in the form of demand or time
deposits, these deposits are not financing investment, or indeed anything;
their transactions’ velocity is zero.
If, on the other hand, these deposits are transferred
through the nonbanks, they are invested or otherwise put to work. Such use of
deposits does not change the volume of deposits in the payment’s system, merely
their ownership.
The activation of these deposits increases employment, the
demand for varieties of goods and services – and the opportunities of the
commercial bankers to make bankable loans. The “loan pie” is not a fixed
entity; it grows when the economy grows.
Sheila Bair’s assessment fees on foreign deposits, changed the landscape of FBO
regulations. It helped make E-$ borrowing more expensive, less competitive with
domestic banks (the exact opposite of the original impetus that made E-$
borrowing less expensive, when E-$ banks were not subject to interest rate
ceilings, reserve requirements, or FDIC insurance premiums).
What happens after Oct 14? The BOE just guaranteed that their bond market disintegrates on 10/14. What was temporary will with 100% certainty be extended again.