End Quantitative Easing and Tax Bank Bonuses at 70% Wright’s Rant for July / August 2013 Final

End Quantitative Easing and Tax Bank Bonuses at 70%

The blame for partial collapse of the world financial system since 2007/8 seems now to lie heavily on the banking sector for reckless lending and excessive trading in financial derivatives, which few people, including bankers, fully understood.

Yet, despite the blame and criticism, Governments have continued to favour the banking sector with initiatives like Quantitative  Easing, which, again, few people understand and bank shares have again risen in value along with bank profits and bank bonuses are again at high levels.

See below for help from BBC website on QE.

As I understand QE, the Bank of England effectively makes cash available to other banks (at very low or no interest) so they can lend this money on to “real” businesses.

This is all in the interests of the so-called “lack of liquidity”.

It might be a slightly good thing to do if:

1)   It was the right thing to do

2)   It worked

Firstly, I don’t think it is the right thing to do, as I don’t see the problem being one of liquidity but more a problem of solvency and confidence.

Many companies and sovereign wealth funds are sitting on lots of cash but not investing it because they are not yet convinced now is the right time to take risks and invest.

This fear is based on many factors including:

a)   Uncertainty about the viability of the Euro as a currency

b)  Fears of high inflation

c)   Fears of more big banking defaults to come

d)  Uncertainty about growth rates in the emerging and established economies

This is hardly surprising. The problems in Euro land have not been solved, just postponed. Austerity programmes in Greece, Cyprus and Italy have lead to additional political instability and public outrage.

Adverse / uncertain weather conditions plus speculators have confused future food and raw material price expectations.

In UK, the black holes at COOP Bank and the debate about banking reform are unsettling.

Conflict in the Middle East, Africa and parts of the Far East and South America plus feelings of concern over the strength and stability of the Chinese economy are not helping.

Secondly, the banks have not used the extra cash made available to them to lend on to the right activities in the “Real Economy”.

Instead they have kept some of the cash to boost their own reserves and balance sheets (at the command of the Government), some to provide additional lending to existing “basket case” and “zombie” clients to delay collapse and administration and the balance has mainly gone to businesses in the financial sector.

The banks and financial institutions have also done well out of funding increased Government debt evidence by the rise in Government spending and the state deficit plus an increase in the National Debt.

I don’t really get the model where the B of E prints more money, gives the cash to banks without charge, then pays the banks to borrow the same money to meet the state deficit!!!

The other banking myth that has been demolished is the idea that salaries and bonuses have to be high to attract the best talent.

The number of resignations from the top of the talent pool of cheats and fraudsters and snake oil salesmen and the resulting glut of an estimated 100,000 unemployed bankers in the UK alone does not seem to have depressed wages.

There is no lack of supply to fill top positions in banking. If the Free Market worked properly then salaries should be falling shouldn’t they?

So, let’s tax the rich banks and bankers and give more to the poor who have a greater propensity to spend and boost the economy.

Oh, and while we’re at it, let’s cut back on silly infrastructure spend and poor / no return on investment spend in University and Academic research, particularly in the field of economic and social science research. But more on these subjects later.

Scrap spending on Motor Highways and Start spending more on the Internet Super and Broadband Highway and Digital Training.

BBC Online 13 February 2009  Quantitative Easing
The Governor of the Bank of England, Mervyn King, ……… the monetary policy measures introduced by the Bank will eventually “provide a significant boost to demand”.

…. These additional measures include so-called ‘quantitative easing’ or increasing the money supply. This policy has been used extensively in Japan and was something that the US Federal Reserve Chairperson, Ben Bernanke, also mooted. For his comments he was nicknamed ‘Helicopter Ben’ for suggesting the idea was like dropping dollar bills from a helicopter!

The Bank will buy assets from financial institutions, which might include government debt, bonds, mortgage-backed securities and possibly equities (shares). In doing so, the commercial banks are better able to lend money and so get the economy moving again. The process happens because of the relationship between the Bank of England and the banks.

All banks have accounts at the Bank of England, which are classed as ‘reserves’. When the Bank of England buy assets, these reserves will increase, which reduces the banks’ balance sheets? The Bank of England are hoping that banks will want to maintain their balance sheets and so they will lend more in order to do so.

Quantitative easing has been described as printing more money; the effect is that the money supply should increase, but the Bank of England will not be physically printing paper money; the increase is all in terms of book entry. The definition of the monetary base (M0) is cash – notes and coins held outside the Bank of England – and commercial bank reserves held at the Bank of England. Quantitative easing increases these reserves, so M0 will increase. The hope is that the increase in the money supply will find its way through to the real economy and lead to increased spending to boost aggregate demand.

One concern about this policy is that it might trigger inflation. The Bank of England are suggesting that inflationary pressures are falling and whilst the consumer price index (CPI) is still above the target level, it expects inflation to undershoot this target in the coming months. The risk of quantitative easing, therefore, is likely to be judged as relatively low.

Whether it will work is another matter. The experience of Japan between 2001 and 2006 did not seem to suggest that it was a massive success but, at the same time, the success of such a policy depends on when it is used and how it is used. The question will be, therefore, will the Bank do enough and at the right time?

12 March 2009 Quantitative Easing

The Bank of England …held a £2 billion auction to buy government bonds from banks. Fund managers and banks decided what gilt-edged stock (gilts) – so called because the original paper certificates had a thin layer of gold leaf around the edge – they should hold. It was revealed that the banks made offers to sell £10.5 billion worth of gilts. The auction was in two parts, the first in the morning was called a non-competitive auction. In this, the banks could make commitments to selling gilts but not set prices. Banks, it seems, were unwilling to put their toes in the water at this stage of the auction and there were no bidders.

At 2.15pm, the next stage in the process began. This was a reverse auction where banks submit electronics bids to the Bank stating what gilts they would be prepared to sell and at what price. This auction was oversubscribed by more than five times. This is the first day of a series of auctions……to inject £75 billion worth of cash into the financial system.

Having bought the bonds, the Bank will be hoping that the cash injected will find its way through to lending to businesses and individuals. The housing market is still suffering, for example, and there have been reports that despite houses being available for sale, the log-jam was in the inability of some people in the market to get mortgages.

Since the Bank’s announcement that it would be adopting quantitative easing, demand for bonds has, unsurprisingly, risen. The price of the benchmark 10-year gilt has risen by up to 20% in recent days as a consequence. The relationship between bond prices and yields is an inverse one, so yields on 10-year bonds have fallen to a record low. In September 2008, yields touched around 4.75% but have now fallen to around 2.95%. 

Cut Pensions and Health Budget Now.

It seems my views are in advance, but in line, with an increasing number of commentators.

The treasury and Prime Minister must undo the ring fencing for Pensions and Health so better activities can be supported to boost the economy.

STOP THE GROWTH

The time has come to stop the ever-growing expenditure by the state on Pensions and Health. We must also abandon the idea of state spending in these areas being maintained in real terms.

The budgets are already massive and need to be reduced as a percentage of Government Spending and as a percentage of GDP.

State Pension payments for financial year ended 2012 were £ 74 billion, out of a total Welfare bill of £160 billion, 47%.
State pension payments will continue to rise in the absence of a change of policy, another plague or a nuclear war.

NATIONAL INSURANCE MYTH

The myth that we have paid National Insurance contributions so we have already saved for our pensions is utter rubbish.

The fact that we still have NI as a separate payment is not only ridiculously inefficient but also a disgraceful deception of the fact that every state pension paid out today comes from current tax receipts and other government income

I am not saying that expenditure on Health and Pensions should remain static, only that STATE expenditure should remain static.

If people want to pay for improvements in their own pensions or health treatment that’s great, but I want to stop the state acting as a cash transfer agent between different sectors of the community.

NATIONAL DEBT

The National Debt continues to rise, as do the interest payments on it, £48.2 billion last year alone, leaving our children with even greater burdens as years go by.

We can no longer avoid the need to cut state pensions, public sector pensions and pensioner related benefits and increase taxation.

The trouble with FREE services at the point of use like the NHS and under-funded pension schemes for public sector workers and the standard national state pension for ordinary people is that the people who pay and the people who receive are not identical.
The cuts need to be substantial, around 5% and matched with a freeze on cost of living / inflation increases for the next 3 years plus, in my opinion, a selective increase in VAT on stuff mainly purchased by those on higher incomes (cars costing over £100,000, yachts, domestic accommodation over £3 million in London and £2 million elsewhere, bankers’ bonuses, salaries and profits, red corduroy trousers for men etc).

What do you think?

 

 

 

 

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