Friday, 1 February 2013

Modern Alchemy

The pensions and insurance companies explain how to magically transform bad assets in to good ones in today's City AM:

The firms instead suggest the Bank of England use QE money to buy overvalued PFI and infrastructure assets from banks then sell them to pension funds at a lower price, unburdening banks and giving pension funds a good long-term asset in one action.

The notion that the government has some magical spare QE money sloshing around is infuriating enough - the government does not hold QE money as an asset; the government (or some department of the central bank) owes QE money. It has already spent it on buying back government bonds.

If we ignore that bit, what we get is a gift of free money to banks (overpaying for assets) and another free gift for the insurance companies (underpaying for assets).

By subtraction, UK government borrowing will go up. Of course this "unburdens" banks, in the same winning £1 million in the Lottery would unburden you or me.

But why are those "good long-term" assets not already "good long-term assets" from the point of view of the banks?

Maybe you bought some shares when they were 73p and I bought them today for £1.23. We own the same shares, they are as good as each other. The fact that you paid less than I did does not make the shares any better or any worse, does it?

And those "good long-term assets" like "PFI and infrastucture assets" are only worth what they are worth because the government is subsidising them. They themselves are pushing up public sector debt.

So what these geniuses are asking for is another two layers of subsidy (and increased government debt) to people who are already entitled to one layer of subsidy (the PFI or infrastructure assets, which themselves increased government debt).


H/t Stillthinking at HPC.


Bayard said...

Yeah, but it sounds so plausible.

Mark Wadsworth said...

B, that's what's so worrying about it. I wonder how many people immediately think "This stinks" and how many think "Oh that seems like a good plan"?

A K Haart said...

I'm no economist but it stinks to me. Banks seem to run no commercial risks at all.

Lola said...

The real worry is that those that propose it probably believe it. Either that or they are simply liars and conmen, trading on the ignorance and gullibility of the (largely state 'educated') public.

My job is 80% dealing with pointless bureaucratic rule. 15% dealing with lies like this and educating clients. 5% actually doing the job.

Bayard said...

Interesting article in Moneyweek pointing out that all the wailing about banks not lending to businesses, which is used to justify ever more QE and has culminated in the government's "Funding for Lending" bank subsidy and saver-shafting scheme, was ultimately orchestrated by the banks themselves. Businesses are not borrowing either because they have enough debt, thank you very much, or they've got enough money already, thank you very much again. So the main people suffering from the borrowing drought are the banks themselves.

adamcollyer said...

It works like this.

BoE creates £1 billion and buys those PFI assets that are worth £800 million. So the bank losses are wiped out. Banks are now happy.

Pension funds buy those assets for £800 million and take £400 million in charges. Pension funds are happy.

Pension fund members lose £400 million but they are mugs anyway and taxpayers will fund their retirement in any case.

BoE has lost £200 million but that's not real money because the BoE has magic powers to create wealth at the stroke of a pen. And anyway, taxpayers can make up any losses.

And taxpayers don't count because they're all rich bastards who should be squeezed until the pips squeak. (copyright © Denis Healey).

Er... what was the problem this was trying to resolve again? Ah yes. It was to help Britain's flagship financial services industry continue driving wealth creation. It's shocking you can all be so negative about it.

Mark Wadsworth said...

AKH, L, B, I am sure there are plenty of people who think that it stinks, but clearly the government has so far gambled on us being a minority.

AC, excellent summary of how the City of London works, thanks.

Lola said...

AC - excellent.

Plus 70% of those pension fund charges go straight back to the gummint as tax - a brilliant stealth tax scam.

Bayard said...

AC, presumably the BoE "creates" that £1Bn by devaluing the currency: the total amount of sterling in circulation is increased, but the total amount of debt - i.e. the deferred expenditure - it represents remains the same, therefore each invdividual pound is worth a tiny bit less. In that case the BoE has in fact stolen the £1Bn from everyone who holds sterling, i.e.savers. Is this right?

adamcollyer said...

B, don't you understand that savers are a problem? They are keeping their ill-gotten gains for themselves instead of spending their money and creating wealth via the multiplier effect. Most of their savings are obtained by grubby means like making profits or working for a salary after all.

Bayard said...

AC, I can quite see that banks don't like savers. As you say, as far as they are concerned people should spend all their money and borrow more, so that the banks can earn money on the interest on the loans, instead of having to pay it out on the interst on deposits. However, to be fair to savers, some of them have earned their savings genteelly through rents, property speculation or inheritance.