Friday, 6 March 2015

Oh, so now they notice?

From the BBC:

The Serious Fraud Office (SFO) is investigating the way the Bank of England lent money to banks during the financial crisis, the Bank has said.

The Bank commissioned its own inquiry last year, then referred the matter to the SFO. Liquidity auctions enabled banks to access extra cash during the credit crunch that followed the collapse of Northern Rock...

As the financial crisis bit in 2007, the Bank launched a new type of liquidity auction - called long-term repo open market operations - whereby banks were allowed to put up a wider range of assets as collateral against the three-month loans. These assets included government bonds and mortgage-backed debt securities...

The exact focus of the SFO investigation is unknown, but BBC business editor Kamal Ahmed believes it may want to find out whether the banks exaggerated the value of such collateral to makes themselves look stronger, with or without the knowledge of Bank of England officials.

Surely we all knew this anyway?

The whole thing since 2007 has been a freebie for the banks and a blatant bank bail out at taxpayers' risk and expense. If the banks' assets had been worth what they told the Bank of England they were worth, then they wouldn't have been insolvent/illiquid and hence the bail out would not have been necessary in the first place.

The question answers itself: the Bank of England must have known that banks were overstating the value of their assets, end of discussion.


Dinero said...

Not nessasarily so the BoE doesn't have the same commercial pressures to value its Balance Seet to market value and can hold assets to face value maturity.
Also the buy back price forms part of a Repurchase agreement and so it should be neutral. Also its part of the remit of the CB (unofficialy possibly) to be the lender of last resort which means it will be helping out commercial banks over an above what the commercial market provides in its absence.

DBC Reed said...

This action seems like small beer when the commercial banks fraudulently make out they're lending their customers money when they are creating entirely new money for the purpose-and charging interest on it.Some scandals are so big they are invisible, especially to our MP's who, according to a Positive Money survey, think money is only created by the State.
Why do we have to live in a Science fiction horror story?
Even if they kept the present money creation system, it would only need a Land Value Tax to stop all the new money going into land price inflation. But they seem too obtuse for that as well.

Bayard said...

"mortgage-backed debt securities"

Aren't these known in the trade as "junk"?

"The question answers itself"

Well, not the real question, which is why this is being done know or, indeed, at all?

Dinero said...

DBC Reed what fraudulent about it , financial contracts are always created from the concent of the counterparties to the contract.

Dinero said...

DBC Reed

If you find Bank credit objectional what do you make of PayPal credit now that PayPal have started offering PayPal credit.

DBC Reed said...

The language of the contract is fraudulent :banks do not lend money; they do not make loans.

Mark Wadsworth said...

Din, you're missing the point. It was supposed to be a soft loan to banks and bankers for below market rates. It was fundamentally a fraud.

Even if the bankers had rocked up and admitted that their assets were worth little or nothing, they would have got the loans.

DBC, LVT-man will sort them out :-)

B, why was it being done? We all know why it was being done, there's no big secret.

Din, that's the point, if you accept the basic premise that it is acceptable for the government can make soft loans to their best mates at taxpayers' risk and expense, then there was no fraud.

Random said...

BTW, the Guardian have come up with some good homey propaganda:

DBC Reed said...

I'm coming to the conclusion that it may be MMT man that rescues LVT: State creates its own money so there is no need for deficit and borrowing requirement and no need for LVT to raise huge sums of tax revenue;LVT just prevents land price inflation while State creates money and chucks it about wildly.Maybe on National Dividend au Douglas with unearned income for all.That's the three prongs of Green Party policy taken care of in passing.

Bayard said...

Mark, by "this" I meant the investigation, not the slush money.

Steven_L said...

Perhaps SFO investigators need to be suitably distracted in time for 'pensions freedom day'

Mark Wadsworth said...

R, it's a strange article.

"The changes to housing benefit entitlements have left many people – who by definition can’t afford their housing – out of pocket, as their private rent is deemed too expensive.

Inevitably, this falls not on the landlord who sets rates, but the tenant."

DBC, maybe, even though the MMTers are not selling their idea very well.

B, ah yes, that baffled me as well.

SL, I thought all the senior civil servants were on final salary schemes?

DBC Reed said...

Positive Money is running a better propaganda campaign than the various LVT groupuscules (real word BTW).
When I started out on the economic reform trail 35 years ago, the Labour Land Campaign was attracting press attention and there was zero reference to the Banks' creation of money problem.The situation is now reversed although the Green Party and Martin Wolf push both equally.

Random said...
Positive Money is a load of BS.
Yes, banks can create their own IOUs. So can anyone. Bank accounts are not "money" as such.
For example, if you print out this comment, I promise to give you 1p, but you will accept that Positive Money is BS.

Mark Wadsworth said...

DBC, they are running a superb campaign but are fundamentally missing the point, despite being headed vaguely in the right direction.

R, correct.

It is always the borrower who 'prints' the money. So the mortgage borrower prints some money and gives it to the bank, which the bank then repackages as its own money i.e. gives the vendor a bit of paper (a cheque or a deposit account statement) with the same number on it.

Random said...

The fundamental thing to remember is no net financial assets have been created. These have to be created by govt crediting bank accounts (spending) and interest from nat savings.

Bayard said...

"Yes, banks can create their own IOUs. So can anyone. Bank accounts are not "money" as such."

Well, I've just looked at the money in my wallet and it says "I promise to pay the bearer on demand..." on it. AFAICS, that makes it an IOU. Banks have always done this and, in Scotland, they still do, that is issue bits of paper with "I promise to pay..." on them. The only difference in England is that, for some reason, only the Bank of England can actually print the things. Apart from there being a problem with money laundering regulations and security, there is nothing to stop you taking away your newly created money that the bank has just lent you in the form of lots of these little bits of paper.

Bayard said...

"The language of the contract is fraudulent :banks do not lend money; they do not make loans."

What is a loan then? If I borrow £10 off you, isn't that a loan? What is the difference between you giving me a tenner with me promising to return it at a given date or the bank giving me ten thousand tenners under the same arrangement?

DBC Reed said...

If I lend you a tenner by means of cheque, then you find I've nothing in my account that's not a loan.Its fraud.Ditto banks have no backing for loans.
The Bank of England fessed up to the whole caper in their stunningly honest "Money creation in the Modern Economy" Bulletin last year.Quotes from beginning: "..the majority of money in the modern economy is created by commercial banks making loans" 2nd bullet point of "popular misconceptions" " banks do not act simply as intermediaries lending out deposits that savers place with them and nor do they'multiply up' central bank money to create new loans and deposits" .
The above remarks would, when I started out, have only come from extreme monetary reform theorists. It is a most peculiar experience seeing them coming from the BoE.You have to wonder why the BoE did it.
@MW How is Positive Money missing the point? What point?

Mark Wadsworth said...

DBC: "If I lend you a tenner by means of cheque, then you find I've nothing in my account that's not a loan.Its fraud."

Why would anybody do that?

If you make out a cheque from an account with nothing in it, then whether this is fraud or not depends on whether you will honour the debt in some other way or whether you intended to obtain goods and services by deception.

"How is Positive Money missing the point?"

Like you, or most people, they don't understand bookkeeping or banking.

So while they are very vaguely aware of what the issue is (private rent collection and hence inflated land prices) they think that the problem starts with the banks and not with private rent collection, so they offer a completely daft solution, which banks will soon work out how to circumvent.

If I were advising a bank under their rules, we'd be back to normal within about a week.

Please read and understand the link which Random posted above for a few pointers.

Dinero said...

>DBC Read
granted the language used is awkward - borrower ,lender, deposit ,

howeve the process is not inequitable -

the bank takes an IOU onto their books and issues there own IOU for the use of the customer which is more acceptable in commerce and more useful for the customer because the bank has capital to maintain the value of the IOU if the customer's personal IOU defaults because the bank issues less IOUs than they are given, the difference gives the banks IOUS a capital buffer.

Mark Wadsworth said...

Din, yes, good summary, that's much the same as what I said above at 13.19.

DBC Reed said...

Having ploughed my way through some of the texts meant to make me see the light, I return to the old beliefs , renewed by the strange, confident, experience of their now being orthodox.You lot are now the cranks;please try to disabuse yourselves of minority , fanciful notions some of which contradict what you proclaim them to say (and more of the patronising bullshit I am so used to).Far from disproving MMT ,Neil Wilson has prepared a Primer on Modern Monetary Theory in which he declares "Economies out there like Japan and the US are not behaving as classical money theory suggests they should. Our government has issued £375 billion of new currency and nothing has happened. The data is suggesting strongly that we don't understand what is happening. Perhaps MMT explains it. At the moment I don't know" Hardly a convincing rebuttal of all things MMT!
With the blog you have kindly instructed me to read for my own good at my somewhat advanced age, Wilson does not say that the present system does not create money : it just says that Sovereign Money is no better by having banks create money too.
26Nov" The point above is that banks still create money; its just that SM tries to pretend it isn't"(Grammar?)

Mark Wadsworth said...

DBC, you are back to your old habit of accusing me of saying something I never said and then debunking that.

The MMTers make some good points, I have never said it is all nonsense.

Their observations are

1. Govt does not need to 'borrow' and pay interest to spend, it can just spend i.e. print.

2. This would lead to hyper inflation, so governments can deal with this in two ways:

a. offer to pay interest if people promise not to spend their money immediately.

b. Unprint the money by collecting taxes.

As your quote points out, if you observe the real world, it does largely seem to stack up.

Random said...

Hmm Mark I don't think you fully understand MMT. Governments always spend by crediting bank accounts. They always 'print money.' The borrowings are corp welfare.
Spending and not issuing bonds is no more inflationary. For example, the Cameron govt supporters argue
pensioners will spend interest payments in the economy. I believe this is 'trickle down theory.' Anyway, it is likely to be MORE inflationary than just spending money.

Mark Wadsworth said...

R: "Spending and not issuing bonds is no more inflationary."

Yes, the last few years of QE insanity would show that to be the case.

But it is a question of fact and degree.

People aren't 'spending' their freshly printed money because they are worried about the future and there is little sensible to spend it on.

What if the UK government stopped unprinting money (i.e. collecting taxes), kept spending the same and the economy boomed again?

Do you really think that we would not have hyper inflation?

Random said...

All I am saying is that 'borrowing' money is no more inflationary than 'printing' it. In fact it could more, as the interest payments are more spending. I never said to stop collecting taxes!
There are two purposes for taxes in MMT:
Taxes create demand for the currency. You can't pay your TV License or Council Tax in Bitcoin or Gold. LVT is perfect in this regard as it does not affect economic activity. It also cannot be avoided.
Granted I support LVT for other reasons (I see most taxes as theft.)
Although taxes do not 'fund' spending as such, they drain resources from the private sector, leaving more room for the public sector. When at full employment and capacity, spending is inflationary.
MMT views govt as 'consolidated govt sector' and interactions between bits of the govt are not important. Outflows and inflows are.

Mark Wadsworth said...

R: "I see most taxes as theft."

I'm left-libertarian.

Land ownership is theft and taxation is theft, so make the punishment fit the crime.

And LVT does not drain resources from the productive sector.

It takes the unearned income from the non-productive sector and redistributes it (either directly via CI or indirectly by reducing taxes on the productive sector).

Random said...

I should also empthesise that auto stabilisers like the job guarantee are important in MMT.
Job guarantee workers produce output and 'buying the bottom' of the labour market is not likely to cause inflation.
Inflation in MMT is caused by buying resources that are not there.

Random said...

Taxes IN GENERAL drain private sector spending capacity.

Random said...

If a 100% Land Value Tax was implemented tommorow, would aggregate demand rise or fall? Taxes don't go anywhere- these revenues can be seen as burnt or put in a bin. Even rentiers like landlords spend money.
This is why you have to cut other taxes and raise spending in addition to a LVT. In addition land is used better
A tax on upper classes for example save more of their money and so the effect is less on demand.
This is why you cannot see LVT fully as a privately collected tax. The landlords spend greedily some money on themselves.
If all the landlords had printing presses you could see it, if they collected land rents in their own currency. The govt spending always works by creating new money and has to come before tax or borrowing back their own IOUs.

Dinero said...


Goverments don't print money when they spend they spend money that is allready in existence and that they have allready collected or borrow money that allready exists to fund any deficit.
Your description puts to much emhasis on the governments role and ignores the money created by the private sector.

Random said...

How would the private sector do that? It would be counterfeiting.
Unless you mean countries in the Eurozone or state and local governments.
You are viewing govt as a currency user not issuer.

Dinero said...

The government hardly ever prints money. To do that they would have sell bonds to deposit creating commercial banks , or get overdrafts from commercial banks.

However they don't do that, they instead sell bonds in the bond market and aquire money that allready exists.

The private sector creates money by commercial bank loan agreements.

Mark Wadsworth said...

R, I have covered all this stuff ad infinitum.

Let's assume that govt spending and govt taxation are entirely independent things.

There is good government spending (law and order, roads, refuse collection), neutral government spending (welfare and pensions) and wasted government spending (bank bailouts, windmill subsidies, quangos).

There are bad taxes (income, output, employment, profits) and good taxes (taxes on rents).

Ignoring the whole 'money' nonsense for one minute, government spending is transfers TO certain people and taxation is transfers FROM certain people.

It is not very difficult to hit the sweet spot so that government spending is near the top of the cost-benefit curve and taxation is near the top of the 'not depressing the productive economy' curve, by and large, the two come out the same.

So all that 'government spending' boils down to 'transfers back from the unproductive economy to the productive economy' or at worst 'redistribution of unearned income'.

So in net terms, if you got your spend and tax policies right, there'd be no impact on the 'private' sector at all, it would be transfers from one part of the private sector to other parts of the private sector.

Din, I'm afraid to say you're wrong.

When governments spend money, they print it; when governments borrow money they print it. It's all the same thing.

The key is to look at the other half: when governments collect tax they 'unprint' money again.

Dinero said...

> Mark that is wrong

When governments spend, it is money that was collected in taxes or borrowing

When the government borrows it borrows deposits that allready exist and transfers those deposits from the account of the bond buyer

Random said...

D, look at this:
I have a feeling Dim is in a Eurozone country where it is different and they surrender sovereignty to the ECB.
MW, agreed. But if you want the private sector to save overall you have to constantly have deficits. A country with net imports needs constant deficits for foreigners to save. All I am saying is there does not have to be corresponding money given to than is taken. Taking money just gives demand to the currency.

Random said...

D -"When the government borrows it borrows deposits that allready exist"
What made these deposits? Govt spending. The spending comes first.

Dinero said...

Hi Random

I'm in the UK

The government has a central bank . The Bank of England for example, but to call the government currency issuer is impresise and misleading. the vast majority of money is created by the private sectors actions.

The deposits are created by loan agreements such as mortgages. Government spending does not create deposits it re-arranges them. The vast magority of deposits are created by the private sector and the government aquires some of thier spending power by taxation and borrowing.

Mark Wadsworth said...

R: "But if you want the private sector to save overall you have to constantly have deficits."

No, you are getting bogged down in all this money nonsense.

Imagine a barter or non-rentier economy, where land is communally owned and everybody is so well behaved and public spirited that they do no need much in the way of 'government' or 'government spending.

Surely, with improvements in education, technology and so on, it is possible for the total wealth of this society i.e. overall savings and investment to increase?

All this government deficit spending is a relatively new invention - past hundred years or so.

Are you really saying that there was not a huge increase in overall wealth between the stone age and one hundred years ago?

Random said...

It is just an accounting statement. I am sure wealth can increase. But for savings to increase you have to either be running govt deficits and/or trade surpluses.
True, but from 1945 to the mid 1970s, the golden age of capitalism, saw demand management by governments and large deficits. This has nothing to do with the size of government - large governments can have small deficits and vice versa.
There has been large increases in wealth, but there was widespread poverty in the Industrial Revolution until governments intervened. And government spend on megaprojects. We saw huge progress such as the Moon Landing and many inventions were spinoffs from military research.
Granted, rent controls and less homeownerist policies helped significantly in fact.
But these two ideas are not contradictory.

Random said...

And you can't apply what is in a barter economy to the modern world.

Mark Wadsworth said...

R, I assume that you are confusing 'savings' (households spreading consumption evenly over time) with 'investment' (businesses expanding productive capacity).

The optimum overall savings rate is ZERO, the optimum investment rate is whatever it is to maximise output/consumption.

"And you can't apply what is in a barter economy to the modern world."\

Yes I can. Once you realise that money is a unit of measurement* and not a thing in itself, what we are left with is a barter economy.

Most people and most businesses, on average, end the month with the same amount of 'money' (i.e. cash or debt) that they started with. They produce and they consume roughly the same amounts. It all nets off.

* 'Money' is a unit of measurement of indebtedness. For every £1 'on deposit' there is £1 'overdraft, mortgage or unpaid credit card bill'.

If you net off monetary assets and liabilities, the sum total is precisely ZERO.

Random said...

By 'savings' I refer to paying down debt also. The change in net financial assets of the private sector.

Random said...

It seems household debt is very high due to the ridiculous credit binge and household bubbles. So it seems the government will have to run deficits for a while to get things down to a sensible level.

Lola said...

R. Would it help if you understood that 'money' is the invention of the market, not government? You have to take 'money' out of the tax and spend discussion. Government takes wealth out of the productive economy (I will come back to rents in a moment), destroys some and then hands some back in the way of 'services' and capital spending. The trouble starts when governments monopolise money and realise that with the institution of a central bank and the collusion of commercial bankers they can play games with 'money' to buy votes - the welfare / warfare state needs lots of money that cannot be raised by taxation. All this bad money from nothing distorts production, aka wealth creation since it has not come into existence as a result of real wealth creation. There is a good link here

Returning to land rents, these are de facto taxes. These rents include mortgage interest. As MW points out land is the ultimate monopoly. Rents arising from it are not earned, are not the product of labour. And as land is one of the three legs of production - and it is a monopoly - it consumes all profits.

Overall pretty well all economic problems stem from bad money, land monopoly and rapacious rent seeking self serving government bureaucracies. We invented Parliament and the separation of powers to try and control this tendency.

It's not working out well, is it?

Random said...

No, it is not. I think the UK needs a written constution, there has no really been any separation of powers since Bliar was in power and after the "abolition of parliament" bill.

Random said...

What is your view on this?

Lola said...

R. I absolutely do not think the UK needs a written constitution, primarily because it would be written by the very people it would be designed to control.

What was the 'abolition of parliament bill'?

Random said...

Essentially it is saying some form of spending is a necessary evil to ensure all resources are put to work, even if 'bad money' as you say.
Also, how would deal with problems like the 1930s depression?

Random said...
Scary stuff.

Lola said...

R The link to the electric analogy. They are confused. we do, actually, live in a barter system. It's that we use 'money' to make barter more efficient. That's the point of the Mises link.

Lola said...

R. @ 23:31. Why do all resources need to be put to use? Resources aren't consumed, they are created. The proposal sounds like more pointless and destructive interventionism to me.

Lola said...

R The LRRA 2006 needs swiftly repealing.

Random said...

L, the problem is without this you have a bunch of unemployed doing nothing and the social costs that go along with that.
So giving them a job sets a minimum standard.
It also allows for inflation to be controlled.

Derek said...

Sort of on topic. There's an interesting series on Radio 4 at the moment about the history and origins of debt and money. Promises, Promises: A History of Debt. I've found it pretty good so far.

Lola said...

R. The reason you have 'a bunch of unemployed doing nothing' is because of bad money not despite it. That's what the Mises article is about.
In any event the Keynesian saw that you can have either inflation or unemployment is a fallacy.
Inflation is always and forever a function of money. In the times when we had private money - which was most of history - there was never (or very rarely) any inflation.

DBC Reed said...

@MW Just to catch-up: I wasn't doing my usual thing ( though I would defend my right to do my usual thing very strenuously).You are doing your usual thing: fielding criticisms directed at somebody else, I think Random, who was dissing Positive Money as bullshit.
God almighty this topic has taken off!Just listen to the voices of economic orthodoxy I say ( the Bank of England, Martin Wolf).

Bayard said...

"If I lend you a tenner by means of cheque, then you find I've nothing in my account that's not a loan"

So? if I need to borrow a tenner from you, why should I care where you got your money from, or whether you, too had borrowed it? All I care is that I can get £10's of goods or services in exchange for that money. I am assuming, BTW, that you are not talking about winding me up by "lending" me money using a dud cheque.

Anyway, since all money is debt, as Mark explains above, then all money in your account at the bank is a loan of one sort or another.

Random said...

L, the point of the job guarantee is just that- full employment and price stability. You can have BOTH full employment/price stability. Effectively you use an employed buffer stock. So there is no NAIRU. The unemployed rate becomes the rate of people on JG.
Are you advocating free money e.g. floating banknotes?
If there was a shortage of oil, would you still get inflation in your model, Lola?