19.8.09

UK's Endless Pump Priming

Sterling did well to lose only half a cent on the dollar after the Bank of England minutes.

The Governor wanted not only to extend the Quantitative Easing programme by another 75 billion sterling but to apply it to a wider range of government bonds.

Though he was outvoted by the rest of the band on the deck of the good ship Bank of England, who opted for an extra 50 billion, it suggests concern about the locaton of the lifeboats is growing.

In other words, "how do we get out of this?"

PUMP PRIMING

King’s comments suggest the BoE is being sucked into ever greater issuance. As one poster on the FT puts it, “Cornering a market is very very difficult. Once you have started you simply cannot stop. So the extremely thin/illiquid gilt market will hold up longer than we all think, but WHEN (not if) it bursts it will be brutal.”

The original idea (at least how it was sold to the politicians and public) was to pump prime the corporate debt market - accepting bank and other assets in return for printed money. Increasingly that printed money goes to support government spending.

That's right. The government borrows money (technically, issues debt) which is financed by the Bank of England (technically, creates money and buy's the government's debt).

QE is a mechanism to move to support unsustainable asset prices. That means bubble support.

TWO YEARS INTO THIS CRISIS, banks:

• Don’t know or won’t say how much money they have lost
• Because they dare not put a value on assets

It’s not, as bank apologists will tell you, a moot point because these assets are going to rise in value. Even if banks can value their assets, they won’t reveal a figure that would affect the terms and conditions of their bailout by the taxpayer.

WHERE'S THE MONEY, HONEY?

If assets turn out to be worth less than government estimates, then the taxpayers’ bill is dramatically higher than anticipated.
If assets turn out to be worth more than government estimates, the bank bailout is more excessive than currently appreciated.

Ok, the bankers have had a stressful year. But can't they answer the question, "Where's the money, honey?"

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