The Bank of England remembers its wartime roots — Claire Jones

Hidden in last Thursday’s announcement from the Bank of England that it intends to buy another £200bn-worth of mostly government bonds was this line:

The MPC will keep under review the case for participating in the primary market.
It might sound like dull techno-speak, but the mere possibility of the Old Lady of Threadneedle Street buying bonds directly from the government (i.e., in the primary market) is a big deal.

Since gaining independence, central banks have liked to see themselves as unsullied by politicians’ whims. While the clear distinction between monetary policy and government spending blurred in the aftermath of the financial crisis, until now central banks tried to keep their distance by only buying government bonds in secondary markets – that is, from other investors – as opposed to directly from the state.

However, direct financing is far from novel....

This makes no difference in reality but the shift in perception is huge. The veil is being drawn back on the  ability of the central bank to provide funding for government directly. The government as big household or firm analogy is exploding. It is now becoming clear that there is a vast difference between a currency issuer and currency users, and that the government is the monopoly provider of the currency, with all that implies.

FT Alphaville
The Bank of England remembers its wartime roots

Claire Jones

Peter May — Paul Mason demonstrates all too clearly why much of Labour don’t ‘get’ money

I confess I expected better. Paul Mason misses the fact that it is not ‘hit and hope’ it is actually the way money IS created – the neoliberal deceit is the ‘fact’ that we tax and spend.

The Treasury has after all, admitted as much as, indeed, have the Bank of England in September 2017: “Regarding whether taxation is necessarily required to finance government spending the answer is no, it is not. Along with raising money by taxation, governments can borrow money and they can create money outright.”…

Actually, money is created outright as credit. Banks extend loans that create deposits by crediting deposit accounts. Governments that are currency issuers create tax credits denominated in the currency as the unit of account and use them to credit nongovernment accounts, nowadays usually through the central bank as the government's fiscal agent.

According to the "law of reflux" money returns to its source. Credits that banks create through lending are used to pay down loans, which destroys the funds created by the deposit. Payment of tax credits to the government in payment of tax obligations destroys the funds created by the initial issuance. Of course, this is in aggregate, taking flows over time into account.

Spending and taxing are separate different fiscal operations for a currency issuer. Spending must logically precede taxation. Taxation, as well as payment of fees, fines and tariffs, destroy funds created through issuance, which occurs through government spending including transfers.

Spending is therefore offset by taxation and, in terms of "funds" spending with respect to sources and uses, but taxation is not used operationally to "pay for" spending. Spending and taxation are a separate fiscal operations, and tax policy is separate from spending policy. Taxes don't "pay for" spending — ever — under any circumstances.

Hence, it makes no sense to say that taxes are needed to "afford" spending, or that spending without offsetting taxes is "living beyond our means," or that liabilities are "unfunded." In terms of accounting statements, funding is simply a matter of accounting entries ("keystrokes on spreadsheets") that balance the books.

For a full explanation of the MMT POV on money and banking and finance, see Eric Tymoigne's book draft, The Financial System and the Economy.

Progressive Pulse
Paul Mason demonstrates all too clearly why much of Labour don’t ‘get’ money

Peter May

Lars P. Syll — How money is created

David Graeber and the Bank of England.

Lars P. Syll’s Blog
How money is created
Lars P. Syll | Professor, Malmo University

Norbert Häring — The curious silence of the British media regarding Mark Carney and the secretive G30

Central bank "independence." Say again?

Oh, right. Central bank independence means political indolence of technocrats from influence or intrusion on the part of elected representatives. It has nothing to do with influence by financial industry cronies.

Real-World Economics Review Blog
The curious silence of the British media regarding Mark Carney and the secretive G30

Norbert Häring

Also

Jean-Claude Trichet cannot be chairman of the ECB’s ethics committee any longer

Tom Rees — Bank of England hikes interest rates for first time in a decade

• Bank of England increases interest rates for the first time in a decade in order curb high inflation squeezing UK households
• Base rate lifted from 0.25pc to 0.5pc; Mark Carney will give a press conference at 12.45pm to explain the central bank's decision
• Bank of England last hiked interest rates in July 2007; interest rates fell to historic lows to help the UK economy recover from the financial crisis
• Pound plunges on currency markets on dovish commentary from the central bank

The Telegraph
Bank of England hikes interest rates for first time in a decade
Tom Rees

See also

Business Insider
BANK OF ENGLAND HIKES RATES TO 0.5%

Also

Bitcoin has been on a tear over the last week, posting record highs on consecutive days. The digital currency had not been higher than $6,300 at the start of the week but has now gained $700 on that level in just a few days.

The recent run has been helped by news on Tuesday that CME Group, the world's largest exchange operator, plans to introduce bitcoin future contracts in response to client demand. This is seen as a stamp of legitimacy from the world of traditional finance for bitcoin.

Traders are also speculating that this week's bull run is partly helped by a coming "fork" in bitcoin's underlying software. The SegWit2x software update is scheduled for November 16 and could split bitcoin in two, creating a new currency.

This has happened in the past with bitcoin cash and bitcoin gold and, in those cases, bitcoin holders got those new coins free. As a result, investors may be piling into bitcoin in the hopes of a SegWit2x dividend. 

Bitcoin passes $7,300
Oscar Williams-Grut

Also

Brent crude has successfully consolidated its position above $60 per barrel this week, and WTI is approaching $55 per barrel, which would be the highest oil price in more than two years.

OilPrice.com

Why Oil Bulls Are Running Rampant

Nick Cuningham

Bill Mitchell — A former UK Chancellor attempts to save face and just becomes confused

On May 6, 1997, just 4 days after coming to office in what was to become Tony Blair’s retrogressive regime, the then British Labour Chancellor Gordon Brown announced that Labour would legislate the so-called independence of the Bank of England. The BBC claimed this was the “most radical shake-up in the bank’s 300-year history”, which gave “the bank freedom to control monetary policy”. Gordon Brown’s legacy to the British people, of course, is in his famous ‘light touch’ regulation, which he boasted about in the lead up to the GFC but went silent about soon after. But he has come out of the woodwork recently to reflect on his decision to set up the Monetary Policy Committee (MPC) within the Bank of England and abandon the practice where the Chancellor and the Governor of the Bank would meet on a monthly basis to determine interest rates. He claims that decision kept Britain out of the euro and was a great success. But then in the same speech he railed against the ‘political’ intrusion of the MPC into broader fiscal policy debates and its failure to conduct monetary policy correctly during the GFC. A very confused narrative. The point is that central banks can never be independent of treasury departments and the claims to the contrary were just part of the depoliticisation of policy that accompanied neoliberalism. Brown is also wrong that setting up a separate MPC kept the nation out of the euro. Britain realised the euro would be a disaster long before 1997....

Bill Mitchell – billy blog
A former UK Chancellor attempts to save face and just becomes confused
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

American Banker — Bank of England completes cross-border payment proof of concept

The Bank of England is on a mission to replace the settlement service. Despite its view that blockchain technology is "not sufficiently mature to support the core RTGS system," the central bank wants the next version of the system to be compatible with distributed ledgers in the private sector, according to the release.

While the proof of concept was conducted on a simulation isolated from the actual system code, its successful conclusion reinforced this aim, the Bank of England said....

Goin' for it.

American BankerBank of England completes cross-border payment proof of concept

Brian Patrick Eha

Helene Lee and Asani Sarkar — The Role of Central Bank Lending Facilities in Monetary Policy

Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve’s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed’s discount window is less integrated into the monetary policy framework. In a follow-up post, we will discuss differences in the central banks’ counterparty and collateral policies.

FRBNY — Liberty Street Economics
The Role of Central Bank Lending Facilities in Monetary Policy
Helene Lee, senior associate in the Federal Reserve Bank of New York’s Markets Group, and Asani Sarkar, assistant vice president in the Bank’s Research and Statistics Group

Bill Black — Bank of England: Taking the Banks’ Fraud Proceeds Slows Growth

Crime pays! Who knew?

Elite bankers and the pathetic economists who serve as apologists for their frauds specialize in proving our family saying that it is impossible to compete with unintentional self-parody. The subtitle of the WSJ article providing the latest proof is “Fines on banks translate into $5 trillion of ‘reduced lending capacity,’ bank says.” The “bank” referred to is the Bank of England, which is supposed to be the UK’s primary bank regulator. To be kind, the “study” by BOE is so embarrassing that a better descriptor of the BOE would be “fraud enabler.”

New Economic Perspectives
Bank of England: Taking the Banks’ Fraud Proceeds Slows Growth
William K. Black | Associate Professor of Economics and Law, UMKC

JP Koning — Central banks deposits for you and me

Whatever the case, don't be fooled by the technological terminology; if the Bank were to open itself up, this would be more of a returning to the fold than a bold new future.

Interesting post in light of discussions in the comments here at MNE. Personal accounts at the Bank of England are historical rather than unusual.

Moneyness
Central banks deposits for you and me

JP Koning

Larry Elliott — Bank of England chief economist calls for big post-Brexit stimulus

The Bank of England’s chief economist has called for a big package of measures to support the UK’s post-Brexit economy, stressing the need for a prompt and robust response to the uncertainty.

Andy Haldane made it clear the Bank’s monetary policy committee would do more than merely cut interest rates from their already record low of 0.5% when it meets in August.

The Bank’s chief economist used a speech to warn that decisive action was required at a time when confidence had been dented by the shock referendum result.

“In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn.

“Given the scale of insurance required, a package of mutually complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August inflation report round.”

Ratchet up private debt with low interest and easy credit instead of public debt (increase fiscal deficit).

The Guardian
Bank of England chief economist calls for big post-Brexit stimulus

Larry Elliott

Adam Posen of the Peterson Institute and former BOE policy wonk, doesn't understand BOE sets rates

First of all we know about Pete Peterson and his self-serving and subversive mission to end Social Security.

He's been known to hire lackey's who are nothing more than relentless, high paid human propaganda machines for his sick mission. Guys like David Walker, that lying SOB who I got to admit that Social Security checks would never bounce and there was no issue with insolvency.

Now here's Adam Posen. He's the head of the Peterson Institute a deep pocketed think tank that works to spread the lies and support the liars who would make Peterson's dream of ending Social Security come true.

Posen was on the Bank of England Monetary Policy Committee, yet here's what he said back in February with respect to the possibility of Brexit.

"Very high interest rates."

So there you have again, another example of a guy in a high policy post who doesn't have a fucking clue that it is the Bank of England--the very fucking institution this guy works for--that sets interest rates.

Let's hope the other morons over at the BOE don't think this way, too. I won't be holding my breath.

James Cloyne, Ryland Thomas and Alex Tuckett — Modelling banking sector shocks and unconventional policy: new wine in old bottles?

It is a tough challenge to incorporate all of these effects in the theoretical and empirical models that are typically used by macroeconomists, such as structural vector autoregression (SVAR) models and micro-founded general equilibrium (DSGE) models. For these reasons turning back to the older tradition of building structural econometric models (SEMs) – built from blocks of simultaneously estimated equations with structural identifying restrictions – can be useful. This approach can be thought of as a blend of the more theory-free VAR methods and a more structural model-based approach. The main advantage of the structural econometric frameworks are that they produce quantitative results at a sector level, which can still be aggregated up to produce a general equilibrium response. They also allow models to be built up in a modular way that allows replacing and improving sets of equations for particular blocks of the model without necessarily undermining the logic of the model as a whole. This older school approach to modelling has begun to appear in a variety of modern vintages. The GVAR methodology (see Mauro and Pesaran (2013)) also takes the approach of estimating many separate blocks, with linkages between them determined by a weighting matrix. This approach has been used to analyse global shocks (for example Cesa-Bianchi et al (2012)) – with the weighting matrix built from trade relationships.

Bank of England — Bank Underground
Modelling banking sector shocks and unconventional policy: new wine in old bottles?
James Cloyne, Ryland Thomas and Alex Tuckett.

Valérie Bugault — The Geopolitics of the Central Bank System

Interesting take on a contentious subject.

Fort Russ
The Geopolitics of the Central Bank System
Valérie Bugault, Katehon

Again, it's worth citing Carroll Quigley:

"The powers of financial capitalism had (a) far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank... sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (PDF), Volumes 1-8
New York: The Macmillan Company, 1966,Chapter 7, page 324

Bank of England video — Money in the modern economy: an introduction - Quarterly Bulletin article

Bank of England

Money in the modern economy: an introduction - Quarterly Bulletin article

The next thing you know the Establishment will be saying that the Bank of England is hotbed of money cranks.

Martin Sandbu — A licence to print e-money for private banks

Letting the cat out of the bag about money creation and endogenous money. 

As this catches on, it's going to be a game changer.

FT
A licence to print e-money for private banks
Martin Sandbu

Izabella Kaminska — Bearers

Who knew. The Bank of England still issues bearer bonds — in foreign currencies. Izzy finds that curious.

Dizzynomics
Bearers
Izabella Kaminska

Simon Wren-Lewis — Central Bank Independence and MMT

This is a follow up to my last post on Corbyn and central bank independence (CBI). No apologies for returning to this topic: not often do you get to talk about policies that are in the process of being formulated. One of the influences that is said to be important for John McDonnell (the new shadow Chancellor) and his advisors is Modern Monetary Theory (MMT).

A comment I sometimes get on my posts is that my arguments are similar to those put forward by followers of MMT. I have not read much MMT literature, but in what I have read I have normally not found anything I take great exception to. On some issues, like the way monetary policy continues to be presented in textbooks, they definitely have good reason to complain about the mainstream. However their account of the way monetary and fiscal policy work seems quite a close match to what many mainstream economists think, which I guess is why my arguments can be similar to theirs.
One area of apparent difference, however, is CBI. You will sometimes hear MMT people talk about CBI being a ‘sham’, whereas mainstream macro attaches great importance to CBI. So which is right? Part of the problem here is that CBI in the UK (where the government decides the goal the Bank has to achieve) is rather different from that in the US (where the Fed has much more discretion over the choice of targets) and the Eurozone (where the ECB is largely unaccountable and has huge power). I’m just going to talk about the UK set up. (For a MMT perspective on the US, see here.)

Mainly Macro
Central Bank Independence and MMT
Simon Wren-Lewis | Professor of Economics, Oxford University
ht Ralph Musgrave

Update:

Scott comments there:

STF17 September 2015 at 07:31

Thanks for engaging on this matter with this very fine post!

The point of my post wasn't to take a position on CBI as much as to investigate whether the arguments of critics of PQE regarding CBI were correct. As you note, I concluded they were not. I will just say on the MMT view that I think it's quite a bit more eclectic and nuanced than a simple "for" or "against," and as Ralph noted above we might not all agree with each other on where we stand on the spectrum between those two, within some limits.

Regarding plain vanilla deficits (PVD) and PQE--yes, my point was they are not different operationally. The original title of the post at NEP (subsequently changed by Yves at NC) was "Corbynomics 101--It's the Deficit Stupid!" ("stupid" here was a play on the 1992 US election, btw; I wasn't suggesting anyone was stupid). The point there being that the deficit is the point operationally, not whether you do it via PQE or PVD. 

I then suggested--which Richard Murphy agreed with on his blog--that the point of PQE was to reframe the discussion about fiscal policy and alternative approaches to stimulus. One can certainly debate whether or not this particular strategy will be successful, but given the politics of deficits at the moment alternative memes are definitely needed.

Best,
Scott Fullwiler

Neil Wilson — Banks are fully funded

The Bank of England has published a blog post asking if Quantitative Easing boosted bank lending.

The language in that piece isn't helpful. But it is written in the expected format of its intended audience (those who believe in the BLC theories) without being wrong. I thought it might confuse a few people.

All banks are fully funded, as I've indicated before….

3spoken
Banks are fully funded
Neil Wilson

Tim Worstall — But this is impossible under modern monetary theory!

Or perhaps we should revise that to a “this is impossible under a deeply deluded understanding of modern monetary theory”. For there’s a certain segment of the populace who insist that banks just make up money out of thin air.

"There’s a certain segment of the populace who insist that banks just make up money out of thin air." That would include the Bank of England.

See my comment there.

Adam Smith Insitute
But this is impossible under modern monetary theory!
Tim Worstall