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Utopia Talk / Politics / Bank of England emergency
Paramount
Member
Sat Oct 01 09:38:24
They thought they were going to make Russia collapse but it looks like Britain may collapse sooner?


Bank of England launches emergency operation to stave off financial collapse

The Bank of England (BoE) has launched an emergency operation to prevent a collapse of the UK bond market. This threatened to make pension funds insolvent and spark a meltdown of the financial system akin to the “Lehman moment” that set off the global financial crisis of 2008.

The BoE intervention came on Wednesday morning when its Monetary Policy Committee (MPC) said it was reversing its previously announced policy of selling off long-term bonds, or gilts, scheduled to begin next month, and would resume purchases

The bond market selloff started following the Tory government’s smash and grab mini-budget last Friday which handed out £45 billion worth of tax cuts to the corporations and super-rich to be financed by an increase of £72 billion in government debt.

It said the central bank would carry out “temporary purchases” of long-dated government bonds to “restore orderly market conditions,” on “whatever scale is necessary to effect this outcome” and the operation would be “fully indemnified” by the Treasury.

The BoE later confirmed it expected the bond-buying program would total £65 billion at the rate of £5 billion a day for the next 13 days.

The move came after it became clear pension funds, which form a base of the long-term bond market, were faced with insolvency. As part of their operations, these funds use derivatives to hedge their financial positions.

With the fall in the price of bonds they were facing increased margin calls from investment funds that finance their operations for which they did not have the cash on hand. They started to sell off some of their holdings to meet these demands, threatening to set off a vicious circle in which these sales drove bond prices even lower and yields higher.

Comments from senior figures in the banking and financial system indicate the extent of the crisis. An unnamed senior London-based banker told the Financial Times (FT) that at one stage on Wednesday morning there were no buyers for long-dated UK government bonds.

“At some point this morning I was worried this was the beginning of the end. It was not quite a Lehman moment. But it got close,” the banker said.

Kevin Rosenberg, the chief executive for Cardano Investment, which manages strategies for about 30 UK pension schemes, with a total of around £50 billion, told the FT the organisation had written to the BoE warning of the developing crisis.

“If there was no intervention today, gilt yields could have gone up to 7-8 percent from 4.5 percent this morning and in that situation around 90 percent of UK pension funds would have run out of collateral. They would have been wiped out,” he said.

The BoE seems to believe that the immediate crisis can be resolved through its bond market intervention over the next two weeks.

But there is no guarantee of that. Its policy is shot through with contradictions and is being made up on the run. As recently as last Thursday it confirmed that sales of gilts would start on October 3.

The selloff of long-dated government bonds, now flipped, was part of the BoE’s monetary policy tightening program which has seen hikes in interest rates.

It says this part of its agenda will remain. The bank stated in yesterday’s announcement that the “MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2 percent target sustainably in the medium term.”

But its intervention in the bond market, through which it is effectively financing the Tory government’s handout to the wealthy and the corporations, is inherently inflationary.

The BoE and the government have said they will co-ordinate their policies. But as PNB economist Paul Hollingsworth remarked: “It is hard to appear co-ordinated when fiscal policy has its foot on the accelerator and monetary policy on the brake.”

Even before the crisis engulfed pension funds, there was evidence of mounting problems in the financial system. A significant number of banks, including HSBC and Santander, suspended the issuing of new mortgages, along with a series of other lenders, including Virgin Money and Halifax, because they did not know what the cost of funding would be.

Whatever the immediate outcome of the present crisis, the cost of mortgages will rise significantly with warnings that the worst-case scenario of a housing market crash is now becoming the “main assumption,” according to one industry analyst cited in the FT.

Following the BoE intervention, bond prices started to rise and there was some marginal increase in the value of the pound against the US dollar.

The most significant reaction came in the US where, after an initial fall in the futures market, Wall Street surged when the market opened. The Dow finished up by 550 points for the day, 1.9 percent, the S&P 500 was up by 2 percent, with the NASDAQ rising by 2.1 percent.

The surge in the market, coming after a “near death” experience in the UK financial system, appears to have been motivated by the belief it will add pressure on the Fed to ease up on its restrictive monetary measures. But there are growing concerns about the state of the US economy as sentiment on Wall Street swings wildly between fear and greed.

“There’s fear that the whole system collapses and demand is not able to withstand this amount of rate hikes,” Agnes Belaisch, a strategist at Barings Investment Institute told the Wall Street Journal, noting that there was evidence of a recession.

The immediate origins of the UK crisis lie in the unrestrained greed of the financial elites, represented by the grotesque figure of Prime Minister Liz Truss and her Treasurer Kwasi Kwarteng. But the underlying driving forces lie in the explosion of parasitism in the global financial system over decades, accelerating after the crisis of 2008.

Continues http://www.wsws.org/en/articles/2022/09/29/tlbx-s29.html


” The BoE later confirmed it expected the bond-buying program would total £65 billion at the rate of £5 billion a day for the next 13 days.”

So they are going to print money like hell? What is that going to do with the inflation?
Habebe
Member
Sat Oct 01 09:44:39
Objectively atleast in the short term the sanctions have hurt the west more than Russia.

Plus Britain's housing market looks fucked.

Liz doesn't seem very good at her job.

BUT, she was handed a sinking ship.
Paramount
Member
Sat Oct 01 09:44:56
” The bond market selloff started following the Tory government’s smash and grab mini-budget last Friday which handed out £45 billion worth of tax cuts to the corporations and super-rich to be financed by an increase of £72 billion in government debt”


Government debt. It means that it is people like Seb and TC who are put in debt to finance tax cuts for the filthy rich elite. This is like a reversed Robin Hood. The rich are stealing from the poor and from average british citizen. Lol
Habebe
Member
Sat Oct 01 09:50:27
http://www...HWYbC-kQmY0JegQIAhAa&window=6M

The pound is worth basically the same as the Euro which both are worth less than the dollar now by over 10%.

Look atnthe 6 month trajectory though and you will see a steady decline.

Basically the US was tougher on inflation after people really got pissed.

But there is a debate That they may have went too far and that special inflation being more of a concern (energy/good) and this is just making us poorer without the benefit of fixing that.
jergul
large member
Sat Oct 01 09:50:47
In reality, it is fully funding by printing money. It is very hard to see how that will not spill over into inflation and put pressure on the pound.
Paramount
Member
Sat Oct 01 09:52:49
” Liz doesn't seem very good at her job”


It depends on who you ask. If you ask Putin he may say that Liz is doing a good job :)
murder
Member
Sat Oct 01 10:42:13

"t means that it is people like Seb and TC who are put in debt to finance tax cuts for the filthy rich elite."

I think Peter Walsh is British too.

http://www...hread=90657&time=1664570414709

And of course shannon.

Seb
Member
Sat Oct 01 17:01:30
Nope - not printing money - govt had to indemnify the bank for all losses of the intervention - so when the bank sells them again when they recommence QT in November the govt has to make up any losses, effectively removing the money supply from the economy.
Seb
Member
Sat Oct 01 17:02:46
But the net effect is it adds to the growing need for massive spending cuts.

Overall it is not surprising Liz is being called "daggers". Short for Daggenham, a train station two stops past Barking.
Seb
Member
Sat Oct 01 17:26:52
Basically, the bank wants to be hawkish on inflation. They held off a bit because they don't like trussonomics and were hoping to not waste their amunition before truss announced her expected inflationary tax cuts.

But the mini budget went way further than the ones she talked about in her leadership bid and were priced in, it tanked govt bonds and a bunch of pension schemes use them as the underlying asset in a bunch of highly leveraged investments and it led to margin calls and the near collapse of some big funds.

The bank intervention is specifically to prop up a narrow set of asset types at the centre of that, for a fixed period, to stop a fire sale of assets triggering a meltdown.

The bank is working with funds (which will need recapitalisation from their corporate backers or write downs) to manage restructuring their investments and expects the gilts to stabilise at a lower level when they recommence sales of gilt as part of unwinding QE (which the BoE has been more hawkish about than the fed or ECB).

So basically there is going to remain huge pressure on the govt to either walk back the tax cuts or slash spending. The bank definitely isn't going to give them a broad remit to borrow by continuing to buy gilts.

What truss is trying to do is stagger things: use the energy intervention to smuggle in MPs voting on tax cuts now, then in November force them to vote for politically toxic levels of spending cuts to pay for it, because there will then be no alternative.

Politically this isn't going to fly. The cat is out of the bag and the Tory MPs have figured out out. Many are pledging to work with labour to make amendments to remove the tax cuts. Separately there are 20 letters of the 54 required to boot her out already sent in. Labour has a 33 point lead in the polls (which translates to a complete wipe out, some models* put the Tories down to 1-3 seats if a GE were held with that level of swing), so trying to bluff and make the tax cuts. Meanwhile the fiasco means truss gets no credit for the energy intervention, and all the blame for rate rises and consequential massive increase in mortgage payments (much of which would have happened already).

Many Tory MPs would rather fight an election now explaining to their constituents they opposed this, than in two years explaining why they supported this and got a bunch of voters homes repossessed, cut pensions, health, schools etc.

Truss is finished I think - really hard to see how she can come back from this even if she limps on. But her team is so shit I think the odds she's out by Xmas are not that long.

She's only been in post about a week, if you ignore the Queen/mourning period where nothing much could happen.

That's truly impressive on one level.




* None are accurate at that level of swing, but we are talking a landslide on the Blair/Major election in 1997 for sure if those figures held

Seb
Member
Sat Oct 01 17:29:04
The reason why the pound went up is because the markets now expect the bank to respond to trussonomics with sharp interest rate rises until fiscal policy falls back in line with monetary policy.

They interpreted the bank waiting for Truss to make the first move as a possibility the bank was going to be doveish on inflation.
Seb
Member
Sat Oct 01 17:30:52
Murder:

Shannon is an Aussie.
Habebe
Member
Sat Oct 01 17:34:21
Seb, "But the net effect is it adds to the growing need for massive spending cuts."

That actually sounds reasonable.

But also, you need to do something to get energy prices in Check quick, burn some fucking coal for winter if you have to. Colonize Venezuela, do what you have to.

To be honest I think the UK & the EU have been too loose on interest rates.
Seb
Member
Sat Oct 01 17:36:54
Oh and the reason the bank prefered Qt over interest rate rises to tackle inflation is because the principle driver is energy costs. So interest rate rises reduce household purchasing power and lower house prices.

That's not great in a recession (though it turns out we aren't quite in one).

Habebe
Member
Sat Oct 01 17:37:15
Trussonomics seem nutty, but again, she took the wheel of a sinking ship.

The housing market looks ready to tank, your energy prices are at levels we Americans would have revolted by now and your currency has been sliding steady for 6 months.

Is she a torie?
Seb
Member
Sat Oct 01 17:37:35
Habebe:

Can you set out how interest rates control inflation?
jergul
large member
Sat Oct 01 18:09:10
"Nope - not printing money - govt had to indemnify the bank for all losses of the intervention - so when the bank sells them again when they recommence QT in November the govt has to make up any losses, effectively removing the money supply from the economy."

I had no idea you write fantasy as a hobby.

Right now, it is printing money to buy the bonds and perhaps, maybe, stranger things have happened, possibly, there will be QT at some point in the future and government payments will remove whatever liquidity the Bank of England is adding now in this emergency move.

Spending cuts. I figure you think funding Ukraine should be excempt :D.

The only way out is a crass devaluation of the sterling followed by IMF intervention instructing the Gov to make cuts in exchange for loans.
Habebe
Member
Sat Oct 01 18:16:52
Seb, You know exactly how the process works, so what are You getting at without this beating around the bush stuff?

Yes, I get it that your bigfest issue is energy. But you seem content with sanctions, so I don't know the UKs plan tonfix that.
Habebe
Member
Sat Oct 01 18:17:58
"The only way out is a crass devaluation of the sterling followed by IMF intervention instructing the Gov to make cuts in exchange for loans."

Has the UK truly become a 3rd world nation?
murder
Member
Sat Oct 01 20:27:43

It's a woman's prerogative to change her mind, right? :o)

murder
Member
Sat Oct 01 20:29:00

"Murder: Shannon is an Aussie."

WHAT??? I thought shannon was more British than the Queen.

Habebe
Member
Sat Oct 01 20:43:17
I never know if Shannon or Lindsay refers to a man or woman over there.

Paramount
Member
Sun Oct 02 03:55:18
We also had Resolute Steve. At the beginning, his name was something like Fluffy Steve, but he changed his name saying he had matured. I wonder where he is today.
Seb
Member
Sun Oct 02 04:33:12
Jergul:

The bank has been doing QT since Feb when they stopped rolling over mature assets.

The plan was 80bn a quarter by not replacing assets as they reached maturation and sales of 10bn a quarter and sales were due to start last week.

That's partly why the reaction was do strong: UK govt and bank both selling billions in gilts at the same time, particularly when Kwasi had billions in unfunded additional tax cuts, was promising more and the cost of borrowing was going to go though the ceiling.

In any case they have paused it and say they will recommence on oct 31st (Halloween,how appropriate) after they've ensured the pension funds will not need to do a fire sale spreading contagion.

"The MPC’s annual target of an £80bn stock reduction is unaffected and unchanged. In light of current market conditions, the Bank’s Executive has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on 31 October and proceed thereafter."

But sure, sure, fantasy. Whatever.

"Spending cuts. I figure you think funding Ukraine should be excempt :D."

Oh, I think we should axe the massive and pointless tax cuts. That's what spooked the markets - the IMF statement sums it up: they won't deliver growth (quite the opposite), and to get them through shows that the govt and institutions are fundamentally untrustworthy.

Simple way out is that the Tories do not vote through the finance act implementing tax cuts now, because they know it inevitably means spending cuts specifically to allow 5% off income tax for those earning 150k or more a year. That will wipe them out electorally. They are pretty stupid this lot, but surely not that stupid.

The hard way out if they are thst stupid is either massive spending cuts or if parliament won't do that, probably a general election (like with May) which would likely see labour win and reverse the tax cuts. Remember, they scraped the fixed term parliament act and finance bills are considered confidence motions. So either truss blinks (tax cuts reversed), Tory rebels blink (spending cuts) or a general election.

It is actually hard to see how you get to IMF scenario procedurally.

Remember the borrowing doesn't even start until end of Q1 next FY (so next summer), so needing an IMF loan still requires a bunch of decisions to be failed.
Seb
Member
Sun Oct 02 04:34:55
Habebe:

You say that you think Europe and the UK haven't been hawkish enough with interest rates, but I'd like to see you explain why you think that would help because every time I think it through, it seems that interest rate hikes won't actually control inflation under this circumstances.
Seb
Member
Sun Oct 02 04:35:32
Interest rates are not the only means to reduce money supply. Taxes do the same.
jergul
large member
Sun Oct 02 04:45:53
Seb
I know, but it is pretty obvious that Truss has more bombshells in store and that the only recourse the government has is borrowing more money if indeed were ever challenged by the BoE. We are talking about 65 billion in gilts the BoE is going to buy after all.

You are betting on a backbencher revolt? Really?

Or for Truss to call an early election when she has two years. Yah, the "rebels" are going to blink.

The UK government has cash on hand, assets it can liquidate or tax receipts enough to tide it over to 1st FY quarter next year without additional loans?

That definitely does not sound right.
jergul
large member
Sun Oct 02 04:47:58
"In spite of further efforts to reduce inflation, the pound continued to lose value, reaching a record low against the dollar in June 1976. The US Treasury Secretary now agreed with officials in the International Bank of Settlements that the pound was undervalued. He offered to partially fund a stand-by loan of $5.3 billion to support the pound. He insisted, however, on repayment of the loan by December 1976. Proposals for further cuts in expenditure and tax increases to reduce the budge deficit were debated in Cabinet in July. By September 1976, Britain had already drawn heavily on the short-term loan and it was apparent that a loan from the IMF would be necessary to fund repayment.
The 3.9 billion dollar loan

As pressure on the pound continued, the government approached the IMF for a loan of $3.9 billion in September 1976. This was the largest amount ever requested of the Fund, which needed to seek additional funds from the US and Germany. The IMF negotiators demanded heavy cuts in public expenditure and the budget deficit as a precondition for the loan. Healey's proposals for a cut of around 20 per cent in the budget deficit were hotly debated in Cabinet, particularly by Anthony Crosland and Michael Foot. Eventually they acceded, as it seemed likely that the refusal of the loan would be followed by a disastrous run on the pound. Healey announced the forthcoming reductions in public expenditure to the House of Commons on 15 December 1976.

Following the agreement with the IMF, the overall economic and financial picture improved. Interest rates were soon reduced and the pound quickly appreciated in value. By the end of 1977, partly as a result of new oil revenues, there were improvements in the balance of trade. Britain did not need to draw the full loan from the IMF. Nevertheless, the IMF crisis reinforced a change in policy orientation away from full employment and social welfare towards the control of inflation and expenditure."
Seb
Member
Sun Oct 02 04:57:09
Jergul:

Largely from pension funds, to give them breathing space to restructure, who aren't going to buy more of them from the govt. And then they start selling assets again next month. Once the pension funds have wound down their exposure to gilt prices, do you really see the Bank helping the govt out here?

"You are betting on a backbencher revolt? Really?"

Yup. You only need 30, she was the MPs second choice (and then only because the members preferred her and that figured they need her patronage).

Consider there are a bunch of Johnson supporters that want her to blow up as it's his way back (this was always the plan for him).

There are a bunch of rishi supporters that think she's a loon and egging he said about her economic policy has immediately happened.

There are a bunch of people that voted for her out of self advancement that will swing the other way quickly now she's seen as weak.

And then there are a load of mps in northern seats where the combination of spending cuts and interest rate rises are directly against the interests of the people that voted for them.

I don't think she has the internal political capital to push this through.

The bank isn't going to help her - she spent two months over the summer slagging off its leadership, and in any case it would be against the banks mandate.

jergul
large member
Sun Oct 02 05:03:49
Nah, she could just call an election that would decimate the tories in the house of commons. Too much leverage.
Seb
Member
Sun Oct 02 05:05:43
Also she has no mandate for any of this shit. It's diametrically opposite to what the Tories got elected on and not in manifesto.

It will be hard to push through. Impossible I would say. And the sequencing is wrong. They haven't set up the cliff edge where one of these things happen automatically.

You need an active decision for both otherwise you get a general election she will lose.

Borris managed to square the circle, but the polls supported him and the implications of the choice on brexit were abstract not understood in terms of practical consequences the voters.

In this case everyone understands the decision is on tax cuts for the top 5%, Vs cutting health, education, benefits for the poor and middle class and mortgage rate rises; and the principle (supply side driven growth Vs conventional economics) is abstract.

This is politically challenging for a pm who is a good communicator, effective manager, with solid support in parliament and the country and a mandate.

Liz, she's none of these things. Least of all the first two.
jergul
large member
Sun Oct 02 05:11:14
The tory party will lose the election. There is your cliff edge.
Seb
Member
Sun Oct 02 05:12:41
Jergul:

How does calling am election help truss?

Also as an MP in a northern seats, would you prefer to go into that election having demonstrated opposition for insane budget cuts and morgage rate rises, or defending them?

This is not the leverage you think.



Seb
Member
Sun Oct 02 05:16:04
Jergul:

Yes, but that's expected now at some point.

What each mp will be thinking is "how do I save *my* seat? What do I need to say to *my* voters in *my* constituency?"

To manage the parliamentary party, the conservative party at a national level needs to offer something attractive for MPs wearing their rosette to offer.

If it doesn't, then party discipline breaks down.
Seb
Member
Sun Oct 02 05:17:25
Playing chicken with ten rebels is one thing.

Playing chicken with a third of more of your parliamentary party doesn't work. You are then the chicken.
Seb
Member
Sun Oct 02 05:22:16
Let's look at this way:

Truss: "if you ammend my budget to reinstate the taxes, I'll whip against the finance motion and call an election that will result in us losing"

Well, she won't be PM if she does that. So vote for the amendment. Chances are, she won't call an election, because then she definitely won't be PM in 6 weeks time, but if she accepts it though she will be wounded, she will.

And if she is mad enough to throw her toys out of the pram and do it, you can maybe hold your seat by publishing an open no confidence letter, and campaigning that you voted against her mad budget.

But if you do vote for the budget, in 18 months years you need to campaign in defence of these policies to your constituents, many who will have lost their homes.

Which do you do?
Seb
Member
Sun Oct 02 05:26:03
Context: the Tory press are lining up Kwasi as a scapegoat on the basis he briefed hedge fund managers and exacerbated the fall on the pound.

They are creating an off ramp for her.

She would need to be spectacularly stupid not to take it.

Anyway next week is the party conference. So we can reconvene then with more data points.
Seb
Member
Sun Oct 02 05:41:33
Gove pretty much said he won't vote for it.

jergul
large member
Sun Oct 02 05:42:43
The big thing is refusing to windfall tax the energy sector anyway. You might as well. The only reason Norway is not doing it is because Equinor ends up transferring 90% of its before tax profits to the State in one way or another anyway.
Seb
Member
Sun Oct 02 05:44:48
http://twi...?t=0pcQh33xdAFrZYskkdvlag&s=19

Seb
Member
Sun Oct 02 10:07:44
Jergul:

On the windfall tax we are of one mind.

But they'd already said that very firmly so expect priced in.
Habebe
Member
Sun Oct 02 10:33:32
"You say that you think Europe and the UK haven't been hawkish enough with interest rates, but I'd like to see you explain why you think that would help because every time I think it through, it seems that interest rate hikes won't actually control inflation under this circumstances."

It won't in regards to energy, which might be your biggest single issue.

But it is helpful at general inflation. IIRC your inflation is pushing 10% ish.


Do you bekeive that is almost entirely energy?

We agree, you need to slash spending/printing. But that only stops making the problem worse.

Plus, massive devaluations in both the GBP & Euro are not helping things other than mabey making some sale goods cheaper for export, but not enough to overcome energy.
Seb
Member
Sun Oct 02 11:31:11
habebe:

If you are want to control inflation by restricting money supply you have three options:

Raise taxes
Raise interest rates
Quantitative tightening (reversing QE)
Habebe
Member
Sun Oct 02 11:33:41
Seb, Do you think UK/EU intentionally wanted devalued currencies to boost exports?

Serious question.
Seb
Member
Sun Oct 02 12:45:21
Habebe:

No.
Seb
Member
Mon Oct 03 01:23:19
As predicted she's abandoned the cut to top rate.

But will it be enough to calm markets.
Habebe
Member
Mon Oct 03 01:34:59
So no more tax cut?
jergul
large member
Mon Oct 03 01:44:11
Seb
I am surprised and markets may not react positively. Rule by backbencher decree is not inherently soothing.
Habebe
Member
Mon Oct 03 01:55:16
I mean, the markets are sort of fucked regardless.

Europe with exceptions (France is doing less bad, Norway/Malta seem ok) is being crushed under food/energy/general inflation.

China has become a hermit nation with an ever growing financial & Real estate collapse.

The US economy is slightly less terrible than Europe but roughly on par, with a real estate market going down hill.

There isn't too much one can do to change that as the PM of the UK.
Seb
Member
Mon Oct 03 02:35:24
Jergul:

Pound up so far.

However it's just the 45p rate.

So there will still need to be spending cuts and interest rate rises, but they may have bought themselves some time for November.

I suspect markets will not improve dramatically until Kwasi goes and new economic policy with a credible figure in place.

If Truss sticks with her flattened 1d (if such a thing is even possible) version of reganomics then I predict up to two years of stasis and malaise. Too much of the Tory backbenchers hate her and think get policy stupid, but unlike Boris she has no personal relationship with the electorate to wraponise against rebels.

There's a high chance in that scenario of some events eventually forcing a GE.

And then labour will inherit a wasteland.

You and I both know the sensible budget here. Windfall tax on energy cos, targeted reforms at boosting productivity (i.e. investment incentives, not broad corporation tax cuts), closer trade alignment with Europe. Public sector spending restraint is probably necessary, but in the form of below inflation increases rather than cuts on the nominal SR settlement.

Fiscal policy has to support monetary policy even if I think the G7 are doing the equivalent of pushing on string when it comes to whacking up interest rates in response to an energy crisis.
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