Bank of England Clueless

Unfortunately, it appears that according to former MPC member Danny Blanchflower:

"The MPC didn't know where the economy had been, didn't know where it was when they made the forecast, and had no clue where it was going and still doesn't."

The  most alarming question that arises from the above is that, if the Bank of England (which has been relatively proactive in trying to reboot the economy) is so clueless, what does that say about the ECB?

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Bank of England Releases Libor Emails

The Bank of England has released further information and correspondence in relation to the BBA Libor Review in 2008.

As per the Bank of England's website:

"At the hearing on Tuesday 17 July, the Treasury Committee requested papers relevant to the Bank of England’s interaction with the US Federal Reserve and with the British Bankers’ Association (BBA) Libor Review in 2008. To allow the Treasury Committee to see the full context, this submission contains all papers relevant to the BBA Review. It provides a brief commentary and timeline of the events around the BBA Review in 2008, together with the supporting documents.

In 2008, the Bank of England worked closely with the Federal Reserve Bank of New York (FRBNY) and the Financial Services Authority to input into the BBA Review of the Libor system.  The Bank of England and other central banks were concerned to influence the outcome of the BBA Review. 

Because the Libor system was, and is, a private sector arrangement and was not subject to financial regulation, it was not appropriate for the public authorities to endorse or determine the outcome of the BBA Review. When the amended proposals were adopted in December 2008, the Bank was not aware of any dissenting views expressed by the official or private sectors.

In reading these documents, it is important to distinguish between three issues. First, allegations of wrongful behaviour by Libor panel banks. Second, concerns about the operation of the Libor process in times of market stress. Third, the need for any system based on self-reporting to be alert to the possibility of “accidental or deliberate misreporting”, as referred to in the Geithner memorandum.

The Geithner memorandum contains no allegation of wrongful behaviour and relates to the second and third of these issues. At no point did the FRBNY draw the attention of the Bank to evidence of wrongdoing in the setting of BBA Libor. Indeed, with the exception of the memorandum sent by Mr Geithner to the Bank in early June 2008, none of the other documents published on 13 June 2012 by the FRBNY had been shared with the Bank.

The attached timeline gives a detailed account of the interaction between the Bank and the Federal Reserve and the BBA.  The broad outline of events is as follows:

• From May 2008, the Bank of England encourages the BBA to conduct a global review of Libor and banks to engage with the review at a sufficiently senior level.  It also begins to discuss these issues with the FRBNY.

• The Bank considers the points in the Geithner memorandum and ensures that those points are taken on by the BBA.

•  The Bank and the Federal Reserve work closely together behind the scenes to influence the consultation paper issued by the BBA on 10 June 2008.

• The Bank also continues to work on influencing the outcomes after the consultation paper is published until the BBA publishes its final report on 18 December 2008." 

The relevant documents can be viewed here.

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King Denies Fed Warning

In the understatement of the decade, Mervyn King (Governor of The Bank of England) has told the Treasury Committee that there needs to be change of culture at Barclays.

"Barclays has to create a new bank with a new culture to take it forward."

He also denied that the Fed had warned the Bank of England that Libor was being manipulated:

"If the Fed had regulatory concerns they would have shared that with the regulator, [not the Bank of England].

They didn't pass any information to us that Libor was being manipulated.

The Fed could have shared that with us and they did not, all we would have done was pass it on. The Fed is a regulator, we were not; the Fed asked us for advice on how to interact with the BBA."

This denial is rather odd given the following:

"Writing to the head of the Bank of England, among others, Geithner made six recommendations, which included eliminating incentives that could encourage banks to manipulate the rate and establishing a “credible reporting procedure.” 

Not least the fact that King responded and thanked him for his recommendations.

Notwithstanding that apparent conflict between what King said and reality, his statement that the Bank of England was not the regulator may well be technically correct given the appalling tripartite system set up by Brown. However, it surely had more than a passing interest in what was going on with the banking system and, now that it will have "beefed up" powers, most certainly has an even greater "interest".

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LIEBORGATE The Oncoming Storm

The roll of distant thunder coming across the Atlantic has hit the shores of Britain.

The Washington Post reports that the Bank of England was warned by Timothy Geithner (then President of the Federal reserve bank of New York) in 2008 that Libor needed to be fixed:

"While president of the Federal Reserve Bank of New York, Timothy F. Geithner pressed British regulators to reform the way a critical global benchmark called the London interbank offered rate, or Libor, is calculated, according to a June 1, 2008, e-mail obtained by The Washington Post.

Writing to the head of the Bank of England, among others, Geithner made six recommendations, which included eliminating incentives that could encourage banks to manipulate the rate and establishing a “credible reporting procedure.”

'We would welcome a chance to discuss these and would be grateful if you would give us some sense of what changes are possible,' Geithner wrote."

Here is a link to a copy of the email and the Bak of England's response: Geithner email.

The New York Fed is set to release a treasure trove of documents Friday morning (EST) detailing its response to concerns raised as early as 2007 about Libor, which helps set the standard for $10 trillion worth of corporate bonds, credit cards, mortgages and other loans around the world.

The storm is coming, the Bank of England and others had best batten down the hatches!

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Bank of England Increases QE £50BN

The Bank of England has left interest rates unchanged. However, it has increased quantitative easing by £50BN over the next four months.

The rationale for turning on the printing presses again being the persistent lack of economic growth, slowing export markets and weak business indicators.

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Interest Rates Under Review

The MPC has placed its interest rate of 0.5% "under review", as per the Minutes of the Monetary Policy Committee Meeting held on 6 & 7 June 2012.

The reason for the "under review" status being the ongoing deterioration of the economic situation in Europe, and "weaker economic data from the United States and emerging economies".

"Overall, the Committee judged that, at the present time, a further reduction in Bank Rate would not have any advantages over an expansion of the asset purchase programme, though it would keep the position under review."

This means that it is highly likely that rates will be reduced in the very near future.

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Whither Project Merlin? - Osborne's Maxed Out Plan A

Kudos to Mervyn King and George Osborne for gamely trying to shore up the British economy, against the oncoming Eurozone tsunami, with a £100BN support programme.

The FT reports that:

"the chancellor told a City audience on Thursday night that he was working with Sir Mervyn King, the Bank of England governor, to “deploy new firepower” amid fears that turmoil in the Eurozone could lead to a severe credit crunch and higher interest rates in Britain.

Mr Osborne’s aides spoke of a “maxing out of Plan A” – taking advantage of the country’s record of fiscal discipline and credibility with the markets to unleash an aggressive monetary policy offering cheaper loans to businesses and households."

The markets have reacted favourably (as they always do) to "hopeful" news.

This is all very well, if one could trust the banks to lend the money on to companies and individuals. However, all that the banks will do it use the £100BN to shore up their own balance sheets.

Not one penny of this will reach the business or individuals who need it, and would be the engines of growth for the British economy.

It would be better of Osborne took the £100BN and simply dropped it from a helicopter over the UK, that way he could be sure that it will have some positive effect on the economy.

Am I being too cynical?

I don't think so, have you all forgotten the hopes and hype wrt Project Merlin?

Whatever happened to that then?

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Inflation Down

For the first time in this Parliament, CPI inflation has fallen from 3.5% in March to 3% in April. For the record, RPI inflation fell from 3.6% to 3.5%.

This also means that it is the first time the George Osborne has not received a letter from the Governor of the Bank of England, to explain why the inflation target has been missed. An open letter is triggered if the CPI rate remains above 3% or below 1% for three months in a row.

Drinks all round!

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Major Problems Ahead

The head of the Bank of England, Mervyn King, has said today that the Euro crisis is likely to get worse and that the UK and Bank of England are developing "contingency plans" to be implemented should the crisis spiral out of control.

He is quoted by Bloomberg:

"There are major problems ahead.

There are major credit losses to be realized. Whatever happens there will be difficulties ahead that will undoubtedly affect us."

Tin hats everyone!

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King Rewrites History

Sir Mervyn King, Governor of The Bank of England, has stirred up a hornets nest after his recent BBC radio lecture in which he rewrote history and his/the Bank's role in the financial crisis.

Amongst other things, King said that the Bank would be very happy to co-operate with another inquiry into the collapse of Northern Rock (the bank that the Bank of England refused to bailout).

This willingness to co-operate rather took the breath away of Andew Tyrie, chairman of the Treasury Select Committee, who said that the Bank "should get on with it at the first available opportunity".

Others on the Select Committee expressed astonishment at the Governor's comments, given that the Committee has asked the Bank on numerous occasions to co-operate with an inquiry only to have their requests refused. The Bank remains the only member of the tri-partite system not to have published a review into its role in the crisis.

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Bank of England Disconnected From Reality

The Bank of England, in its latest Quarterly Bulletin, has demonstrated that it is somewhat disconnected from reality and displays a mack of understanding of human nature.

In the bulletin, the Bank warns that “saving appears to be too low”:

“If current households choose not to pass on those gains to later generations, they may be able to spend more and save less. Future generations, however, will need to save more for their retirement or work longer.”

That is all very well, maybe. However the Bank appears to have forgotten that UK interest rates (0.5%) are at the lowest they have been for years.

Add to that the fact that we are being told that we will have to endure years of austerity and, like it or not, people's reaction will be very human; namely to enjoy the good times (ie spend) whilst they still can.

Economic cycles and people's reactions to them are driven by emotions not logic.

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Hector Sants Resigns Again

Hector Sants (CEO of the failed, and soon to be defunct, FSA) has finally resigned from office.

He had resigned once before in 2010, and was due to leave in the summer of that year. However, he was persuaded by George Osborne to stay on to become deputy governor of a new regulator due to "go live" in 2013:

"As predicted on this site, George Osborne has sounded the death knell of the ineffectual and inept FSA (ironically, despite its lousy performance, FSA staff were paid nearly £22M in bonuses last year).

Osborne has stated that it will cease to exist in its current form, and a "Consumer Protection and Markets Authority" will be created.

Hector Sants, the CEO of the FSA, will stay to become the new deputy governor and chief executive of the new regulator. That announcement is to be treated with a degree of scepticism. The new body will be considerably less powerful than the FSA, and it is likely that as soon as the transition has occurred Sants will depart (as this in effect a demotion)."

As noted, this was in effect a demotion, as the Bank of England's role is to be considerably enhanced. Therefore it is not surprising that Sants has decided to step down this summer, his role in the new Prudential Regulatory Authority (PRA) body will be taken on by the Bank of England's Andrew Bailey.

Despite persuading him to stay on in 2010, Osborne doesn't seem to have offered official public thanks to Sants for his work.

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Contingency Plans For Greek Exit From Eurozone

Sir Mervyn King, Governor of the Bank of England, as just sated that there are contingency plans for a Greek exit from the Eurozone.

Olly Barratt @ollybarratt

'contingency plans' in place for #grexit says sir mervyn of BOE"

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The Threat from Europe

Sir Mervyn king, Governor of The Bank England, has spoken forthrightly this morning about the threat from Europe.

Using phrases such as:

- "Exceptionally perilous conditions";
- "Major solvency concerns";
- "Systemic crisis"

Clearly shows that he is very worried, and that the threat to the UK from the Eurozone crisis is worsening.

Sir Mervyn has called for UK banks to increase their capital reserves (via cutting dividends and bonuses, not cutting lending), not because they are under capitalised (they are better capitalised than European banks) but because it is "sensible and desirable to build resilience to threats to UK stability."

The "threat" of course comes from Europe.

How will this all end?

Here are six possible scenarios:

1 The Euro is devalued in order to keep all member states together and ease the pain on PIIGS.

2 PIIGS leave the Euro en masse, and in an "orderly" fashion. The Euro remains relatively stable as remaining countries in it are stable

3 PIIGS leave the Euro one by one in a disorderly fashion, as markets push Euro down and yields up.

4 Eurozone leaders create a "big bazooka" to deal with the short term confidence issue, and move towards full fiscal/political union in medium term (the Euro stabilises).

5 Eurozone leaders fail to create big bazooka but continue to work towards medium term fiscal union, markets tear Eurozone apart.

6 Germany leaves Eurozone and the remaining members devalue Euro.

To my view options 3, 5 or 6 are the most likely.

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A Continent of SPIVs - Kicking The Can Down The Road

Sir Mervyn King, governor of the Bank of England, is appearing before the Treasury Select Committee (TSC) today.

He has told them that he has little faith in whatever "plan" is agreed by the Eurozone "leaders" (aka "Clown College"). In his view, whatever is decided at tomorrow's EU summit will not solve the region's underlying problems; it will only buy one or two years of breathing space.

Quite!

In the unlikely event that Clown College can come up with a plan to "kick the can down the road" for a year or so, how will this be financed?

It seems that, as Europe is skint, they will be tapping the IMF (funded by the USA) for the money which will be provided via a Special Purpose Investment Vehicle - aka SPIV.

How very appropriate!

Now repeat after me, and learn this for prep:

- There is no plan
- There was no plan
- There will never be a plan

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QEII Launched Into Choppy Waters

Hot on the heels of yesterday's launch by the Bank of England of QEII (valued at £75BN),
Moody's cut its ratings on a number of British banks.

RBS was dropped by two notches from A2 to Aa3, Lloyds TSB dropped by one notch to A1 from Aa3, Santander UK, Co-operative Bank, Nationwide and seven other smaller British building societies were also dropped.

The rationale being that Moodys' is of the view that the British government may not support certain banks in the event that they face collapse.

Unsurprisingly, George Osborne stated that he has confidence in the viability of the UK's banks.

The Treasury, as it happens, is also fighting tooth and nail any attempt by the EU to force UK banks to increase their capitalisation as a result of the soon to premiere "Stress Test III".

Is the reluctance by the Treasury based on their confidence in the banks?

Errmm..no.

It is a reluctance based on pragmatism, namely that were RBS to require more capital, the Treasury would be forced to buy shares (using taxpayers' money) at around 50p (as per the agreement with RBS) compared to the current price of 23p.

The alternative would be for the government to fully nationalise RBS.

Neither option appeals to Osborne.

In other news, a certain London based financial newspaper (which heavily relies on advertising revenue from banks) is continuing to spread the rumour that there is a plan for saving the Euro and the European banking system.

However:

Learn this,
Repeat this, and
Retweet this:

THERE IS NO PLAN!!

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The Global Liquidity Bailout

World Central Banks Announce Global Dollar Shortfall Funding Resolution

What does this mean?

It means that at least one country is close to defaulting, and that this mechanism has been put in place beforehand to stop global financial meltdown.

It also means that the central banks have taken away the responsibility for trying to resolve the economic crisis from the hands of the politicians.

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King Warns On Rate Rise

Mervyn King, Governor of the Bank of England and deputy chair of the European Systemic Risk Board (ESRB), issued a warning whilst speaking yesterday at the European Parliament that a rise in long-term interest rates would have "severe" consequences.

King's rationale being that the level of indebtedness would be increased by any rise in rates.

Given that the comments come ahead of this week's MPC rate setting meeting, it is being interpreted as a signal that UK rates will remain at 0.5% for the time being.

Whilst the MPC may well see the dangers of an increase in rates, no such "real world" understanding is apparent in the actions and attitude of the ECB who fear only inflation and ignore recession. Sadly for the people of Europe, the ECB are determined to press forward with higher rates irrespective of the damage that these increases will do the the European economy and to the citizens of Europe.

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Inflation Falls

The Office for National Statistics (ONS) report that consumer price inflation (CPI) fell to 4% in March, contrary to the expectations of "experts" who were looking for a figure of around 4.4%.

Retail price inflation (RPI) also fell to 5.3%.

The reason for the fall is being attributed to the price war being waged between supermarkets, which has pushed down the cost of food and drink. Additionally, the rise in VAT has probably now worked its way through the system.

It would be folly indeed, given the poor sales figures being reported by the high street stores, for the Bank of England to raise interest rates in the near future.

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Gordon Brown's Mea Culpa

The Telegraph reports that Gordon Brown has admitted that he made a “big mistake” in the way he tackled financial regulation before the banking system collapsed.

As noted many times before on this site, the tripartite regulatory system set up by Gordon Brown failed primarily because no one body that belonged to it (ie Bank of England, Treasury and FSA) was deemed to actually be in charge of it.

Brown's admission is somewhat late in the day to be of any value!

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