Government's £150 billion asset purchasing and "money printing" plan

The Chancellor of the Exchequer recently lodged a paper explaining what would happen. Rather than relying on the newspapers, you can read it for yourself below. Its one and a half pages make interesting reading, including part of the justification: to get inflation back up to 2%

The private sector could benefit to the tune of £50 billion



HM TREASURY: DEPARTMENTAL MINUTE

Contingent liabilities arising from the asset purchase facility

This Minute gives Parliament further information about the contingent liabilities described in the Treasury Minute of 19 January 2009. It concerns the Asset Purchase Facility ('the Facility') on which further details were announced today in an exchange of fetters between the Chancellor and the Governor of tt1e Bank of England.

As foreshadowed in the earlier Minute, the Chancellor has authorised an extension to the Facility to allow the Monetary Policy Committee (MPC) to use it for monetary policy purposes if the MPC deems that appropriate. The Facility can be used to purchase UK Government debt on the secondary market as well as private sector assets (specified in the previous Minute). Purchases undertaken for monetary policy purposes would be financed by the creation of central bank money.

The maximum scale of the purcl1ases under the Facility has been raised to up to £150 billion, of which up to £50 billion could be used to purchase private sector assets. The purchase of private sector assets will continue as planned and the scale of purchases will not be affected by the extension of the Facility. The option of issuing Treasury bills to finance such asset purchases will remain open. If and when the MPC decides that private sector purchases should be financed by the creation of central bank money, the Bank executive will apply the same criteria in selecting those assets as if the purchases were financed by the issuance of Treasury bills. And in that case, the need to finance purchases using Treasury bills is expected to cease, at least initially. These are maximum limits within which the MPC will determine the scale of its purchases each month; the overall limits and the balance of purchases between government debt and private sector assets will be kept under review. .

If the Facility were to be used for monetary policy purposes, the MPC would decide, each month, on the asset purchases it judged necessary to meet the inflation target. The MPC would continue to be accountable for use of the Facility in the same way that it is for its decisions on the level of Bank Rate, including reporting its decisions in its monthly minutes and explaining its analysis in the quarterly Inflation Report. It will also publish a quarterly report of the transactions undertaken and, where appropriate, information on specific transactions and operations. Implementation of the MPC's decisions on asset purchases would fall to the Bank's Executive.

HM Treasury stands behind the Bank and is, therefore, providing an indemnity for the facility. As is the case for the purchases of private sector assets financed by the issuance of Treasury bills, HM Treasury will indemnify the Bank for any losses that it makes arising out of, or in connection with, the use of the Facility to purchase UK government debt and private sector assets financed by the creation of central bank money.

The risk of the indemnity being called cannot be forecast accurately. It arises partly because asset prices will fall if yields on interest bearing assets rise. But other factors could be relevant too. If the perceived iIIiquidity and credit risk attached to those assets lessens, they may appreciate in value. If the liability is called, provision for any payment will be sought through the normal Supply procedure.

The purpose for extending the use of the Facility is to enable the Bank of England to use asset purchases in order to meet the 2 per cent target for CPI inflation and stimulate the economy. To the extent that the Facility is used to buy gills on the secondary market financed by central bank money, this would be similar to the current implementation of monetary policy, except that the instrument of policy would shift towards the quantity of money provided rather than its price. The Facility also uses central bank money to purchase high quality private sector assets to improve liquidity in credit markets that are currently not functioning normally.

It is still intended that the facility will be temporary. Its closing date is not yet decided and will be announced when the Government is able to make an informed decision on the state of the markets.

I regret that, owing to the urgency of the situation as outlined above, it was not possible to give notification of this indemnity with the customary full fourteen parliamentary sitting days' notice.

HM Treasury
5March 2009

Rock Shares

This comment appeared in this Saturday's issue of The Northern Echo (p.17)

"So, Northern Rock is prepared to lend £14bn in the next two years (see Businees Echo, Feb 24). Where's the money for my shares?"
George Maxwell, Reeth, North Yorkshire

Rock investors lose court case

Former Northern Rock shareholders have lost their legal challenge to the government's plan to compensate them.

In the High Court last month they argued the government had deliberately undervalued the bank in the run up to its nationalisation last year.

This had infringed their human rights, they argued, and meant they would now receive nothing.

Full article found on the BBC Website

Robin Ashby has done interviews with IRN and Tyne Tees News today on the issue

Evidence to Treasury Select Committee

By Christopher Bean 3rd February 2009

Thoughts on the Treasury Select Committee's exploration of the audit & credit rating agencies activities during the present financial and economic crisis.

Verification vs. Viability
The examination of the auditors and credit agencies stimulated a strong feeling of ambivalence as they provided true to form a dissimulation of their reliance on ‘compliance’ with current standards which seemed to dissolve them of any responsibility and certainly any accountability; which was satisfying only in that it confirmed my interpretation as being not wrong. All that such ‘certification’ establishes is that the organisation (system) has been built and is operating in accordance with a codified set of criteria – it does not establish if the organisation (system) is viable within the current and predicted volatility of even the short term future.

Building the wrong system right does not make it any less wrong.

The aggregation of standards reveals nothing as to the viability of the organisation’s ability to operate within an evolving dynamic environment; by dynamic I do not mean the rather sophistic answer provided by the witnesses, but at least those representing: flows of energy, material and information aligned with spatial and temporal progress of the organisation’s relationships with its operating environment.

This does not require 500 pages of detailed analysis as the witnesses mentioned; it is fully acknowledged that the problem is complex, but so is the human body and you would not expect your doctor, the health accountant, to present you with an analysis that was too difficult to understand; you would expect a synthesis of your condition to provide a comprehensible picture of your health, something that could be grasped within minutes.

As soon as we go into detail which is where individual domain experts operate, no matter how small our specialist area we shall sooner or later be overwhelmed by data. Not understanding the nature of systems, results in difficulty finding the right level of aggregation, which as you will be aware requires taking account not only of higher systemic levels but also of indicators of sub-systems. We are all aware, implicitly, of the need to understand how deep we need to break down the detail; but where does the limit lie? For instance, to understand the breeding behaviour of a sheep there is absolutely no need to record the wool count, research blood-pressure and renal function; even if you did take all that into account, the resultant degree of refinement would be an arbitrary choice. What matters is not the amount of information but making the right choice. This is a universal truth as regards the flood of information currently overwhelming us. Information is invariably the fear of complex states of affairs. Possessing more information certainly does not mean being better informed.

The problem is not the complexity, which as we know is essential to the richness of life; it’s the inability of the auditors, restricted by the needs of their comfort blanket compliance, to absolve themselves from the responsibility and its associated accountability, for dealing with complexity. Within any complex system there are only so many variables (not constants) that represent the viability of the organisation – any viable system being governed by only a small number of rules.

Summary currently the auditors test for verifiability against accounting standards, compliance - is the organisation being operated right. What they, or some new body, should be examining is the viability; the validation of the organisation – is it the right organisation for the dynamics of the environment it is operating within. This also has the effect of restricting new entries and forms of competition to the market place.

This problem is the most common oversight made by auditors (who I accept have no remit, which includes national audit activities in the public sector, certainly both NAO & WAO are aware of this limitation) when striving to understand and put meaning to the viability of a complex problem. Verification is useful when you are buying something with causal relations such as a clock.

What separates a verifiable organisation, system, from a validatable viable one is complexity – a difference of such significance as the difference between success and failure.

This dilemma in dealing with complexity stems from the fact that our whole education and management practice (see OGC project management guidance plus Treasury Green, Red & Magenta books) tends towards drawing simple logical conclusions and defining obvious cause-effect relations. Yet simple cause-effect relations exist only in theory; they have no existence in reality; intervention in a system where its links have not been understood, results in that system behaving in a counter-intuitive manner; action taken does not produce the result that might ‘logically’ have been expected or that previous experience of the system suggested.

Conclusion Certainly within the UK, much is spoken about complexity, but the reality is that institutionalized thinking has not developed beyond a whole plethora of traditional practice, doing better what was done before; yet future success (however that might be measured, possibly in terms of competitive and comparative advantage) depends almost entirely on possessing the capability (not requiring new high cost domain expertise) to understand the nature of complexity. The present financial and now economic crisis highlights more than anything else this essential need; however, I have yet to witness any desire to grasp this nettle, a nettle which is somewhat akin to Poe’s Purloined Letter!

Foresight

Owners of capital will stimulate  the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their  debt  becomes unbearable. The unpaid debt will lead to bankruptcy  of banks, which will have to be nationalised and the State  will  have to take the road which will eventually lead to State
intervention and thus Communism."
                                                              
Karl Marx                                                   
Das Kapital 1867