Bank of England’s Posen back to his money printing ‘best’ – wants the BoE to buy private assets
The last couple of months it looked like the mantel of ‘ginger-in-chief’ had been squarely handed off to David Miles. Miles has been the lone voice demanded more money printing at the BoE whist the former money-printing junkie, Posen, has been quiet on that front for a few months – until now that is.
But now the out-going Posen has showed the rest of the BoE how it’s done and has come out and suggested that BoE should consider buying ‘private assets’. Here we highlight the most important bits from Posen’s speech given to the Barclays ‘Short end rates seminar’.
The speech is very similar in substance to the one he gave back in September 2011 – which at the time we reported in an article titled “Adam Posen of the BoE re-defines insanity as it gets set to print’.
Posen kicks off he most recent insanity-redefining speech with a very clear call for more money printing:
Monetary policy, including all forms of quantity-based easing, affects expectations about future economic conditions, about the availability of liquidity and, thus, at the margin, the willingness to make risky investments. So I will argue today that:
- A further round of asset purchases by central banks should focus on private sector assets in order to make a sustained improvement in perceptions of risk, if not in risk aversion;
- Such asset purchases can be targeted on dysfunctional financial markets that are both important and potentially sizable, and can encourage securitization in those markets; and
- There are straightforward transparent ways to minimize the credit risk on central bank balance sheets, and any negative spillovers on markets or politics, from so doing;
Posen then justifies any further BoE action with:
As too often stated, monetary policy cannot make underlying imbalances disappear – but monetary policy can offset them in part and limit overreactions to them. If central banks do both, as they can, they should keep us from going further into a self-fulfilling cycle of fear and contraction.
This is quite an amusing statement on its face, the BoE has printed – and how’s that worked out for them? Ah yes, that’s right, the UK is back in a deep recession – so much for keeping the UK from a ‘self-fulfilling cycle of fear and contraction’. Posen et-al never countenance for one second that maybe it is the very actions of the central bank and it’s money printing ways that exacerbate the ‘cycle of fear’, but we digress.
And this is partly through influencing the relative price of credit and risk assets at any given time, albeit not lastingly. Ultimately, activist monetary policy can provide necessary insurance to restore confidence.
Really? How’s that confidence working out lately? Posen tries to respond to this obvious point with:
So why are we still miserable, given the actions already undertaken by the world’s major central banks? There are three possible reasons.
He then tries to concoct some spurious fantasy reasons why the BoE expanding its balance sheet at a record breaking global pace hasn’t fixed anything – we’ll spare our readers such mind-numbing tedium.
So, just in case there is any doubt where this is all heading, Posen spells it out very clearly:
In other words, I believe it is time for the major central banks, including the Bank of England, to engage in purchases of assets other than government bonds. Those central banks should also aggressively lend against a wide range of banking system assets, appropriately discounted. This has not been tried on a sustained basis at scale as yet. There have been short-lived emergency interventions wherein these central banks have purchased high quality assets, and these seem to have been highly effective. The European Central Bank engaged in its Long-Term Repo Operations [LTRO] and that, too, had the desired effect, but their impact of course has been overwhelmed by other factors.
How amusing, Posen justifies more ‘aggressive’ money printing just like the ECB did with their LTRO’s – and then in the same breath admits that the LTRO have ‘been overwhelmed by other factors’, or in other words had failed. It’s always someone else’s fault when it comes to the BoE.
Posen then admits that the Fed blew up the housing bubble in the 2000s – but then fails to see the bubble staring him right in his face right now:
A decade ago, the Federal Reserve and other central banks were criticized for creating a bubble by keeping interest rates too low for too long. To whatever extent the Fed loosened too much in the early 2000s, it is only a fraction as much as they and we have eased monetary policy since September 2008, and we have kept it there – and there has been no commensurate rise in asset prices, let alone an active carry trade or bubble.1
Er, what about those 300 year low yield (high price) gilts in the UK – no bubble there then Posen?
Posen then admits that the BoE, were it to actively buy ‘private assets’, are ‘unqualified’ to evaluate their credit risk:
A second operational concern is that monetary policymakers and central bank staff are unqualified to evaluate the credit risk of variegated private assets. I do not deny this characterization in the slightest…
This is making our point all along – how can a group of bureaucrats sat round a table know what the price of ‘anything’ should be? They can’t, but now even the BoE admits this obvious point – but incredibly, despite this, they still want to print more money and ‘buy private assets’. What can possibly go wrong when people with infinite ‘money’ admit they don’t know how much they should pay for stuff, but do it anyway?
Posen unbelievably then calls for the UK government to set-up a Fanny Mae type organsiation:
I would advise, and I would encourage the Bank to advise, HM Government to create a Fannie Mae-type of entity to facilitate development of such securitization
For those in the cheap seats Fanny Mae has needed the biggest bailout by far out of all the plethora of bailed-out organisations in the states. As USA news reports:
It’s the first time since Fannie Mae entered conservatorship in 2008 that the company hasn’t needed a quarterly financial pick-me-up from the government.
The agency has received $116 billion in aid from the Treasury Department thus far and a total of $170 billion in taxpayer funds overall, the costliest bailout of the financial crisis.
And Posen’s grand-plan to save the UK economy is to create a UK version of this agency – the people on the BoE are really that insane. An insanity that will only be surpassed if/when this government actual set’s it up.
Posen not happy with just suggesting one total ‘fail’ of an idea, he has another. ECB style LTROs – you know the ones that the ECB tried at the start of this year and failed competently to stop the insolvency of Greece spread to Spain (oh, and not long until Italy now):
What about long-term repo operations discounting a large range of loans from banks, in some variant on the ECB’s model? Could these be alternative means to the same ends as asset purchases? I believe that LTROs can be quite helpful to putting a floor under the macroeconomic outlook as well as addressing directly disruptions in the bank funding markets. But I do think such operations are best thought of as an emergency response, perhaps an permanent expansion of available discounting facilities at penalty rates, rather than as a mainstay of expansionary monetary policy
So there you have it folks – this is what the ‘best and brightest’ at the BoE has to offer, two massive ‘fail’s’ that will guarantee to make the situation in the UK much, much worse – oh, and the value of the pound that much lower.
Also note last time Posen was out with a speech calling for money printing he got his way within a couple of months. Expect this time to be no different… unfortunately.
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