Bank of England Restarts QE and Injects £75 billion into Economy, Calls the Current Financial Crisis "Worst In History"

Collateral damage: UK households, with increasing inflation. It's worth it, says the governor, Sir Mervyn.

Last time the Bank of England did the QE - quantitative easing - was in 2009, when it digitally printed £200 billion. This time around, it is expected, according to the Telegraph article linked, to exceed that amount by next year.

From UK's The Telegraph (10/6/2011):

Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.

Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.

Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

Announcing its decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets”

The Monetary Policy Committee [MPC] also said that the inflation-driven “squeeze on households’ real incomes” and the Government’s programme of spending cuts will “continue to weigh on domestic spending” for some time to come.

The “deterioration in the outlook” meant more QE was justified, the Bank said.

Financial experts said the committee’s actions would be a “Titanic” disaster for pensioners, savers and workers approaching retirement. Sir Mervyn suggested that was a price worth paying to save the economy from recession.

(The article continues at the link.)

Just like the US Fed counterpart, Sir Mervyn must be thinking the stock market is the real indicator of the economy. Print money, give it to bankers so that they can bid up paper assets like stocks.

QE, or quantitative easing, is supposed to work this way:

1. Central bank digitally prints money and buy government debts (treasuries, gilt, agency bonds) from the banks (in case of the US, primary dealers including many foreign banks);

2. Bank lends the money to individuals and businesses, who will then use that money;

3. Economy grows; if it doesn't grow, just keep doing the step 1 and see what happens. It takes a whole lot of money to achieve the result, they say, without quantifying "a whole lot".
   

How it worked in the US:

1. Central bank digitally prints money and buy government debts (treasuries, agency, agency MBS);

2. Banks get the cash, park it at the central bank receiving a decent interest; the portion they do not park at the central bank, they use it to bid up the so-called "risky assets" - mostly paper assets like stocks and futures, or bonds that they think the central bank will buy next;

3. Banks don't lend to individuals and businesses who could use cheap money, but only lend to credit-worthy people and big businesses who don't need or want money;

4. Stock market levitates on low volume, and the economy stagnates and shrinks.

5. Go back to step 1, repeat ad infinitum.
   

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Bank of England to Embark on Its Own QE2

Bloomberg reports:

"The Bank of England will increase its emergency bond-purchase plan by 100 billion pounds ($160 billion) to aid the economy as the government cuts spending, the Centre for Economics and Business Research said.

"The central bank will also keep its benchmark interest rate at a record low of 0.5 percent until at least “late” 2012, the London-based group said in an e-mailed statement today. The bank kept its stimulus plan at 200 billion pounds this month.

"Britain faces the largest public spending cuts since World War II as the government tackles the record budget deficit. The British Chambers of Commerce earlier this month backed a call by policy maker Adam Posen for the central bank to expand its bond stimulus plan as recent data indicate the recovery has slowed.

"“We expect the authorities to push the monetary policy levers hard in the opposite direction to the fiscal policy levers,” the CEBR said in the statement." [The article continues. h/t 'mizesaw']

So as the UK government tries to remedy decades of resource misallocation by slashing the bloated budget, the "independent" central bank will pour in more fiat money to be freshly misallocated.

The Bank of England's quantitative easing has been done at its wholly-owned subsidiary, Bank of England Asset Purchase Facility Fund Ltd (BEAPFF), and the amount spent for asset purchase is accounted for on the Bank of England balance sheet as "loan" to BEAPFF.

The balance sheet size of the Bank of England was 223 billion British pounds as of February 28, 2010 (the latest annual report), of which 200 billion pounds were for the asset purchase by BEAPFF.

By the way, the Bank of England policy maker cited in the Bloomberg article, Adam Posen, is an American who used to work for the Federal Reserve, the ECB, the US Treasury, the US State, the European Commission, the Japanese Ministry of Economy, Trade, and Industry, the UK Cabinet Office, the IMF, the US Congressional Budget Office (he still works here). He is a member of the Council on Foreign Relations and of the Trilateral Commission. (For more of his illustrious career, go here.)

In other words, Ben and Timmy have their man inside the Bank of England. Of course the British central bank will embark on the quantitative easing again. We can't let Brits succeed in reducing the deficit and repair the damage to the economy, can we?

"We'll all go together when we go", I suppose.

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