Britain to Print £150 billion

[beerwm]

It pledged for the first time in its 315-year history to start effectively printing money as its main means of controlling the economy, warning that this was the only way to prevent the UK from suffering a lengthy recession and potentially becoming mired in deflation.

The move means that for the first time, interest rates are no longer the primary tool for monetary policy, with the Bank instead directly pumping cash into the system.

The Bank announced the radical step after cutting rates by half a percentage point to an all-time low of 0.5 per cent yesterday - the lowest it judges they can go without causing the entire financial system to malfunction.

The decision to create more cash, announced by Bank Governor Mervyn King and the Chancellor of the Exchequer Alistair Darling yesterday, is regarded as a last gasp measure for the authorities to prevent Britain from sliding into a 1930s-style depression.

However, with little evidence that so-called quantitative easing has succeeded elsewhere in the world, experts voiced fears about the consequences of these "nuclear" economic measures.

Some fear that this extra infusion of cash will generate a tidal wave of inflation some years in the future, consigning Britain to many years of either high inflation or perhaps even Zimbabwe-style hyperinflation if left unchecked. Others voiced worries about the economic legacy the unprecedented move will leave future generations, with the economic policy textbook having been torn up amid the current crisis.

The Bank's own Monetary Policy Committee member Andrew Sentance has described the new post-interest rates world as representing "a step into the unknown". Under the new system, the Bank will keep interest rates at this close-to-zero rate for the foreseeable future. It will instead attempt to boost the economy by buying a variety of assets such as corporate and government debt from investors such as pension funds and insurance firms.

Importantly, however, it will pay for these assets not with a pre-raised cache of funds but by creating new money and transferring it to the investors. Mr King said the Bank will create up to £150 billion of cash to spend on the scheme, with the first £75 billion to be spent in the next three months, starting next Wednesday. The total is equivalent to just under £5,800 for every household in Britain. However, should the scheme fail to spark any growth in the economy, the amount it will spend is likely to soar even higher.

"The world economy has turned down very rapidly since last Autumn, the amount of money is not growing at all, and the economy is in a recession, so we need to increase the supply of money," said Mr King.

The effect will be to funnel a significant amount of money directly into the financial system. Although the £150 billion is a significant figure, equivalent to just over a tenth of Britain's entire annual economic output, the Bank hopes that the eventual effect of the injection will be far greater since it will encourage investors who receive the money to go out and spend it in the economy, helping bring the credit crunch to an end.

The Bank has had a team of ten experts working on constructing the scheme just before Christmas, as it became increasingly obvious that interest rates were failing to stimulate the economy.

Graeme Leach, chief economist at the Institute of Directors, said: "We strongly support quantitative easing and think it will be most effective if the Bank is aggressive in its use.

"Markets need to see a shock and awe approach over the coming months but even then there is no guarantee of success."

Although America's central bank, the Federal Reserve, and the Bank of Japan, have undertaken to use these radical policies as well, the Bank has distinguished itself by taking what it considers to be a deeper and further step than any of its counterparts. Nevertheless, there are doubts over how successful the Japanese were with their money creation, while it remains too early to judge the Fed's success.

Barely more than an hour after the Bank's announcement, the European Central Bank cut its own interest rate by half a percentage point to 1.5 per cent and indicated that it will keep cutting borrowing costs and may soon embark on similar unconventional policies.

Tony Dolphin, senior economist at the Institute for Public Policy Research said: "Such a policy has never been tried before in the UK, so it is impossible to gauge the likelihood of its success. But desperate times require desperate measures and with the UK and global economies in the midst of their worst recessions since the War, and in the absence of inflation pressures, it is right that the Monetary Policy Committee is doing everything in its powers to support economic activity."

Charles Goodhart, a former MPC member, said: "We're moving into a new world in the UK from interest- rate adjustment to quantitative easing. It's a great deal more uncertain how things will be done. This month what the MPC says is going to be much more important than what they do."

Mr King pledged that as soon as the policy appears to be effective he will reverse it by selling off the assets and effectively destroying the £150 billion the Bank is creating in the coming months. However, many economists are sceptical that the Bank and Government will be able to resist the temptation to allow inflation to run out of control.

http://www.telegraph.co.uk/finance/...ion-leap-in-the-dark-for-Bank-of-England.html

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any idea of the side-effects?

GBP to fall?

 

[doctorj]

I've offered the use of my bubblejet for a very modest commission but strangely I'm yet to hear back...

 

[Happy]

Zimbabwe comes to mind.

 

[sinner]

At least in the UK they call it what it is!

You rarely see the phrase "printing money" in US mainstream press.

 

[drsmith]

Do they print it or create it electronically?

A one followed by a heap of zeroes and the Enter key is far more environmentally friendly than the printing press and obviously far simpler.

 

[inrodwetrust]

From an ABC's AM interview

Bank of England to print billions of pounds

So the bank's governor Mervyn King has announced that the British Treasury has given him the authority to print 75-billion pounds or $AU165-billion worth of new money. The technical term for it is quantitative easing.

MERVYN KING: We need to continue to increase the supply of money. And what we're announcing today is measures to increase that supply directly. So we'll be buying assets from individuals or institutions and giving them money in return.

Basically putting money into the systems by buying corporate bonds, although I don't know what he means by buying assets from individuals.
Printers perhaps?:

And the idea is too take money out of the system by buying govt bonds, to complete the process. AFAIK.

ROSS WALKER: The aspect of quantitative easing is that the central bank comes in, is buying up government bonds, which of course pushes up their price. And that actually in the case of Japan caused some big problems because you then had a lot of people relying on elevated values of those assets. They then fell back once the whole quantitative process began to be reined in.

 

[kitehigh]

Do they print it or create it electronically?

A one followed by a heap of zeroes and the Enter key is far more environmentally friendly than the printing press and obviously far simpler.

The money is created electronically, no need to print that much.

http://business.smh.com.au/business...to-print-money--75b-pounds-20090306-8q8y.html

"The new cash is created electronically, but the process has much the same effect as printing notes because it expands money supply and boosts the balance sheets of banks and institutions."

 

[GumbyLearner]

The money is created electronically, no need to print that much.

http://business.smh.com.au/business...to-print-money--75b-pounds-20090306-8q8y.html

"The new cash is created electronically, but the process has much the same effect as printing notes because it expands money supply and boosts the balance sheets of banks and institutions."

It looks like they might need it.

Lloyds nationalized

Acquisition of HBOS proves many assets exposed via non-disclosed hidden junk.

http://www.theaustralian.news.com.au/business/story/0,28124,25157014-643,00.html

A couple of excerpts

On a shareholder internet forum at the weekend, reaction to the effective nationalisation of Lloyds was apoplectic. "This is the biggest bank Roby in British history," says one poster. "Welcome to the socialist republic of UK Plc," adds another. One contributor suggests Daniels and Blank be "strung up" in especially painful fashion.

and

The taxpayer now owns Northern Rock, Bradford & Bingley's mortgage book and almost all of Royal Bank of Scotland and Lloyds and, through them, more than half of all mortgages, retail accounts and loans to small and medium companies.

There is also a mind-boggling potential exposure to losses should the fortunes of the banks and the wider economy deteriorate. The scheme insures RBS and Lloyds against the fall in value of pound stg. 585 billion worth of assets, roughly equivalent to the Government's entire annual spending.

Ministers admit the full cost of the scheme is uncertain. "At this stage we just don't know," Treasury financial secretary Stephen Timms says.

Tory MP for Wokingham John Redwood says: "If buying one very large bank was careless, buying two is lunatic. When the Government bought RBS it bet the farm. Now, buying control of Lloyds, it is betting the farm, shop, factory and everything else of value in our overborrowed country."

 

[gfresh]

Looks like the UK Government is taking on more than their very own balance sheets! Can they really afford to if they do not really know the asset quality? Could we be seeing the bankruptsy of the UK in the next 12 months I wonder? Iceland style..

What happens to these banks if the government now backing them also goes bankrupt?

Looks like stage 2 of this crisis is in effect, large organisations that took over toxic ones, are now drawn under themselves, now the government is taking on these organisations and... ?

 

[noirua]

PM, Gordon Brown, "Kevin, we're going to spend £150 billion in an effort of quantitative easing."
PM, Kevin Rudd, "Gordon, it only cost me $10.38, a packet that is, of exlax. Did the trick fine, you really must have a serious problem m8."