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What a difference a decade makes

Ritchie today:

In 2004 around 75% of Uk government debt was owned by insurance and pension companies. The rest was almost entirely owned by overseas interests, Banks held almost none, and nor did the government.

Ritchie a decade ago:

It was in this way that the banks profited enormously from quantitative easing. Because the government was, effectively, forcing the price of gilts up by pushing the interest rate down in pursuit of its monetary policy the bank , without having to take any action or initiative of their own, make a profit.

How much profit that was is hard to guess at. It would be invaluable if research was undertaken to establish this. But I suspect that a significant part of the £199 billion of spending on QE was turned, almost immediately into profit by UK based banks. It is this fact, and nothing else, that restored bank profitability and bank bonuses in 2009.

This may have achieved a result: the banks were more liquid as a result. I think that the wrong way of recapitalising the banks. It would have been substantially more honest to acquire equity stakes in them. But what this process did not do was a) mean that the Bank of England directly supported the deficit, although of course by implication it did or b) mean that more money was available to the economy as a whole. The banks who sold the gilts kept the proceeds on their balance sheets. Other institutions who made sales used the funds to inflate other asset prices.

I believe QE can work. But QE1 was captured by the banks.

That’s why QE2 has to be different.

As the banks didn’t own any gilts – in fact the banking system was short gilts at the beginning of QE – then of course the banks didn’t make the profit from the purchase of gilts, did they?

Still, we do have useful information here. Today is 12 April 2021. The claims about gilts, banks, QE and profits were made 4 November 2010. Thus it takes Richard Murphy 10 years and 159 days to catch up with reality. Not bad for someone who trendsets, produces the agenda for future actions.

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