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According to Barclays, who is actually to blame for this mess?


1:16 pm - July 4th 2012

by Frances Coppola    


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Following Bob Diamond’s resignation yesterday morning – forced, according to the BBC, by an unholy alliance of the Bank of England’s Mervyn King and the FSA’s Lord Turner – Barclays is fighting back.

It produced this statement in advance of Diamond’s meeting with the Treasury Select Committee today.

The impression given by this statement is that Barclays feels it has been hung out to dry for manipulating a rate when they believed they were doing so under instruction from the Bank of England.

And Barclays insists that other banks were submitting lower rates and that Barclays repeatedly complained to the British Bankers’ Association (BBA), the Bank of England, the FSA and the Federal Reserve about this to no avail.

If it’s true that Barclays warned regulators that other banks were manipulating their submissions and regulators ignored the warnings, it doesn’t exactly show the regulators in a good light. That’s bad enough.

But scroll down through the statement and the charts in the appendices, and right at the very end there is a file note recording the main points in a telephone conversation between Paul Tucker of the Bank of England and Bob Diamond at the height of the financial crisis in 2008.

Here it is in full:

It would appear that someone ‘senior’ in Whitehall didn’t want Barclays out of line with other banks. Wonder who that was?

I’m not the only person who noticed this, by the way. Joseph Cotterill at FTAlphaville did too.

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About the author
Frances is an occasional contributor to Liberal Conspiracy. She spent 17 years of her life working at a senior level in banks, but now is a professional singer, singing teacher and image consultant. She blogs here.
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Reader comments


1. Luis Enrique

regulators might have been happy about too-low libor rates during the crisis, with good reason. Whitehall officials might ask why Barclays reported borrowing rates looked so high in comparison to others, with good reason. Don’t we want people in government paying attention and asking questions about things like that?

if other banks really were low-balling their libor rates during the crisis, that “mess” was not created by the mystery questions-asking Whitehall mandarin.

I suppose banks didn’t want to report honest libor rates because that would make them look like there were in (even more) trouble – an admission “we have to pay through the nose to borrow” is just the sort of news to spark a run. How angry should we be about that? It’s not obvious to me. Normally we certainly wouldn’t want banks misleading people about something like that, at times of systemic crisis, it’s more complicated.

I think we can be angry about investment banks pissing about to help their trader buddies, though. That only came out because people were dumb enough to commit to email – imagine what goes on that’s organized by word of mouth. Who trusts an investment bank to maintain a Chinese Wall now?

2. margin4error

Anyone but barclays – seems to be barclays’ view of blame.

But the “who” is less important than the “what”

What is to blame, is the general culture of unacountability across the entire British banking system. The culture of banking in the UK has changed dramatically since Big Bang in the 80s – and while much of the old boy network mentality is fortunately gone, the more cut-throat nature of banking now has not been addapted to in regards to managing consequences and restricting behaviour.

That is a massive task – but it is one we need to address.

Who can we trust to put what is ‘wrong’ right?

The bankers?
New Labour; who urged the City on with ‘light touch regulation’?
The Tories; who seem to have forgotten that they stood in ‘Opposition’ and cried for even more freedom for their donors.
The very idea of an inquiry where politicians investigate bankers is like a fox lecturing a wolf on the evils of his carnivorous lifestyle.
It’s hard to believe there will be any real reforms, just more smoke and mirrors.

4. margin4error

Barrie

Everything you just said is smoke and mirrors.

So set up a public inquiry – put a judge in charge – and get everything out in the open.

After all, who can we trust over the murdoch scandal? Well, maybe no one – but it does seem to be being fixed…

5. Richard W

” If it’s true that Barclays warned regulators that other banks were manipulating their submissions and regulators ignored the warnings, it doesn’t exactly show the regulators in a good light. ”

Hell will freeze over before the UK media class go after public servants with the same ferocity and forensic scrutiny that they apply to the private sector. Just watch them over the next few days lose interest in the Paul Tucker angle. Their complete lack of criticism of King has been one of the disgraces of the financial crisis.

Who was the someone ‘ senior ‘ in Whitehall that was unhappy that Barclays were out of line?

I would suggest that it was likely to be a senior official who understood the importance of Libor.

I suspect it was the same senior Treasury official who was leaking market sensitive dynamite to Robert Peston throughout 2007/08. Peston knew better than anyone what was going on behind the scenes because someone senior in Whitehall was telling him. Possibly someone who used to be a colleague at the FT and worked at the Treasury. At the time the rest of the press were amazed how well informed Peston was and speculated who the leaker was but never did out the source.

There was a senior official who had been an FT colleague of Peston. The same official who was deeply involved throughout the UK banking crisis from NR to RBS. Quite probably the last thing they wanted on their hands was an additional bailout of Barclays.

” Membership of the UKFI Board will comprise a private sector Chair, three non-executive private sector members, a Chief Executive and two senior Government officials from HM Treasury and the Shareholder Executive. Sir Philip Hampton has agreed to become the UKFI’s first Chair and John Kingman will become Chief Executive. ”

” John Kingman is Second Permanent Secretary and Managing Director, Public Services & Growth, HM Treasury. Previous roles in the Treasury have included Managing Director, Finance and Industry and Director of the Enterprise & Growth Unit. John has worked on the Lex column of the Financial Times and in the Group Chief Executive’s office at BP. He has also been a Board Director of the European Investment Bank, a non-executive director of Framestore CFC Ltd, and a Visiting Fellow at the Institute of Political and Economic Governance at Manchester University. ”
http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/press_114_08.htm

http://www.guardian.co.uk/business/2009/may/22/john-kingman-ukfi-treasury

Who’s to blame?

Simple. The clowns who keep peddling the ‘free market,’ and self regulation. As I keep telling you. There is no such thing as a free market. There are markets, sure, but they are all fixed. And self regulation is no regulation.

Oh, and the clowns who think rigging and fixing markets is not a big deal, but stealing bottles of water is.

Oh and guillotine a few from time to time might help.

7. Frances_coppola

Sally,

Brilliant ball, accurately aimed at the wrong stumps.

George Osborne keeps claiming that what went on at Barclays is all due to George Brown and the people around him.

The trouble with that claim is that there is no supporting evidence, certainly none emerging from Bob Diamond’s testimony to the Treasury Select Committee hearing on Wednesday.

It looks as though Osborne is getting increasingly desperate to distract attention from who is to blame for the UK’s double-dip recession and the ensuing policy u-turns to boost aggregate demand, like stopping the fuel tax escalator, originally introduced by Kenneth Clarke when he was Chancellor, and the imminent prospect of more Quantitative Easing by the BoE’s Monetary Policy Committee:

The UK economy needs another big dose of quantitative easing to kickstart the stalled recovery, a Bank of England policymaker has asserted.

David Miles reiterated his support for a further cash injection of at least £50billion in an interview with the Financial Times at the weekend.
http://www.thisismoney.co.uk/money/news/article-2164273/Bank-Englands-Miles-UK-economy-needs-substantially-quantitative-easing.html

Seeing as it is the 4th July, here is a quote from one of the founding fathers that does not get much play from the tea party or their right wing mates.

James Madison……..” There is an evil which ought to be guarded against in the indefinite accumulation of property from the capacity of holding it in perpetuity by … corporations. The power of all corporations ought to be limited in this respect. The growing wealth acquired by them never fails to be a source of abuses.”

10. Frances_coppola

Oh no, not more QE. Surely there is enough evidence by now that throwing money at banks doesn’t make them lend? QE DOES NOT WORK, and there is some evidence emerging that it is not only useless, it is actually counterproductive. See this post from FTAlphaville:

http://ftalphaville.ft.com/blog/2012/07/03/1067591/the-base-money-confusion/

Frances: “Oh no, not more QE. Surely there is enough evidence by now that throwing money at banks doesn’t make them lend? QE DOES NOT WORK”

You and I both predicted months ago that the banks would mostly hoard QE in reserves rather than boost lending to business which is what has happened.

This goes a long way to explain why George Osborne launched that initiative in his recent Mansion House speech for low interest loans from the BoE to the banks so they would lend more to consumers and to businesses and so boost aggregate demand to get the economy out of the double-dip recession.
http://www.telegraph.co.uk/finance/economics/9332318/George-Osbornes-Mansion-House-speech-in-full.html

Osborne’s speech is belated recognition that the economy is being held back by demand deficiency. But then Keynes likened the effectiveness of monetary policy for dealing with persisting recessions to pushing on a piece of string.

12. Frances_coppola

Bob B

And that initiative will be no more effective than QE, because it is simply another version of throwing money at banks. If banks aren’t lending it’s because THEY DON’T WANT TO, not because they are short of reserves. That FTAlphaville post gives an excellent explanation of why banks might not want to lend and why creating more reserves achieves nothing. Doesn’t matter whether the money is given or lent, it’s useless.

In this post I explain that what is needed is more government debt, not more reserves – not in order to stimulate the economy, though this would be a by-product, but to address the safe collateral shortage that is causing the flow of funds through the financial system to dry up:

http://coppolacomment.blogspot.co.uk/2012/06/money-machine.html

If you are going to give banks money, give it to them with the string that they must pay off peoples mortgages with it. Then the public will get the benefit,and might start spending.

Giving the bankers money to gamble at the casino is not working.

Frances: “If banks aren’t lending it’s because THEY DON’T WANT TO, not because they are short of reserves.”

The banks are being pressed to increase their capital requirements – to render them more robust against shocks – but are claiming lending risks are an inhibiting factor in prevailing circumstances or that there is insufficient demand for business loans on the part of business.

Whichever, the systemic consequence of the failure of the banks to increase loans for business investment is to depress aggregate demand and hence the economy. In that climate, lending to business becomes more risky so the reluctance of the banks to lend to business for fear of the lending risks amounts to a self-fulfilling prophecy. Basically, Keynes was right about the ineffectiveness of monetary policy as a policy instrument for dealing with persisting recessions.

The fine print of the new policies for cheap BoE loans to banks which Osborne announced in his Mansion House speech are still not clear as best I can tell. Who is to withstand the losses on the additional bank loans – the banks or taxpayers?

A suggestion I made here several months back for ensuring that QE does boost demand is for the BoE to use additional QE to buy bonds from a housing corporation for lending on to housing associations to enable them to build more social housing. That would certainly boost demand for the flagging construction industry:

Construction output has fallen at its fastest rate in three years, dropping 4.9% to £7.8bn in the first half of 2012.

The decline, which is being partly blamed on the double-dip recession, comes amid hopes that the sector would stimulate growth in the economy.
http://www.bbc.co.uk/news/business-18678010

And she’s followed it up with yet another long hop.

16. Frances_coppola

Bob

If they are going to do more QE they really must do something more useful with it than buying gilts. Some form of UK TARP wouldn’t be a bad idea – bank balance sheets look awful, and that is a major depressor of lending.

I think your construction idea is a departure from strictly monetary use of QE – it would amount to direct monetisation of govt spending, which is contrary to EU rules and would upset the IMF. Not that that is necessarily a bad thing!

Osborne is trying to generate lots of political froth to distract attention from the double-dip recession for which he is responsible as Chancellor.

His Mansion House speech was effectively an admission of incompetence in the face of prior warnings about the downstream consequences of his budget – not just from the Labour opposition but from economic commentory in the FT and by the NIESR.

Of course, the rigging of Libor is bad and very likely to inflict long-term reputational damage on London as a global financial centre. But the double-dip recession means permanently lost GDP – which is currently running 4pc blow its previous peak in 2008 – and, very likely, loss of production capacity.

18. gastro george

Barclays and the government are being pretty successful at getting the media to concentrate on the 2008 BoE sideshow. Isn’t the real issue the systematic manipulation of LIBOR (and others) in the many years before the crash – enabling them to fix the derivative casino?

Frances: “I think your construction idea is a departure from strictly monetary use of QE – it would amount to direct monetisation of govt spending, which is contrary to EU rules and would upset the IMF. Not that that is necessarily a bad thing!”

There has already been some debate in the financial press and economics commentary about why QE is only applied to purchasing gilts in the money market – which has largely led the previous holders of the gilts to stash the sale proceeds away in reserves either to satisfy current pressures for financial institutions to boost capital requirements or to await the arrival of more propitious times for lending to business. Btw we should recognise that without past QE bank lending to business would likely have been even worse than it was.

My suggestion for using addditional QE to finance lending for social housing would address current issues about the scarcity of social housing as well as making sure that the QE was boosting aggregate demand more or less directly.

The current flurry of media reports about the imminence of more QE by the BoE suggests to me mounting concerns in official quarters about the persisting recession and what to do about it.

20. Richard W

If history is any guide there will be global warming in hell before King allows the BoE balance sheet to be used by the politicians by buying housing association bonds. King had obviously been told he must do something and the announcements in the Mansion House speech were designed to have a big headline number but really amounted to very little. King clearly outmaneuvered the politicians. The £80 billion funding for lending initiative is a gimmick that will take years to reach that total. All it means is banks can extend loans without expanding their balance sheets and having to hold more capital. However, it does not really do anything for current loan books.

The sterling extended collateral term repo facility is designed to improve liquidity and not directly credit. It is cheap money but falls well short of the three-year money that the ECB LTRO offers. The Bank will determine how much is lent and not demand. It is only six-month money so will do little to address medium-term funding difficulties. An auction determines the rate for the money rather than fixed, but a minimum of 25 basis points above Bank rate.

The first auction just cleared at the minimum 25 basis points. So better than nothing but clearly not that attractive. King won this encounter with the Treasury by giving the impression of doing something without actually doing much.

21. Luis Enrique

Frances,

that’s a very interesting article you link to @10.

First, it demonstrates that it is quite wrong to observe high levels of cash reserves at central banks, and conclude that banks aren’t lending because they are hoarding cash. I am pleased to realise this because it is a mistake I think I have made myself. The quantity of cash on reserve at the central bank is the number of potatoes in the system, the amount of lending is how often the potatoes are being passed from hand to hand. You can’t infer one from the other.

The second interesting thing in that article concerns the effect of trying to increase the hot potato effect by imposing a negative interest rate on reserves. The author argues this will in fact be contractionary. I am not so sure. Yes, a negative IOR isn’t going to reduce the aggregate quantity of cash held in reserve (it can’t, unless cash-in-hand held by households and firms increases) but it might still spur lending by changing the relative returns on various assets, increasing bank’s willingness to lend at lower interest rates hence changing household & firm’s willingness to borrow. Banks will fail, in aggregate, to reduce cash on reserve, but in trying to do so (taking cash on reserve and lending it out – and then eventually getting the same cash returned to them as deposits) the money multiplier may crank into action. But the author argues that instead banks will pay off liabilities, shrink balances sheets and may even start hoarding physical cash.

But that article does not tell us QE won’t work. It’s wrong to think QE is supposed to work because increasing cash in the system somehow increases bank’s ability to lend. That’s not true (banks are not reserve constrained as discussed ad infinitum) and it’s not how QE is intended to work. Look again here:

http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/default.aspx

QE is supposed to work via other channels. For example by increasing inflation. (and if you don’t think QE increases inflation, they let’s monetize the entire stock of government debt and fund fiscal stimulus, why not).

Luis: “QE is supposed to work via other channels. For example by increasing inflation. (and if you don’t think QE increases inflation, they let’s monetize the entire stock of government debt and fund fiscal stimulus, why not).”

Whether QE is likely to boost inflation surely depends on: (a) whether it boosts aggregate monetary demand – which it won’t do to the extent that QE is hoarded; (b) the extent of spare capacity in the economy and whether that capacity is able to respond to an increase in aggregate demand.

23. Frances_coppola

21 Luis

I’ve discussed this question of the supposed inflationary effect of QE ad infinitum with a lot of people. As my view is that government debt is simply another form of money, QE cannot possibly be intrinsically inflationary since all it does is replace one sort of money with another. In theory it debases the currency, but there is little evidence that this happens in practice and still little evidence of any inflationary effect either. The idea that QE is inflationary is based on the same wrong idea of how the monetary system works as Singh & Stella’s criticisms of negative CB deposit rates in Izzy’s article, which is why I linked to that one. But Singh & Stella have actually attacked the “QE is inflationary” meme themselves here:

http://www.voxeu.org/article/central-bank-reserve-creation-era-negative-money-multipliers

We do not have an example of a sovereign voluntarily monetizing its debt stock when it is not shut out of markets: every example of hyperinflation due to monetization in the last century (and there are a lot) has been a distressed sovereign in the aftermath of a severe economic shock, shut out of markets, often with serious foreign currency debts and usually suffering a catastrophic collapse of production. So the hyperinflation scare story simply doesn’t compare like with like.

However, if you read my own post (link above) you will see that the last thing I would advocate, in a financial system that depends on government debt and currencies being roughly in balance, is large-scale monetization of debt. On the contrary, I concluded that even the smaller scale monetization of QE is causing liquidity problems in shadow banking and that therefore more government debt is needed to replace that being withdrawn from circulation.

But quite apart from all this, whatever stimulative effect QE has is weak at best and I am of the opinion that there are far more effective ways of stimulating the economy than increasing the monetary base.

24. Luis Enrique

Bob

well in theory, as I imagine you know, actual inflation responds to expected future monetary policy, and if QE is a signal of more accommodative policy then it might cause inflation regardless of what happens to the money.

But anyway, you are right, the extent to which QE will cause inflation, in current circumstances, is unknown. So what’s not to like? Either it will stimulate AD, or it won’t, so we can safely monetize the public debt and make room for fiscal expansion.

Bob Rowthorn and Bill Martin argue here that the British economy isn’t currently supply constrained:
http://www.cbr.cam.ac.uk/pdf/BM_Report3.pdf

If so then it’s crucial to boost aggregate demand and the debate needs to focus on how best to do that.

Osborne’s Mansion House speech explicitly recognised the importance of demand in getting the economy out of recession mode, which is a great step towards enlightenment. At least the Conservatives seem to have escaped from their conventional wisdom that empowering small business employers to fire their employees without cause or compensation is what is holding the economy back.

26. Luis Enrique

Frances,

“QE cannot possibly be intrinsically inflationary”

fine. I think you’re ignoring some other possible channels via which it might be (i.e. as a signal of future monetary policy) but fine, lets say QE isn’t inflationary.

In which case, what are the costs of monetizing 100% of govt debt? You argue it would create a shortage of collateral in the shadow banking system. Again, I think there’s more that could be said on that – but let’s just accept you’re right and that’ would be the cost of monetizing government debt.

What are the benefits? We have a public sector who is not only failing to stimulate the economy with government funded job-creation etc. but is actively harming it by having government departments fire workers, cut back on spending etc. And why are they doing that? Because they are worried about government debt and the deficit. But if we can monetize the debt without causing inflation, everything changes.

I think you need to argue the costs are worse then the benefits, not just point to the existence of some costs.

27. Richard W

22. Bob B

” Whether QE is likely to boost inflation surely depends on: (a) whether it boosts aggregate monetary demand – which it won’t do to the extent that QE is hoarded…”

Well it depends what you mean by that because it is not altogether clear. ‘ Aggregate monetary demand ‘ does not mean anything. We are in recession because the demand to hold money is elevated and that reduces economic activity. Recessions are always caused by a rise in the demand to hold money unless there has been some supply shock. So policymakers do not want to boost money demand, they want to reduce money demand. One of the transmission mechanisms of QE is through reducing the spread of corporate bonds over gilts. These are often priced at a spread to a government debt instrument of the same maturity and reducing the spread does reduce the demand to hold money.

One can’t believe that QE changes the government yield curve and also believe that riskier assets which uses the government yield curve as a benchmark are unchanged. That implicitly is what people are saying when they say QE has no effect. All the variables change with QE and so does the demand to hold money. We could say it is not enough but that is a different argument.

QE is a swap of assets but no one ever suggested it was anything other than a swap.

I buy the shortage of safe assets story. However, I’ve read people suggesting that BoE QE reduces the amount of safe assets used in repo, which is not the case. It is nearly always government debt instruments at the front end of the yield curve which are used in repo, usually Treasury bills. The BoE QE operations only buy in the 10-25-year maturity a completely different end of the market. QE changes the portfolio ratios of pension funds and insurance companies etc but only affects banks through their reserves. Moreover, swapping reserves for gilts reduces the need for bank repo by the same amount because reserves have increased.

Why not monetise the entire national debt stock? That is a variation of Richard Murphy’s proposal on here to cancel the gilts bought by the BoE.

One of the tools the BoE use to conduct monetary policy is through paying to the banks interest on reserves. So what would happen if the BoE bought the entire stock of gilts in market hands? They would in effect transform the maturity of the national debt to one-day Treasury bills. The national debt stock would not disappear, it would just change to reserves which the BoE are paying interest on. Eliminate interest on reserves as a form of reducing government liability and they would lose control of monetary policy completely. QE would then be massively inflationary unless we seen an unlikely increase by the same amount in the desire to hold money. A hardly credible liquidity trap.

28. Luis Enrique

Richard W what do you make of the arguments concerning the IOR in the alphaville post Frances links to @10?

29. Luis Enrique

when it comes to QE, just looking at the contemporary situation and talking about swapping one form of zero-interest government liability for another etc. is, I think, making the mistake Scott Sumner describes in point 2. here:

http://www.themoneyillusion.com/?p=15196

and that is:

The big mistake most people make is overlooking the intertemporal aspect of monetary policy. It’s always true that a temporary doubling of the money supply (say for one week or one month) will have almost no effect on the price level, that’s true regardless of the level of interest rates…. So if we are going to talk about QE it only makes sense to talk about changes in the base that are expected to be permanent. … Even if rates are zero; interest rates will not be at zero forever.

Of course the central bank doesn’t actually want to target the monetary base, they should target NGDP. Thus they should promise to “leave enough base money in the system permanently so that NGDP is expected to rise at 5% a year.” Indeed they don’t need to even mention the term ‘monetary base’ just say they will target NGDP along a given path, level targeting, the implication is that you’ll provide the base money needed in the long run to make it happen.

and note his aside:

if interest rates are expected to be at zero forever, we should monetize the entire national debt

30. Richard W

@ 28 I will read it later to see what the argument is.

@ 29 I agree with Scott Sumner that interventions that are expected to be temporary have hugely different effects to what is considered permanent. It is a similar argument to temporary tax cuts do not work unless it is a temporary consumption tax cut. The BoE have been explicit throughout that their QE is temporary, the market believes them so the QE effect is limited. It is a similar issue to what happened in Japan. The likes of Krugman seen the problem and said that their central bank had to credibly promise to effectively be irresponsible as a way to exit their liquidity trap. Now, central bankers by nature are conservative and participants in the market know that. Therefore, exiting from suboptimal economic activity is incredibly difficult within their current monetary policy framework because participants in the market believe that central bankers are too conservative to do enough. The BoE interventions can only be temporary in the context of the present framework in which they conduct monetary policy. Yet, theory predicts that temporary interventions have only limited effects. Change the remit to a Scott Sumner 5% NGDP target and everything else changes.

” and note his aside:

if interest rates are expected to be at zero forever, we should monetize the entire national debt. ”

But no one expects interest rates to be zero forever, if that was expected the yield curve would be flat.

http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/

31. Frances_coppola

Luis

I’m not saying there are no benefits to monetizing debt. Clearly there are. But I would push back to you that there are costs that have not been considered, not least of which is the fact that government debt is extensively used as collateral, as “safe” investments for pension funds etc. and as a liquidity buffer for banks – these last two are regulatory requirements. The financial system is not yet in a position to create “safe” assets of the same standing and liquidity as government debt – its major source of “safe” assets prior to 2007 was MBS, which turned out to be anything but safe, and at present there doesn’t seem to be an alternative of sufficient volume and liquidity. Monetizing government debt on a large scale would therefore cause havoc in the financial system. This effect should not be ignored.

Richard W,

Yes, I’ve seen that argued about QE too, and I admit I had missed the fact that repo uses securities of a different tenor from QE. But even if it used the same tenor it would not be the main issue. The shortage of safe assets really arises from the replacement of unsecured lending with secured in the wholesale markets, and the downgrading of previously AAA-rated sovereigns. Demand for safe assets is far outstripping supply.

32. Frances_coppola

21 Luis

(caught up at last!)

Negative rates on CB deposits are contractionary BY DEFINITION. The question is to what extent this contractionary effect would be negated by banks increasing lending to the real economy instead of paying to park deposits at the central bank. Part of me would like to agree that making it more expensive for banks to maintain CB deposits might give them an incentive to lend, or to invest in more risky assets, but I doubt it, frankly.

I’ve said this again and again – bank lending is not determined by availability of reserves. The decision to lend is ALWAYS a commercial decision determined by the relationship of risk to return. At the moment banks are reducing risk, so they don’t want to take on more risky loans. Hence their high deposit balances. If you make it more expensive for them to hold CB deposit balances, they would simply find another safe asset to sit on – what price banks’ bullion holdings rising? The only form of lending they might do instead would be lending against safe collateral (and I don’t mean property) or under government guarantee. If the Government understood that, they would realise that Government guarantees for the LOANS THEMSELVES (not the funding) are the only way SME lending can be increased at the moment. Cue a State Investment Bank.

Richard W: “Aggregate monetary demand ‘ does not mean anything.”

In the standard macro model, “aggregate (monetary) demand” is short for “aggregate (monetary) demand for goods and servies”, in the usual symbols:

Y = C + I + G + X – M

Try the regular mainstream macroeconomic texts by Blanchard, Dornbusch etc..

As for the cause of recessions, it more illuminating to look to see what is happening to aggregate demand and what is happening to supply-side prices such as the prices of imported fuel or the possibility – as recognised by Kalecki and Abba Lerner – of powerful trade unions using monopoly power in the labour market to push up wage rates.

With the deregulation of money markets in the 1980s, it wasn’t possible to make much sense of what was happening with “money supply” data – which is why “monetarism” (or the Medium Term Financial Strategy) was formally abandoned as official policy in the autumn of 1985. The IMF pronounced the obituary on “monetarism” in 1996:

” …instability of monetary demand, especially in the context of supply shocks and declines in potential output growth, complicated the task of monetary authorities. As a result, during the 1980s most central banks – with some notable exceptions – either abandoned or downplayed the role of monetary targets.”
IMF World Economic Outlook, October 1996, p.106.

34. Luis Enrique

Frances #32

yes, hopefully it is well understood that banks don’t need reserves before they can lend in a crude sense, although they do need to find reserves after the fact, and the central bank can thus influence lending by influencing the price of finding reserves.

I (genuinely) don’t understand what you mean by negative IOR being contractionary by definition. For instance <a href="http://www.ft.com/cms/s/0/5d3f0692-9334-11de-b146-00144feabdc0.html#axzz1zYq9JpCI"Sweden did it because a negative IOR is supposed to be expansionary monetary policy i.e. a stimulant.

Also, I may be misreading you, but this:

“by banks increasing lending to the real economy instead of paying to park deposits at the central bank …. the decision to lend is ALWAYS a commercial decision … they don’t want to take on more risky loans. Hence their high deposit balances. ”

does’t sound consistent with the article you linked to at 10 which makes it clear that high deposit balances don’t mean banks aren’t lending – the level of deposit balances is determined by the central bank determined high powered money supply and would be the same whether banks are lending a lot or a little. So it’s not a more or lending to the real economy or having deposits at the central bank instead – if they were lending to the real economy they would still have the same deposits at the central bank, in aggregate at least although one bank could reduce its deposits if another bank increased theirs.


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  1. Liberal Conspiracy

    According to Barclays, who is actually to blame for this mess? http://t.co/qlUKP9j7

  2. Martin Grouch

    According to Barclays, who is actually to blame for this mess? http://t.co/qlUKP9j7

  3. Jason Brickley

    According to Barclays, who is actually to blame for this mess? http://t.co/sSOEswag

  4. leftlinks

    Liberal Conspiracy – According to Barclays, who is actually to blame for this mess? http://t.co/v0QUa1qB

  5. Mumbling Malone

    According to Barclays, who is actually to blame for this mess? http://t.co/qlUKP9j7

  6. BevR

    According to Barclays, who is actually to blame for this mess? | Liberal Conspiracy http://t.co/cptWFYTx via @libcon

  7. CAROLE JONES

    According to Barclays, who is actually to blame for this mess? | Liberal Conspiracy http://t.co/UT77fcYH via @libcon





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