Laughing
Well-known member
Not without a repeal of the 1998 bank of england act. Nothing I said was wrong. The government can ask, as policy for qe, the bank can say no. Equally the boe needs government permission to instigate qe.
What's really happening with this new Labour government
- Thread starter TheLodger
- Start date
Laughing
Well-known member
With a change to law. This isn't rocket science there is legislation that states and limits the autonomy of the boe.
BlindBoyGrunt
Well-known member
I think it's more the fear of the fight, or the challenge of explaining how the world really works that daunts them, so governments cling to the idea that they’re like households - needing to “balance the books” or “find money” before spending. This neoliberal mantra is baked into political rhetoric (“there’s no magic money tree”) and ignores the reality of fiat currency systems where the UK (or US, Japan, etc.) creates money by spending.
The Bank of England has been wholly owned by the government since 1946. It's very hard for any organisation to be independent of the government that owns it. The Bank of England definitely is not. The government granted the Bank of England some independence in 1997, but kept a right of veto over all it does, which means that the independence is pretty limited in practice. The only real tool available to the Bank of England is quantitative easing, and the Bank only undertakes this with the specific permission of the Treasury, who underwrites all its risk when engaging in quantitative easing activities. In that case to claim that the Bank of England is independent really does make little sense. The Bank of England is independent of the government so long as it does what the government wants. The Bank of England Act of 1998 provides a Chancellor with the option of overruling the decisions of the Bank of England. That means that the Bank simply has a veneer of independence.
Furthermore, the government has the power to remove that veneer of independence by revoking the BOE Act.
Laughing
Well-known member
You may be right. I suspect it's more to do with the general public being easily manipulated into thinking in terms of household budgets and the damage that could be done by ignoring that perspective.
Politics doesn't happen in a vacuum and every decision is looked at by our press for ways to manipulate the policy to criticise the government.
A lot of damage could be done.
Laughing
Well-known member
I am not going to go round in circles with you. The government can ask the boe to implement a qe policy the bank can say no. This is a fact.
My point is that the boe are very unlikely to refuse to do something the government wants to do, if it values the small level of independence that it has. If it tries to thwart the governments will, it knows that government can easily take away any powers that it has.
Please stop being obtuse.
Laughing
Well-known member
I am not being obtuse. You entered the argument, I think, giving me an FYI. I am aware and the bank acts independently of government directing where qe is concerned.
Whether Parliament can jump through hoops to change legislation is neither here nor there for the discussion we have been having. As things stand today the bank has independence on monetary policy which includes qe.
BlindBoyGrunt
Well-known member
The BOE's independence is very limited,You could say it is independent in name only.
The treasury appoints its governor.
The government creates money by QE or spending. When the government spends it credits accounts and the BOE acts as banker. The money enters the system and no permission is needed.
BOE may have operational independence over monetary policy - setting interest rates and managing inflation etc - but it is only semiautonomous because it's mandate comes from the government, so if the gov says that the target is 2% inflation, the bank acts to achieve this on their behalf.
Okay, some of us disagree on how likely the BoE would or wouldn't be to refuse spending the government decided to carry out. Lets park that.
I only mentioned that we of course can spend money in response to @Soutras incredulousness that we could pay for such lofty ambitions as ditching the child benefit cap.
Looking back at articles about it from before the election the claim seems to be that for £1.4bn spending, it'd take 300k children out of poverty. Total no brainer that. We're storing up so many costs for decades ahead when children growing up in those conditions become adults.
I only mentioned that we of course can spend money in response to @Soutras incredulousness that we could pay for such lofty ambitions as ditching the child benefit cap.
Looking back at articles about it from before the election the claim seems to be that for £1.4bn spending, it'd take 300k children out of poverty. Total no brainer that. We're storing up so many costs for decades ahead when children growing up in those conditions become adults.
I responded to your post which itself was a response to a post by SuperStu who said:
"there's unlimited money. We print our own"
You replied saying
"Love the 6th form economics but we can't print as much money as we like. Firstly the boe is responsible for creating currency, not the government.."
The clear implication in your response was that the government did not have the power to create new money only the boe. The reality is that since the government owns the boe it can order the boe to create new money and this is what happens every time the government spends money. This does not need to happen via qe. The government does not spend from an account called tax receipts. Taxes take money out of the economy subsequently. Your post suggested that the boe can simply overrule the government. The boe does not have the power to say to the government: "No..we will not let you have this money". With regard to qe the boe has the theoretical power to refuse the government, but this does not happen in practice. If it did the government would very quickly repeal the BOE Act. This is easily done.
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Laughing
Well-known member
I am aware of that. The government have no control over the boe use of quantative easing. As I said they can ask. The bank can say no.
The autonomy isn't in name only. Yes the government set targets, the bank decides how to achieve those targets.
Again I am going round in circles. It is a fact that the government can ask for quantative easing but cannot enforce it.
We can go round and round but that is a fact and no amount of discussion or opinion changes that fact.
This shouldn't even be in dispute, Google whether the government can enforce qe on the boe.
Laughing
Well-known member
There was no implication. It's a fact.
Boro.Fur
Well-known member
The government cannot directly force the BoE to implement QE or any other specific monetary policy measure, but the government can influence the BoE's actions through setting the inflation target and through the public and political discourse surrounding economic policy.
BlindBoyGrunt
Well-known member
You are going round in circles and you keep coming back to QE, but we're not talking about that. The government can create money to spend without the permission of the BOE. .
High street banks create money every day. When you go in for a mortgage or a loan to buy a car, your bank literally conjures the money up out of nowhere. The money doesn't exist, and then it does, no questions asked, no permission sought.
When the government does this, it owes the money to the bank which it owns.
You are simply being obtuse because you have lost the argument.
Billy Horner
Well-known member
That’s not how high street banks create money. They don’t (and can’t) “literally conjure the money out of nowhere”.
Firstly, people or businesses have to deposit funds with banks. The BoE will set a minimum capital requirement, meaning that the high street bank will need to hold at least that amount in cash reserves , but can use the rest of the deposit(s) to lend to other personal or business customers.
So, if a customer deposits £1000 with a bank and the minimum capital requirement is 10%, that bank will have to maintain at least £100 of that as cash reserves, but can use the remaining £900 to fund loans. When a borrower then deposits that £900 loan with their bank, they can then repeat the process (keep £90 and loan out up to £810) and so on.
But that’s not conjuring money from nowhere. It’s directly related to the deposits held and minimum capital requirement set by the BoE and is self limiting as a logarithmic progression.
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Read Money Creation in the Modern Economy from the BofE Quarterly Bulletin 2014 (Q1) if you're interested in that sort of thing.
TL/DR:
- The B of E no longer relies on reserve ratios or direct controls to control bank lending. Money multipliers/multiple credit creation is old skool. The rate of interest is the primary tool to influence credit.
- The government can spend money into existence - that's how fiat money originated. They don't need to tax first
- This is not without consequences. If the economy is already at/near full employment, it will be inflationary. The government can offset this by increasing taxation to act as a 'reserve drain'. Note - the tax is needed to offset the inflationary effect, not to finance the spending.
-Alternatively, the Bank will use interest rates to attempt to fulfill its inflation mandate, with the associated consequences for the real economy
TL/DR:
- The B of E no longer relies on reserve ratios or direct controls to control bank lending. Money multipliers/multiple credit creation is old skool. The rate of interest is the primary tool to influence credit.
- The government can spend money into existence - that's how fiat money originated. They don't need to tax first
- This is not without consequences. If the economy is already at/near full employment, it will be inflationary. The government can offset this by increasing taxation to act as a 'reserve drain'. Note - the tax is needed to offset the inflationary effect, not to finance the spending.
-Alternatively, the Bank will use interest rates to attempt to fulfill its inflation mandate, with the associated consequences for the real economy
No you've got it wrong. If a customer deposits £1000, it can create £9,000 new money to loan.
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Billy Horner
Well-known member
No, that’s not correct. The banking system can ultimately create £9000 in new loans, but not the individual bank based on just that one deposit.
If you’re-read what I wrote, I explained that the first bank can create a loan of £900, then a second (or possibly the same) bank receives that deposit and can create a further loan of £810 and so on. That’s why I said it was a self limiting logarithmic progression.
If you start with £900, reducing by 10% at each progression, and sum to infinity, the answer is £9000. That’s how the banking system can create that amount of new money, through multiple loans each slightly smaller than the previous one, not by simply converting a £1000 deposit into £9000 in loans.
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