Session 2012-13
Quantitative Easing
Written evidence submitted by Mr. Alan W Kay FCA
2 WHERE DID THE BENEFIT OF THE QE MONEY GO?
3 NOBODY KNOWS EXCEPT IT COULD BE ANYWHERE IN THE WORLD!
4 This paper sets out the evidence that Parliament, the Bank of England, its MPC and the Treasury have no idea where the benefit of the Quantitative Easing money actually went. This is because they have no record of the identity or nationality of the actual owners. The Bank bought through agents – Gilt Edged Market Makers (GEMMs).
5 Furthermore, Bank officials appear to have misleadingly asserted to the Treasury Committee that the Bank "injected a vast amount of liquidity into the economy" when they had no idea where the benefit of the liquidity actually went.
6 Despite this lack of knowledge as to who owned the gilts and where the money went, a further £175 billion of QE was allocated by the Coalition for gilt purchases between October 2011 and July 2012. This also happened despite clear evidence from a detailed study of the MPC Minutes that its members had no clear idea either! Indeed, the Treasury, the Bank and the MPC seem never to have asked! Why not?
7 The following specific concerns are addressed in this paper:
a. The Bank has admitted in response to my FoI requests in 2009 and 2012 that it had no idea as to the identity (or nationality) of the real owners of the gilts purchased under QE. The Bank bought through GEMMs and thus has no knowledge of the identity of the actual beneficiaries of the QE money.
b. The Governor and his colleagues have persistently and misleadingly asserted to your Committee that the QE money has been injected into the UK economy without knowing who actually benefited from the money.
c. The MPC has persisted in expanding the QE programme despite frequently acknowledging that the QE money was not reaching the vital SME sector.
d. The Bank’s FoI disclosure to me in 2009 responding to questions related to the real fate of the QE money has been omitted from the Bank’s website listing of such disclosures.
e. Contrary to argument set out in the submission, the Bank has insisted that the benefit of the QE money could not leak out to the benefit of the global economy despite the gilt owner’s ability to exchange QE sterling into a foreign currency.
f. MPs such as Harriett Baldwin [1] with relevant investment banking and FX knowledge readily agree that the benefit of the QE could have leaked overseas by being exchanged into foreign currency.
g. The Governor, as chairman of the MPC, has allowed it to meet throughout the period from April 2009 until September 2012 without having a minuted discussion as to the identity of the actual beneficiaries of the QE money.
h. Mr Andrew Sentence, an external member of the MPC from October 2006 to May 2011, has confirmed to me in an exchange of Tweets in September 2012: "[I] Agree QE impact leaked overseas - contributing to weakness of £ in 2009 and since - pushing up inflation & squeezing consumers".
i. Dr Ros Altmann published a prescient online article on 11 March 2009 in Thisismoney elegantly pointing out the subsequently now proven danger of the QE money leaking overseas. (¶85)
j. The Bank and the Treasury have persisted in further QE tranches without substantial evidence of the very limited direct impact on the UK economy. Indeed, as part of this investigation, a spokesperson for the Bank has admitted to me that QE is not the most efficient way of introducing sterling into the economy because preferably it should all have gone to the UK non-bank financial sector.
k. The Treasury has now also confirmed to me that it is not aware of any disclosure by either the Bank or the Treasury to Parliament, the Treasury Committee or the public that the owners of the QE purchased gilts are unknown.
l. An investigation over three years has found and proved the answer to the question "Where did the benefit of the QE money go?" The answer is simple – Nobody knows – except that it is anywhere in the world!
8 This submission sets out the evidence supporting the assertion that the true beneficiaries of the QE are unknown and that the Bank and the Treasury have actively concealed this admitted fact from your Committee, Parliament, the media and the public. In consequence £375 billion has been deployed off the Bank’s balance sheet in the mistaken belief that it has only boosted the UK’s money supply. In the purely technical sense, it did but only if the ability to convert sterling to foreign currency is ignored. The Bank has persistently and misleadingly insisted that QE benefit leakage via FX is not possible.
9 This submission also sets out proposed questions to be put to the Governor and his relevant current and former Bank and MPC colleagues. These same questions are also relevant to the Chancellor and Treasury officials including the Permanent Secretary.
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11 Alan Kay FCA, has had a multi-disciplined career in commerce and Government including as a seconded Under-Secretary in the DTI / Industrial Development Unit (1972-75). His career has included general management roles in a major conglomerate, in motor manufacturing as well as a senior consultant in the Company Strategy Division of PA Consulting.
12 Whilst seconded to the DTI, Kay had overall responsibility for the management of the Department's loans and investments in the private sector as well as the investigation and negotiation of major inward investment applications and corporate rescues. He was also actively involved in management and performance issues concerning British Steel, Rolls Royce Engines and Mersey Docks.
13 He has been responsible for the investigation and exposure of:
a. Systemic consumer and revenue fraud in the photocopier rental and leasing industry
b. Fraudulent manufacture and sale of multiple cars produced against a single car order
c. Misconceived investment of £3 billion in British Steel in the 1970s
d. Numerous instances of corporate fraud and professional incompetence.
14 In 2009, he became very concerned about the overall planning and management of the QE programme. This gave rise to a three year investigation, the results of which form the basis of this written submission.
15 Alan Kay was the lead, founder director of a company which was responsible for the creation of Orbian, an innovative solution to trade finance which was set up in 1998, as a joint venture company with Citigroup, later to be joined by SAP. Orbian is the world’s leading non-bank supply chain finance provider. He was the lead inventor on Orbian’s US patent.
16 He then became co-founder and director of a company which developed a second-generation trade finance and settlement solution based on the novel concept of the electronic legal equivalent of the bill of exchange. This know-how and the related US patent application have been licensed to a fully-funded company which is close to launching the O-Bill solution on the world market. He is also involved in the development of a Sharia-compliant trade finance and settlement solution for Islamic trade. It has taken over ten years to get the original invention this far!
17 In October 2012, I had a conversation with a spokesperson at the Bank in which I realised that my trade finance and settlement expertise is relevant to a problem faced by the Bank. The QE programme has not succeeded in injecting much needed liquidity into UK SMEs. In addition to the QE benefit leaking via FX overseas, UK banks have been repairing their own balance sheets. In consequence, I declare a potential financial interest in the design and delivery of a method of enabling the Bank securely to redeploy QE money to the direct benefit of UK SMEs and the UK economy. This investigation commenced long before any such idea arose.
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20 The Debt Management Office (DMO) is an Executive Agency of HM Treasury. Amongst its responsibilities is the management of the gilt market. Almost all gilts are sold by the DMO to Gilt Edged Market Makers (GEMMs). GEMMs purchase newly issued gilts on a wholesale basis from the DMO which maintains a register of gilt owners at the level of the GEMMs. The GEMMs in turn maintain their own records of gilt ownership by their clients. The gilt ownership records of the GEMMs are not accessible by the DMO or any other agency such as the Treasury or the Bank.
21 Between March and November 2009, the MPC authorised the purchase of £200 billion worth of assets, mostly UK Government debt or gilts. The MPC voted to begin further purchases of £75 billion in October 2011 and, subsequently, at its meeting in February 2012 the Committee decided to buy an additional £50 billion. In July the MPC announced the purchase of a further £50 billion to bring total assets purchases to £375 billion.
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23 The purpose of the purchases was and is [October 2012] to inject money directly into the economy in order to boost nominal demand. The objective is to meet the inflation target of 2 per cent on the CPI measure of consumer prices. Without that extra spending in the economy, the MPC thought that inflation would be more likely in the medium term to undershoot the target.
24 What are the official declared objectives for committing £375 billion on QE?
25 The ‘objectives’ evolved over time. Objectives stated in the MPC minutes include:
(a) Improving the functioning of corporate credit markets
(b) Make up … shortfall in nominal spending … generate a correspondingly larger rise in the stock of broad money and credit
(c) Reduce spreads and to improve the flow of credit
(d) Increase the supply of money as well as lending and nominal spending
(e) Stimulate demand
Objectives stated in response to Freedom of Information requests in 2012:
26 HM Treasury: HM Treasury FoI correspondence 2012 (¶):
27 "Raise the level of spending in the economy by increasing the amount of money in circulation."(¶)
28 Bank of England FoI correspondence 2012 (¶):
29 "The aim [is also] to lower the yields on government and corporate bonds and boost other asset prices, therefore lowering borrowing costs for a range of businesses and households throughout the economy".(¶)
30 "Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been." (¶) [The Bank cannot possibly know this since where the money went is unknown].
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31 3(c) Misleading Parliament & the Treasury Committee
32 It appears that Parliament, the Treasury Committee, the MPC, the media and even the Treasury appear never to have been told that the Bank has no means of knowing where the benefit of the QE money actually went. It seems that the Bank never saw the need to find out. Indeed, because GEMMs operate on a wholesale basis, it is they and not the Treasury’s Debt Management Office which maintain their own private registers of client gilt owners.
33 Despite being responsible for the management of the QE programme, the MPC appears from its minutes neither to have been advised nor ever to have asked where the benefit of the QE money was actually going. It seems they were ignorant as to the fact that the benefit could go anywhere in the world. Could it be possible that the Governor was also totally in the dark?
34 Because both the Treasury and the Bank either did not know or were concealing an uncomfortable truth, it would appear that Parliament and the public have been misled as to the true facts. There has thus been neither Parliamentary nor public scrutiny of the fact that the actual beneficiaries of the QE money are unknown neither has there been any formal public consideration being given to the severe, adverse impact of this fact on the UK economy.
35 The leadership of the Bank and the MPC claim that the Bank has "injected a vast amount of liquidity into the UK economy". Another part of the Bank has published Working Paper 442 in January 2012 acknowledging that the benefit of QE sterling could have been exchanged for foreign currency and has thus disappeared overseas.
36 Following my Freedom of Information request in 2009, the Bank of England, HM Treasury, Treasury Committee and even the National Audit Office should have become aware that nobody had any idea where the benefit of the QE money had gone. Now, three years later in 2012, both the Bank and the Treasury have again confirmed in response to my FoI requests that they still have no idea who benefited from £375 billion of QE money.
37 Worse, the Bank, the MPC and the Treasury have collectively failed to inform Parliament, the Treasury Committee or the media that the actual beneficial owners of the purchased QE gilts are unknown.
38 The Governor and other officers of the Bank have appeared before the Committee and have made misleading assertions, which cannot have been based on evidence.
At the Bank's MPC meeting in September 2012, the committee members again considered a further increase in QE. There was no discussion on the hidden question as to who had the benefit of the QE money.
What has the Bank told Parliament about the QE objectives?
39 October 2011: The Governor appeared before the Treasury Select Committee on 25 October 2011 when he stated in response to a question (Q57):
40 "I think the fall in bank lending would have been worse had we not conducted our asset purchases because what we were doing was injecting money into the economy…"
41 February 2012: The Governor together with Charles Bean, Paul Tucker and Adam Posen appeared before the TSC on 29 February 2012. The Governor repeated his earlier assertion about the purpose of QE:
42 "(Q14) Sir Mervyn King: Can I just go back to what I thought was the simplest way in which at least I could understand asset purchases? We conducted asset purchases to inject more money into the economy. We did so because, very unusually, the amount of money in the economy was hardly growing at all. Why was that? Because the banks were deleveraging, but to ensure that we could get the growth rates of broad money back up to normal levels."
43 "(Q26) Sir Mervyn King: ...we have injected a vast amount of liquidity, so the one thing that the British banking system is not short of is liquidity."
44 These statements are severely economical with the truth. The Committee was not told that the Bank and the Treasury had no means of knowing where the benefit of the QE money had actually gone. The MPs never asked presumably because no one in their right mind would expect that precious UK resources would be applied to finance a global recovery.
Treasury Committee 15 September 2009
45 Key statements / exchanges include:
46 Mr Bean (Q21): "Ultimately it takes time for quantitative easing to work…"
47 Professor Miles (Q23): [In response to question from Mr Fallon: "if we cannot be absolutely sure of the current impact of quantitative easing on final demand, how can we be sure we need more of it?"] replied "I think the honest answer is that one cannot be sure, but one has to make a judgment on what is most likely to be the right quantity … But there is an awful amount of uncertainty about whether that is exactly the right strategy or not."
48 Mr King (Q23): "… we felt that the benefit of asset purchases would be that it would help to offset what would otherwise have been a very sharp monetary squeeze with the growth rate of the supply of broad money falling rapidly. … I think it is very hard to believe that that scale of purchase has not actually fed through to broad money in one way or another. I think we are beginning now, after six months, to see some signs that perhaps the growth of broad money is picking up."
49 Mr King (Q32): "I think the big picture is that we have engaged in asset purchases: that does feed through directly to broad money held by the non-banking sector …"
50 Mr Spencer Dale (BoE) (Q36): The focus of our asset purchases is to try to increase, as the Governor said, the flow of money in the economy … It is very difficult for us with a single instrument to try to start directing funds to particular sectors of the economy-be it particular sectors or small companies versus large companies."
Treasury Committee 24 November 2009
51 Key statements / exchanges include:
52 Mr Fallon (Q19): "The permanent secretary to the Treasury told this Committee a fortnight ago that quantitative easing was a journey into the unknown and we did not understand every aspect of it."
53 Mr King (Q20): "…if we maintained our policy and bought assets month in month out indefinitely we would end up injecting so much money into the economy that we would generate not only asset price inflation but consumer price inflation and fail to meet our target."
54 Dr Posen (Q21): "There is genuine uncertainty about the impact of quantitative easing. … the impacts of quantitative easing are however highly uncertain particularly given that the operation of the banking system is impaired by the financial crisis."
55 Mr King (Q35): "We are providing a great deal of stimulus from the monetary side …"
Treasury Committee 25 October 2011
56 Key statements / exchanges include:
57 Sir Mervyn King (Q8): "One of the ways in which we can increase the liquidity of a banking system is by increasing their reserves and asset purchases have the effect of very significantly increasing the reserves of a banking system."
58 Sir Mervyn King (Q16): "There was no point doing it [using QE] for SMEs because SMEs are too small to find it easy or cost-effective to issue large amounts of paper. The average employment of a company that issues a corporate bond is 10,000 people."
59 Sir Mervyn King (Q45): "…the idea is that the people who sell bonds to us receive money in return. That money they will then decide to reinvest in others types of securities."
60 Sir Mervyn King (Q46): " … if we buy directly from the Government that will be against the European [sic Lisbon] Treaty.
61 Sir Mervyn King (Q53): " … what we were doing was injecting money into the economy and what the banking system has been doing is destroying money."
62 Sir Mervyn King (Q57): "… One of the things that matters most about asset purchases is that once the money gets into the hands of the private sector, whether it is pension funds, insurance companies, any other kind of fund, they then choose what to buy. They have the ability to buy a wide range of "risky" assets and reduce the premium of the return on those assets over bank rate."
Treasury Committee 29 February 2012
63 Key statements / exchanges include:
64 Charlie Bean (Q13): [In response to a question from the Chair "on the effects of QE on pension funds, what representations did they make to you"] Mr Bean stated "They have not made any representations to me personally."
65 Governor (Q14): "We conducted asset purchases to inject more money into the economy. We did so because, very unusually, the amount of money in the economy was hardly growing at all"
66 Governor (Q26): "…we have injected a vast amount of liquidity, so the one thing that the British banking system is not short of is liquidity."
67 Sir Mervyn King (Q28): "… Because making general funding conditions easier, providing more liquidity, does not mean that banks lend to small businesses. They may be more likely to lend to other parts of the financial sector."
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68 3(d) How Does QE Actually Work
69 The DMO undertakes, amongst other roles, the management of the UK gilt programme on behalf of HM Treasury. In consultation with HMT, it manages the Government's auction of new gilts which are open to all GEMMs who alone are allowed to make competitive bids. Successful competitive bidders in conventional gilt auctions are allotted gilts on a bid-price basis, paying the price they bid. There is also a limited facility for non-competitive bids from members of a pre-approved group of individuals.
70 When gilts are purchased in the market place by the Bank of England subsidiary Bank of England Asset Purchase Facility Fund Limited (APFF), it buys the gilts as a block from GEMMs. APFF does not seek and does not know the identity of any of the actual owners whose transaction is managed and recorded by the GEMM. In consequence, APFF, the Bank of England, the DMO and HM Treasury have no idea as to the identity of the actual owners of the gilts purchased which could be located anywhere in the world. No gilts have been purchased by the Bank of England or APFF from the Treasury or the DMO. To do so would be serious breach of Article 123 of the Lisbon Treaty which expressly forbids any such action.
71 In the initial QE phase, the DMO issued Treasury Bills and lent the proceeds to APFF to enable it to purchase a small amount of corporate securities. This position has now been unwound.
72 The gilt purchases in the main and ongoing QE programme have been financed in the following way which does not involve any lending by the DMO. The Bank has explained that:
73 "The money created for QE is central bank money. It has to be repaid one way or the other to the Bank of England . If there is a shortfall that would have to be made up by the Treasury. It is one of the reasons why APFF could not cancel the gilts because the Government would have to pay the Bank anyway. All QE has been funded by the Bank of England by just creating money electronically - it is called central bank money."
74 DMO records on its gilt register the sale of the gilts by the GEMM to APFF – the identities of the actual owners (clients of the GEMM) are not made known either to APFF or the DMO. This is because their holdings and identities are recorded in the books of the GEMM and are not accessible by the DMO.
75 The DMO does not own any gilts on its own account and thus cannot sell gilts to APFF. All gilts purchased by APFF are existing gilts owned by GEMMs on their own account or as agent for third party investors located anywhere globally. Neither the Bank of England nor APFF are permitted to purchase newly issued gilts from the DMO.
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76 3(e) Where Did the Benefit of the QE Money Go?
77 The identity and location of the actual owners of the purchased gilts are unknown. This was confirmed under FoI disclosure by the Bank of England in 2009 (¶) and 2012 (¶) and by HM Treasury also in 2009 (¶) and 2012 (¶).
78 George Osborne's office was told this by me in 2009 when Mr Osborne was Shadow Chancellor.
79 No restriction has been placed by the Bank or APFF on either the selling agents or the actual owners of the purchased gilts as to what they can do with the money. Whilst the sterling paid for the gilts remains, of course, in existence, the owner can exchange the sterling it receives into any foreign currency. The funds can be invested, lent or spent for any purpose anywhere in the world. In the Bank’s FoI correspondence with me, the Bank has repeatedly claimed that the benefit of the QE money is solely to the UK economy.
80 Similar misleading statements appear to have been made by the Governor and other officials of the Bank to the TSC on 25 October 2011 and on 29 February 2012.
81 The Bank’s above assertion under FoI disclosures is contradicted by the Bank’s own published Working Paper 442 dated January 2012 which exposes deeply buried secrets when it states:
(a) "There may also be potential leakages, to the extent that gilts were purchased from the banking system or from the overseas sector."
(b) "The exchange rate could form part of this adjustment mechanism. To the extent that financial institutions want to diversify into foreign currency assets, they may wish to exchange sterling deposits for foreign currency deposits as an intermediate step to purchasing foreign currency assets. That could bear down on the exchange rate."
(c) "First, some gilt sales to the asset purchase facility may have come from outside of the UK non-bank private sector which may have reduced the initial effect on broad money."
(d) "It cannot be certain that the ultimate sellers of all the gilts purchased during QE were members of the UK non-bank private sector. The intention of QE was to purchase assets largely from UK non-bank financial companies, such as insurance companies, pension funds and other asset managers. But the banking sector or non-resident sector may have sold some of their gilt holdings to the Bank of England. In this case, the money balances of the non-bank private sector would not have risen, so the initial increase in M4 money holdings may have been less than the programme of asset purchases."
82 WP 442 makes no mention of the discovered fact that the Bank has no idea as to the identity of the real owners of the purchased gilts. However the authors of WP 442 clearly recognised that the benefit of QE money could flow overseas.
83 It is reasonable to ask whether the Governor and the other members of the Bank's Court of Directors and the MPC were indeed ignorant about this shameful waste of UK resources. Or were they all too complacent to recognise the disastrous impact on the UK economy of the benefit of precious QE money being created by the Bank only for it to leak via FX overseas.
84 The Bank, in effect, is funding the world economy with only an unknowable proportion of the scarce funds finding its way into the UK economy. It is hard to believe that such a unwanted result was not obvious to successive Governments, the Bank of England and their multiple advisers.
85 Dr Altmann spotted this economic nonsense when she wrote the following prescient article in Thisismoney on 11 March 2009 (Day #1 of the QE programme):
(a) "The Bank of England is today implementing its first major 'quantitative easing'. It will create about £2bn and use this money to buy gilts from institutions in the market. This is supposed to stimulate the economy as the institutions selling gilts are expected to invest in UK company debt instead. This is not going to happen!
(b) For the policy to work, investors must use the money they receive from selling their gilt holdings to buy smaller or medium sized corporate bonds. This is then supposed to help UK companies who need to borrow to survive. But institutions can invest in non-UK companies and there is nothing that will force them to focus only on sterling debt.
(c) Institutions who sell gilts have a wide opportunity to invest [elsewhere], so there will be substantial leakage to other assets. Many will switch to overseas Government bonds, some will buy index-linked gilts, some will buy top quality corporate bonds of overseas companies, not UK companies, but very few will want to switch to smaller UK company credit - where the need for new investment is most urgent.
(d) So QE will help overseas government and corporate borrowers more than domestic companies who so urgently need the money…"
86 It is asserted that his grotesque mistake is a primary cause of the collapse of UK growth.
87 Dr Altmann’s opinion has subsequently been confirmed by Andrew Sentance (former MPC member) in a Twitter exchange with me when he wrote on 1 September 2012 "Agree QE impact leaked overseas - contributing to weakness of £ in 2009 and since - pushing up inflation & squeezing consumers".
88 Charles Bean (Deputy Governor) attempted to explain the workings of QE in a speech on 13 October 2009. Despite not knowing the identity of the owner of the gilts purchased by the Bank, he drew comfort from a statement of the obvious. Sterling cannot be transmuted into USD, Yen etc. Agreed. Whoever receives the QE sterling holds a claim against the Bank. Ergo, no QE money is lost to the UK economy.
89 It is misleading because it ignored how the benefit of the QE money could migrate overseas by conversion through FX as recognised in WP 442.
90 Despite the FoI disclosures to me by both the Bank and the Treasury in 2009 confirming that the actual owners of the purchased gilts were unknown, both Parliament and the Committee were not so informed.
91 Despite the FoI disclosures to me by both the Bank and the Treasury in July 2012 confirming that the actual owners of the purchased gilts were unknown, the MPC was not so informed when it met in August 2012.
Do either the Bank or the Treasury know about the true fate of the QE money?
92 Both organisations have a fundamental problem. The Bank neither asks for nor holds any record as to the identity of the owners. This makes it impossible to know what really happened to the benefit of the money.
93 This lack of knowledge was confirmed in July 2012 in response to Freedom of Information requests served on both the Bank and the Treasury.
94 Extracts from HM Treasury’s FoI correspondence in 2012 (¶)
(a) "HM Treasury does not hold any report setting out the total amount of funds paid out under APF by the name or type of UK financial institution. ... Also, as it is not possible to know where and how these funds work their way through the economy, HM Treasury does not hold any information on where funds have been onward lent." (¶)
(b) "It may help if I further clarify the purpose of QE ... It is a macroeconomic policy tool, which is designed to raise the level of spending in the economy by increasing the amount of money in circulation." (¶)
(c) "The Bank of England's asset purchases during QE have largely been from non-bank financial institutions, including insurance companies and pension funds, which use the money received to purchase other assets such as corporate bonds and equities. It is important to note that those from whom the Bank purchases the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners." (¶)
95 Extracts from the Bank of England’s FoI correspondence in 2012 (¶)
(a) "You may find it helpful if we provide some further explanation. When the Bank of England buys gilts under the reverse auctions associated with its Asset Purchase Facility (APF) it does so from its direct counterparties" (¶)
(b) "May I point out however, that those from whom we purchase the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners." (¶)
(c) "The aim ... was to lower the yields on government and corporate bonds and boost other asset prices, therefore lowering borrowing costs for a range of businesses and households throughout the economy. There is a good deal of encouraging evidence that QE had the effects we intended. Government and corporate bond yields fell considerably as the separate trenches of asset purchases were announced, and the period of the Bank's initial QE asset purchases saw an increase in the issuance by businesses ["averaging 10,000 employees" !] of the bonds and equities by which their activity is financed." (¶)
(d) "Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been [Bank cannot know this since it is unknown where the money went]. Ultimately, that money needs to be placed on deposit somewhere within the banking system at a commercial bank. It is possible that these additional deposits might encourage greater lending by the commercial banking system, although this was not the primary objective of the Bank's QE policy." (¶)
(e) "A further important aspect of QE asset purchases is that they are reversible, and indeed all of the assets can be sold back to the market sometime in the future when a tightening of monetary policy is required in order to meet the 2% inflation target."(¶)
96 Highlights from the Bank of England follow up to my email dated 23 July 2012
97 "I believe your main concern is that the Bank of England should be able to trace where the money from QE has gone. In particular, you are concerned that some of the money may have left the UK and is being used to fund business activities in other countries. Let me reassure you that while we cannot identify the ultimate sellers of gilts, we can trace the newly created money, and it cannot leave the UK banking system." (¶)
FoI requests in 2009 produced similar responses
98 HM Treasury’s FoI response letter dated 22 December 2009 states:
99 "Also, as it is not possible to know with any certainty where and how these funds work their way through the economy, HM Treasury does not hold any information on where funds have been onward lent." (¶)
100 Bank of England’s email of 23 November 2009 in response to my FoI request stated:
101 "In respect of the Asset Purchase Facility (APF) I am afraid that it is impossible to provide this information because a seller can use an agent (e.g. a bank) to conduct the transaction. We only observe the transaction, not who benefits from the transaction." (¶)
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102 3(f) Support for SMEs – Another Missed Target
103 The original plan behind QE was to provide additional liquidity to the UK economy. The asset purchase programme was to included a proportion of corporate bonds from the SME sector. However, this proved to be impracticable as the Governor explained to the Treasury Committee on 25 October 2011 (Q16) "There was no point doing it for SMEs because SMEs are too small to find it easy or cost-effective to issue large amounts of paper. The average employment of a company that issues a corporate bond is 10,000 people. It is very expensive to issue corporate bonds. It might be better if it were less expensive, but the fact is that if you want to help SMEs you need to look at the source from which they obtain finance normally, and that is the banks."
104 The issue of support for SMEs was a frequent point for discussion at the MPC monthly meetings – but nothing was done except to hope that some part of the QE money would find its way to the SMEs via the banks.
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105 3(g) Freedom of Information Correspondence (Highlights)
106 There are four Freedom of Information disclosure threads:
a. 2009 – Bank of England - set out as a Summary (¶) and as FoI main exchanges (¶)
b. 2012 – Bank of England - set out as a Summary (¶) and as FoI main exchanges (¶)
c. 2012 – HM Treasury - set out as a Summary (¶) and as FoI main exchanges (¶)
107 A summary of key issues is included in this Factual Information section. In each case, the main communication exchanges with me are included in Appendix A.
108 2009 – Bank (¶156)
a. "beneficiaries’ of the facility is, in fact, the economy as a whole".(¶)
b. "I am afraid that it is impossible to provide this information because a seller can use an agent (e.g. a bank) to conduct the transaction. We only observe the transaction, not who benefits from the transaction". (¶166)
c. "However, we have designed the programme in such a way that we are attempting to buy principally from the non-bank sector." (¶)
a. "May I point out however, that those from whom we purchase the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners." (¶)
b. "The aim of the policy was to purchase those assets from the non bank private sector although as mentioned above we do not know the identities of the original owners." (¶)
c. "Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been." (¶)
b. "…as it is not possible to know where and how these funds work their way through the economy, HM Treasury does not hold any information on where funds have been onward lent." (¶)
c. "[QE] … is a macroeconomic policy tool, which is designed to raise the level of spending in the economy by increasing the amount of money in circulation." (¶).
d. "The MPC can use QE, along with low interest rates, to stimulate activity in the economy to a level consistent with meeting the inflation target in the medium term. Price stability remains the MPC's primary objective." (¶).
e. "It is important to note that those from whom the Bank purchases the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' I (¶)
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111 3(i) Monetary Policy Committee
112 A detailed examination of the minutes of the MPC from January 2009 to September 2012 has found no reference to or any discussion about the actual identity of the beneficial owners of gilts purchased under the QE programme.
113 The MPC has never discussed where the QE money has actually gone. They only considered the supposed economic impact without regard to the hidden fact that the benefit could be anywhere in the world. In essence this occurs when QE sterling currency is exchanged to a foreign currency and deployed as say USD for any business purpose - including the funding of a foreign company competing with a struggling UK company! By the FX route, the Bank's QE money merely winds-up in the accounts of the FX Dealer / Bank as currency stock. The Dealer is most unlikely to be a meaningful investor in the UK economy other than making short-term sterling deposits!
Extracts from MPC minutes January 2009 to September 2012
114 MPC – Mar 2009 (36) "[There] was the high degree of uncertainty over the precise impacts on nominal spending and inflation of these operations. …the Committee would be able to gather some information on how the sellers of the assets were responding to the subsequent increase in liquidity of their portfolios …".
115 MPC - Apr 2009 (32) "It was too early for data to reflect how the purchases of assets were being transmitted into broad money and credit and into nominal spending, and thus to enable the Committee to judge its overall efficacy."
116 MPC May 2009 (36) "There was uncertainty about the impact of asset purchases on this scale to stimulate nominal spending. The Committee would learn a considerable amount about the transmission mechanism of asset purchases in the coming months. ... With the benefit of more information on the impact of its existing asset purchase programme, the Committee would be in a better position to judge these issues at future policy meetings."
117 MPC Jul 2009 (16) "The monetary data did not provide a precise guide to the success of the Bank’s asset purchases. It was possible that the impact of the asset purchases this month on the money numbers had been offset by insurance companies and pension funds running down their deposits to buy UK banks’ new long-term debt or equity. More generally, companies might use the proceeds from the increased issuance of corporate securities to reduce bank debt rather than increase deposits. If the asset purchases helped banks and businesses to repair their balance sheets, that should support bank lending and money spending in the future."
118 MPC Aug 2009 (25) "Although it remained too early to assess the full effect of the asset purchase programme, there were some promising signs that it was having a positive impact."
119 MPC Dec 2009 (30) "Money growth had been disappointing. ….The reasons for that were unclear, however, and it remained likely that the full impact of the asset purchase programme on the economy would be felt only with a lag. The Committee would continue to monitor closely the evidence on the impact of its asset purchase programme."
120 MPC Feb 2010 (35) "It would also enable the Committee to assess the strength of the emerging economic recovery as more reliable data became available."
121 MPC Aug 2011 (29) "There was inevitable uncertainty about the precise impact of asset purchases on demand and inflation"
122 MPC Oct 2011 (33) "Evidence on the impact and transmission channels of the first round of asset purchases, reviewed in the Bank’s 2011 Q3 Quarterly Bulletin, indicated that, while there was considerable uncertainty about the magnitudes, the earlier asset purchases had had economically significant effects. There appeared to be no strong reason to expect the economic effect of further asset purchases to be materially different, but their impact would need to be kept under review. The size of the asset purchase programme could be adjusted if there were evidence that its marginal effects were different than past experience suggested."
123 MPC Nov 2011 (27) "Domestically, there were also uncertainties around the impact of the Committee’s asset purchases on nominal demand, and over how much domestic headwinds, including the fiscal consolidation, tight credit conditions and the continuing desire by households and businesses to repair their balance sheets, would restrain spending."
124 MPC Nov 2011 (36) "The Committee noted that the existing programme of asset purchases would take a further three months to complete and market capacity made it difficult to increase the monthly rate of purchases substantially above what was already under way. During that time the Committee could gather evidence as to the impact of the purchases on asset prices and the real economy. … . Given the imprecision with which the appropriate stance of policy could be calibrated at this juncture, there was little merit in fine tuning."
125 MPC Dec 2011 (27) "The Committee had initiated a programme of asset purchases in October, which would take a further two months to complete. Assessing the effects of the current programme was complicated by the volatility in financial markets, and the Committee was still gathering evidence on the impact of its purchases on asset prices and on the economy."
126 MPC Jan 2012 (28) "Although the Committee was monitoring the impact of the continuing purchases on financial markets and the wider economy, there was no compelling reason to think that the impact on nominal demand would be materially different from the first round of asset purchases."
127 MPC Feb 2012 (37) "While the Committee continued to monitor the impact of its asset purchases, it saw no compelling reason to think that their impact on nominal demand would be materially different than had been anticipated in October [2011]."
128 MPC Mar 2012 (32) "Although the Committee was monitoring the impact of the continuing purchases on financial markets and the wider economy, there was no compelling evidence that the impact on nominal demand would be materially different from the first round of asset purchases".
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129 4. Questions and Recommendations
130 These questions and recommendations have been framed in order to assist the Treasury Committee in giving QE careful scrutiny with regard to its effectiveness, the winners and losers created by it and its cost to the taxpayer.
Questions
131 It is proposed that Treasury Committee puts the following questions to the Governor, Members of the MPC and relevant Bank directors and officials. It is also recommended that the Chancellor and the Permanent Secretary, HM Treasury are likewise questioned. The questions are worded on the basis that they will be put to the Governor. The wording will need adjustment to take account of the role of other attendees and of the different roles of the Bank and the Treasury.
132 These proposed questions make use of various facts and concerns identified in this submission:
133 Q1: When the Bank of England Asset Purchase Facility Fund Ltd (APFF) was set up in January 2009, were you aware that it was planned to purchase gilts from Gilt Edge Market Makers (GEMMs) and that the Debt Management Office (DMO) only recorded the GEMMs’ total gilt holding on its gilt register? If it was later, when?
134 Q2: When did you first become aware that the DMO and thus the Bank and the Treasury had no means of knowing the identity of the actual beneficial owners of the purchased gilts (Owners)?
135 Q3: What action did you take to ascertain the identity of the Owners?
136 Q4: When did you first become aware that both the Bank and the Treasury held no information as to what the Owners did or planned to do with the QE money?
137 Q5: Were you aware of the FoI disclosures to Mr Kay in 2009? (a) If so, when? (b) Did you inform (i) the Court of Directors; (ii) the members of the MPC; (iii) the Treasury Committee or any member thereof; or (iv) the media?
138 Q6: Why has the Bank’s FoI disclosure in 2009 related to the real fate of the QE money been omitted from the Bank’s website listing of such disclosures.
139 Q7: Were you aware of the FoI disclosures to Mr Kay in 2012? (a) If so, when? (b) Did you inform (i) the Court of Directors; (ii) the members of the MPC; (iii) the Treasury Committee or any member thereof; or (iv) the media?
140 Q8: When did you first become aware of Dr Ros Altmann’s article on 11 March 2009 pointing out the danger of QE money leaking overseas? Did you publically respond to that article? If so, when and how?
141 Q9: When, if ever, did you realise that there was a danger of the QE money leaking overseas? (a) If so realised, what action did you take to minimise the leakage? (b) Were the GEMMs required to give any undertaking on their own account or on behalf of their Owner clients as to the onward application of the QE money?
142 Q10: Do you concur with the opinion expressed by Andrew Sentence (MPC member from October 2006 to September 2012) to Mr Kay on Twitter that "QE impact leaked overseas - contributing to weakness of £ in 2009 and since - pushing up inflation & squeezing consumers".
143 Q11: Were you aware of the Bank’s Working Paper 442 published in January 2012? (a) If so, when? (b) Did you pre-approve it? (c) Did you inform (i) the Court of Directors; (ii) the members of the MPC; (iii) the Treasury Committee or any member thereof; or (iv) the media that a risk had been identified in WP 442 that the QE money could leak overseas?
144 Q12: What is the benefit to the UK economy if the Owner exchanges QE sterling to say, USD and lends or invests the USD in a US business?
145 Q13: In an FX transaction, the dealer would purchase the QE sterling from the Owner and sell the Owner another currency such as USD. The dealer now holds the QE sterling on its sterling bank account as part of its currency stock. How does the dealer’s sterling get invested for the benefit of the UK economy bearing in mind the margins earned on FX trading and the very high FX trading volumes?
146 Q14: Were the members of the MPC ever informed that the identity of the Owners is unknown? If so, how and when as there is no record in the MPC minutes?
147 Q15: It has been repeatedly asserted to this Committee and a wider audience that the QE programme has injected vast amounts of liquidity into the economy. What published evidence exists as to the economic sectoral benefit of the £375 billion of QE money?
148 Q16: What explanation do you have as to why he Treasury has now confirmed that it is not aware of any disclosure by either the Bank or the Treasury to Parliament, the Treasury Committee or the public that the Owners of the QE purchased gilts are unknown?
149 Q17: What is your response to the assertion made by Mr Kay "that the true beneficiaries of the QE are unknown and that the Bank and the Treasury have actively concealed this admitted fact from the Treasury Committee, Parliament, the media and the public".
150 Q18: Has £375 billion has been deployed off the Bank’s balance sheet in the belief that it has only boosted the UK’s money supply?
151 Q19: Bearing in mind the provisions of Article 123 of the Lisbon Treaty, was it ever a QE objective to help reduce the cost of UK Government debt by purchasing gilts and thus driving down the price?
152 Q20: What was the principle method by which the Bank hoped and expected that purchasing gilts would improve liquidity in the SME sector? What evidence do you have that you succeeded?
153 Q21: Given the acknowledged need to improve SME liquidity, is there any fundamental objection to the Bank selling QE gilts back into the market and redeploying the funds in a new subsidiary formed to provide SME trade finance?
Recommendations
154 Recommendations for unconventional policy action are set in more detail in my additional submission.
155
APPENDICES
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156 Appendix A/1 - Freedom of Information requests and correspondence – Bank of England 2009
Mr Kay’s email to the Bank of England - 24 August 2009
157 In connection with the Bank of England's Quantitative Easing programme and the provisions of the Freedom of Information Act, 2000, you are requested to:
· Disclose all significant documentation (in existence prior to this request) related to any consideration by the Bank or others as to the potential or intended beneficiaries of the funds made available by the QE programme. This includes both primary / initial beneficiaries and secondary beneficiaries (eg parties to whom the benefit of the funds released have been passed).
· Disclose all analyses or reports produced by or for the Bank setting out by either name or type (eg UK retail bank, UK non-retail bank, non-UK bank, other UK financial institution or corporate, non-UK financial institution or corporate) the total QE funds paid out by the latest possible date. If no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response.
· Disclose all analyses or reports produced by or for the Bank setting out where the QE funds have been applied, paid out or onward lent by the parties or institutions specified in request 2 above. Again, if no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response.
· Disclose what contractual or other arrangements have been implemented by the Bank prior to the date of this request to ensure / maximise that the QE funds are applied for the general benefit of the UK economy.
Bank of England's email reply - 25 September 2009
158 Thank you for your email of 24 August in which you ask under the Freedom of Information Act 2000 (‘FoI Act’) for access to [repeat of text of Mr Kay’s email of 24 August 2009].
159 May I first explain that there is a wide range of information already published by the Bank on quantitative easing (QE), which you may wish to look through in light of your requests above. The information includes:
· explanation of how quantitative easing works.
· details about the types of assets purchased, e.g. gilts, corporate bonds, commercial paper.
· a breakdown of assets purchased and the results of the Asset Purchase Facility (APF) operations.
· market notices.
· information for participants (Counterparty Applications/ Issuer and Security eligibility).
· schedule of operations.
160 We also publish a quarterly report on the transactions we have undertaken as part of the facility, the latest of which was published in July. All of the above information and more is available to view on the ‘monetary policy’ and the ‘markets’ sections of our website at : www.bankofengland.co.uk/monetarypolicy/assetpurchases.htm and www.bankofengland.co.uk/markets/apf/index.htm
161 It is important to understand that the ‘beneficiaries’ of the facility is, in fact, the economy as a whole. If I may clarify that the aim of quantitative easing is to provide a measured stimulus to support spending in the economy to bring future inflation back to target. Maintaining price stability is the objective of the Monetary Policy Committee. Central banks routinely buy and sell government debt in the secondary market as part of their normal operations in the money markets. What distinguishes quantitative easing from our routine operations is their scale and the length of time for which the assets are likely to be held.
162 The Bank buys assets owned by private sector businesses which includes insurance companies, pension funds, banks and also non-financial firms and credits the seller’s bank account. In addition the Bank is buying corporate bonds which will help improve conditions in corporate credit markets and so aid the flow of funds to companies.
163 [Paragraph setting out FoI request limitations omitted]
Mr Kay’s reply on 12 November 2009 to Bank of England's email
164 Thank you for your reply [25/09/3009] which has proved to be most helpful. However whilst I have found detailed information on the purchase of Corporate Bonds, I have been unable to discover any information on the website on the vendors of the Gilts particularly on the split between UK and non-UK vendors. Would you kindly let me have the URL link to this information?
Bank's responding email on 23 November 2009
165 Thank you for your further email of 12 November in which you ask for ‘any information on the website on the vendors of the Gilts particularly on the split between UK and non-UK vendors.’
166 In respect of the Asset Purchase Facility (APF) I am afraid that it is impossible to provide this information because a seller can use an agent (e.g. a bank) to conduct the transaction. We only observe the transaction, not who benefits from the transaction. However, we have designed the programme in such a way that we are attempting to buy principally from the non-bank sector.
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167 Appendix A/2 – Freedom of Information requests & correspondence – Bank of England 2012
Bank of England first response - 23 July 2012
168 Thank you for your email dated 26 June to the Governor in which you request access under the Freedom of Information Act 2000 (FoI Act) to:
a. Disclose all significant documentation (in existence prior to this request) related to any consideration by the Treasury or others as to the potential or intended beneficiaries of the funds made available by the QE programme. This includes both primary/initial beneficiaries and secondary beneficiaries (eg parties to whom the benefit of the funds released have been passed).
b. Disclose all analyses or reports produced by or for the Treasury setting out by either name or type (eg UK retail bank, UK non-retail bank, non-UK bank, other UK financial institution or corporate, non-UK financial institution or corporate) the total QE funds paid out by the latest possible date. If no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response.
c. Disclose all analyses or reports produced by or for the Treasury setting out where the QE funds have been applied, paid out or onward lent by the parties or institutions specified in request 2 above. Again, if no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report to be produced in response.
d. Disclose what contractual or other arrangements have been implemented by the Treasury prior to the date of this request to ensure and maximise that the QE funds are applied for the general benefit of the UK economy.
169 The Bank publishes a range of information on our website about the Asset Purchase Facility which can be viewed at: http://www.bankofengland.co.uk/markets/Pages/apf/default.aspx
170 You may find it helpful if we provide some further explanation. When the Bank of England buys gilts under the reverse auctions associated with its Asset Purchase Facility (APF) it does so from its direct counterparties. The consolidated Market Notice which can be viewed on our website at http://www.bankofengland.co.uk/markets/Documents/marketnotice120301con.pdf
171 [It] states that: Those eligible to apply to participate as counterparties in the competitive auctions will be those firms that are participants in the Bank's gilt-purchase OMOs, and firms that are GEMMs as listed on the website of the DMO. Those eligible to apply to participate as counterparties in the non-competitive element of the auction will be all firms that are appropriately authorised for the purposes of the Financial Services and Markets Act (FSMA), with the exception of firms that are participants in the Bank's gilt-purchase OMOs.
172 May I point out however, that those from whom we purchase the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners.
173 Let me also explain what the asset purchases we have done so far were meant to achieve. The Bank purchased assets, predominantly government bonds. The aim of the policy was to purchase those assets from the non bank private sector although as mentioned above we do not [know] the identities of the original owners. These investors then had cash, with which they could purchase other assets, including those issued by private sector companies. The aim of that process was to lower the yields on government and corporate bonds and boost other asset prices, therefore lowering borrowing costs for a range of businesses and households throughout the economy. There is a good deal of encouraging evidence that QE had the effects we intended. Government and corporate bond yields fell considerably as the separate trenches of asset purchases were announced, and the period of the Bank's initial QE asset purchases saw an increase in the issuance by businesses of the bonds and equities by which their activity is financed.
174 Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been. Ultimately, that money needs to be placed on deposit somewhere within the banking system at a commercial bank. It is possible that these additional deposits might encourage greater lending by the commercial banking system, although this was not the primary objective of the Bank's QE policy.
175 A further important aspect of QE asset purchases is that they are reversible, and indeed all of the assets can be sold back to the market sometime in the future when a tightening of monetary policy is required in order to meet the 2% inflation target.
176 Finally, data on sectoral holdings of gilts are publicly available on the website of the Debt Management Office at: http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/gilt-holdings-data-historical.xls&page=publications/quarterly
177 In addition, you may find the Quarterly Bulletin article of 2011 Q3 by Joyce, Tong and Woods of interest: http://www.bankofengland.co.uk/publications/Documents/quarterlvbulletin/qb110301.pdf
178 [Paragraph setting out FoI request limitations omitted]
Mr Kay’s emailed reply to Bank of England - 23 July 2012
179 Receipt of your formal response dated 23 July 2012 is acknowledged.
180 Certain statements required clarification and confirmation as they appear to be in conflict:
181 Unknown vendor: "May I point out however, that those from whom we purchase the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners."
182 Please confirm my understanding of this statement that the Bank, not knowing the identity of the 'original owners' has no possible way of knowing where the funds are ultimately banked.
183 Increase in UK money in circulation: "Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been."
184 Having just confirmed that the Bank does not know who were the ultimate beneficiaries of the QE funds, please explain how the Bank has any evidence supporting the above assertion on the amount of QE money in circulation in the UK.
185 Identity / location of bank receiving the QE funds: "Ultimately, that money needs to be placed on deposit somewhere within the banking system at a commercial bank."
186 This is an unhelpful statement of the obvious. The QE cash would have been credited presumably to the account of the agent representing the original owner. That agent, as trustee, will apply those funds in accordance with the owner's directions. On this basis, the funds will either wind up in the owner's bank or be invested as directed by the owner. The owner's commercial bank is totally unknown to the Bank and could be located anywhere in the world.
187 Please confirm whether my understanding is correct.
188 Encourage greater lending: "It is possible that these additional deposits might encourage greater lending by the commercial banking system ..."
189 The Bank has previously admitted that it does not know the identity or banking / investment arrangements of the original owner. The QE funds could well have encouraged greater commercial bank lending. However, as the Bank does not know where the funds actually went, this lending could have taken place anywhere in the world. Worse, the funds could have supported the growth and success of the UK's overseas competitors.
190 Please confirm whether my understanding is correct.
Bank of England second response - 6 August 2012
191 Thank you for your latest e-mail of 23 July with some further questions about 'Quantitative Easing' (QE).
192 I believe your main concern is that the Bank of England should be able to trace where the money from QE has gone. In particular, you are concerned that some of the money may have left the UK and is being used to fund business activities in other countries. Let me reassure you that while we cannot identify the ultimate sellers of gilts, we can trace the newly created money, and it cannot leave the UK banking system.
193 In a speech given by the Bank's Deputy Governor Mr Charles Bean on 13 October 2009 at the London Society of Chartered Accountants Annual Lunch, he covered this point in his detailed description of how money from QE enters the economy. He said:
194 (Please note that within the speech Mr Bean simplifies matters slightly indicating that we buy gilts directly from a pension fund rather than through a financial intermediary. He also talks about what might happen if money from QE is used to buy foreign goods, however, this equates to your suggestion that money from QE will be deposited in a foreign bank.)
195 'When the Asset Purchase Facility buys a gilt from a pension fund, say, it can be thought of as paying with a cheque drawn on the Bank of England. The pension fund will then bank the cheque with its own commercial bank, so the latter now has a claim on the Bank of England - that is what reserves are. In reality, these payments are not made by cheque, but rather are carried out electronically. .... Now I can add detours for the money at any point in this cycle. For example, the pension fund that sold the gilt to the Asset Purchase Facility might now withdraw its deposit and use it to purchase a newly issued corporate bond. The company issuing the bond then deposits that money in their own bank. So now it is the corporate's bank that holds the claim on us. A similar sort of circle occurs if the corporate then uses its deposit to buy a new piece of machinery, because the seller of that machinery will end up putting the proceeds into her bank, so that the claim on the Bank of England is now held by the capital goods producer's bank. Whatever the type of purchase, it will always end up with someone's commercial bank having a claim on us. That is even the case if the money is used to buy foreign goods, as the foreign commercial bank will need to exchange the sterling claim with a commercial bank that holds an account with us, if it does not do so itself. The only way that the claim can be eliminated from the system is if a bank chooses to exchange it for cash, which would make little sense since cash pays no interest at all. The reason for going through this in such mind-numbing detail is to make the point that the level of commercial banks' reserves in aggregate is determined by the way we have funded the asset purchases, not by the commercial banks' own decisions. The size of banks' reserves cannot, as is frequently claimed, be a sign that they are "sitting on them". No matter how rapidly or how slowly the economy is growing, or how fast or slow the money is circulating, the aggregate amount of reserves will be exactly the same. So it should be clear that the quantity of central bank reserves held by the commercial banks is useless as an indicator of the effectiveness of Quantitative Easing."
196 If you wish to read the speech in full, please take the link below: http://www.bankofengland.co.uk/publications/Documents/speeches/2009/speech405.pdf
197 I would also point you to a Quarterly Bulletin article on the subject, which reinforces the point that the newly created reserves cannot, in aggregate, leave the reserves accounts of our counterparties (through whom the gilts have been purchased):
198 "Before asset purchases began, the main holders of gilts were UK non-bank financial institutions and overseas investors. Gilts only represented a modest part of UK non-bank financial institutions' overall portfolios, suggesting they might be prepared to reinvest some of the money from gilt sales in other assets. Overseas investors might be more inclined to choose to invest in foreign assets. However, to do so they would need to change their sterling for foreign currency, putting downward pressure on the exchange rate. And, since all central bank money has to be held by someone, those who received the sterling might then choose to invest in other sterling assets."
199 The full article is available here: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/db110301.pdf
200 I hope that you can see from the above that the narrow measure of the money supply will have been increased by QE. In addition, I hope that you can also see that, unless money from QE is removed from the banking system in sterling cash - there is no evidence from the amount of banknotes in issue to suggest this has happened - that the newly created money must ultimately remain within the UK banking system helping the economy by placing downward pressure on interest rates as we explained in our previous reply.
201 Thank you once again for writing to the Bank. I hope that the above information has clarified these-matters for you.
Mr Kay’s emailed reply to Bank of England - 6 August 2012
202 Thank you for your letter dated 6 August 2012.
203 I regret having to trouble you again but your reply does not make entire sense to me as an FCA. I am not an economist.
204 You state in your letter: "I believe your main concern is that the Bank of England should be able to trace where the money from QE has gone. In particular, you are concerned that some of the money may have left the UK and is being used to fund business activities in other countries. Let me reassure you that while we cannot identify the ultimate sellers of gilts, we can trace the newly created money, and it cannot leave the UK banking system"
205 You are quite right is describing my main concern is that the benefit of the QE money should have been entirely for the UK economy. I am wholly unconvinced by your assertion that there is no serious 'hole in the bucket' enabling the benefit of QE to flow through to the rest of the world. The following nightmare scenario appears to me to be one such 'hole':
· Owner sells £100m of sterling Gilts through its Agent to the Bank.
· Agent receives £100m from the Bank which is paid into the Agent's sterling account.
· Owner receives £100m from its Agent's sterling bank account
· Owner receives £100m in its sterling account
· Owner decides to invest in or make a loan to a US corporate
· Owner requires $150m to effect the transaction
· Owner purchases requisite amount of USD from an FX trader to whom the Owner pays £100m
· FX trader remits $150m to the Owner's USD bank account in New York
· FX holds the £100m in its general stock of currencies to be employed in future FX trading.
206 To my accountant's mind, the £100m made available by the Bank in purchasing the Gilts has ultimately benefited the financial state of the US corporate. Furthermore the $150m comprises a much needed inward investment from the US economic view point, helping the US balance of payments. Incidentally, the above scenario is applicable to any similar transaction in any currency or country.
207 As a UK citizen, I find the idea of the UK using its precious resources to support the world's economies wholly repugnant. I am awaiting your reply hoping that I am wrong but your present explanation makes no sense to me.
208 I will consider what further reply may be needed to your letter once you have responded to this email. Please acknowledge its receipt with an indication as to when I may expect a reply.
Bank of England second response - 21 August 2012
209 Thank you for your further email of 6 August concerning 'Quantitative Easing' (QE) and whether money from QE can find its way abroad.
210 Using your very helpful example, let me start from the point where Owner receives £100m in its sterling account.
211 The important point to note is that no matter what the owner does with the sterling which he has received, unless he exchanges it for cash which he takes out of circulation, the additional £100m sterling is circulating and cannot leave the UK banking system.
212 If the owner buys dollars with it and invests those dollars abroad that does not mean that any sterling has left the UK the sterling has just moved from one commercial bank to another. Let us, for example, say that the FX trader has a sterling bank account at a commercial bank that is not the same as that of the original gilt owner. In this case the claim on the Bank of England - the reserves - moves between the two commercial banks when the currency exchange is effected. The sterling moves from one commercial bank to the other.
213 Meanwhile the movement in the dollars from a dollar account of the FX trader ultimately to a dollar account of the company. This does not in any way reduce the extra sterling which has entered the UK economy as a result of QE.
214 Thank you once again for writing to the Bank. I hope that this additional clarification has been of assistance to you.
Mr Kay's emailed reply to Bank of England - 23 August 2012
215 Thank you for your letter dated 21 August 2012.
216 Your reply has ignored or failed to understand my point. Obviously the additional QE sterling has added to the total liabilities of the Bank, offset by the loan to your subsidiary which in turn owns the purchased gilts. Your above letter and earlier correspondence has sought to give assurance that sterling has not somehow disappeared. This is not what I allege. It is the potential for the benefit of the QE funds to have drained away into the overseas economies that is the issue.
217 Following your last letter, I undertook further research and was very surprised to discover the Bank's own Working Paper 442 dated January 2012: http://www.bankofengland.co.uk/publications/Documents/workingpapers/wp442.pdf
218 The WP includes statements such as:
219 "First, some gilt sales to the asset purchase facility may have come from outside of the UK non-bank private sector which may have reduced the initial effect on broad money."
220 This is grossly economical with the truth. By the Bank's own admission, it has no idea as to the identity of the actual owners of the gilts. In consequence, the Bank has no data to support any assertion as to the amount or proportion of gilts purchased "from outside the UK corporate sector". You are reminded of the Bank's letter dated 23 July 2012 which unequivocally states: "May I point out however, that those from whom we purchase the gilts directly are, to very large part, acting as intermediaries for the ultimate sellers of the gilts and so the bank does not know the identities of the 'original' owners."
221 WP 442 goes on to state: "It cannot be certain that the ultimate sellers of all the gilts purchased during QE were members of the UK non-bank private sector. The intention of QE was to purchase assets largely from UK non-bank financial companies, such as insurance companies, pension funds and other asset managers. But the banking sector or non-resident sector may have sold some of their gilt holdings to the Bank of England. In this case, the money balances of the non-bank private sector would not have risen, so the initial increase in M4 money holdings may have been less than the programme of asset purchases."
222 I am totally unable to reconcile your last two letters with the prior admissions by the Bank and the known facts. Please supply a much realistic reply which takes proper account of the fact that the Bank has no data on the actual owner of the gilts. WP 442 clearly recognises that the benefit of QE funds could move overseas to the detriment of the UK economy. Please either confirm that the authors of WP 442 were right (thus confirming my contention) or provide a much better reasoned, fact based explanation as to why your authors and 1 are wrong.
223 I am now also very concerned as to whether there has been proper the public disclosure by the Bank that it has no knowledge of the actual identities and thus nationalities of the 'original' owners. An internet search has located no public disclosure of this fact.
224 Accordingly, as part of the fragmented response to my current FoI request, please provide the following information:
225 In relation to the agreed fact that the actual owners who sold gilts to the Bank are unknown, please identify all public documents and other references by way of Bank and MPC publications, reports and speeches (including by members for the time being of the MPC and the Court of Directors) including statements by Treasury and other ministers to Parliament (including replies to PQs) and Parliamentary Committees amounting to full or even partial disclosure of the fact that the Bank has no record or idea as to the identity of the actual owners of the gilts it has acquired under the Asset Purchase (QE) scheme.
226 In case you find yourself unable or unwilling to provide this information in response to this FoI request, I will shortly be serving a further request both on yourselves and HM Treasury.
Bank of England's letter to the Mr Kay's email of 21 September 2012
227 Thank you for your latest email of 23 August concerning 'Quantitative Easing' ('QE').
228 I have carefully read the extracts from the WP and our previous correspondence and I can see no contradictions. The Bank has made it clear throughout, as Charlie Bean said in his speech in October 2009 that "The Asset Purchase Facility's purchases were targeted at assets held primarily by the non-bank private sector." I do appreciate that you are concerned about the effects of QE going overseas as you see it. In our response of 6 August, we also quoted what Charlie Bean said on this issue and I think it is important to reiterate that. He said "Whatever the type of purchase, it will always end up with someone's commercial bank having a claim on us. That is even the case if the money is used to buy foreign goods, as the foreign commercial bank will need to exchange the sterling claim with a commercial bank that holds an account with us, if it does not do so itself. The only way that the claim can be eliminated from the system is if a bank chooses to exchange it for cash, which would make little sense since cash pays no interest at all".
229 Quite simply, the asset purchases are straightforward transactions and the ultimate beneficiary is the UK economy.
230 You ask for all documents referencing that the Bank has ‘no record or idea as to the identity of the actual owners of the gilts it has acquired under the Asset Purchase (QE) scheme' under the Freedom of Information Act 2000 ('Fol Act') in your further email of 23 August.
231 As we have previously explained information which the Bank may hold for the purposes of its functions with respect to '(a) monetary policy' falls outside the scope of the Fol Act (see section 7 and the Bank of England entry in Schedule 1, Part VI Fol Act). That said, it is highly unlikely we hold such information and it would be a time intensive exercise to search on the terms you suggest.
232 We do not know the individual identities of the beneficial owners from whom we have bought gilts. However, from information on sectoral holdings we know the kinds of companies which hold large quantities of gilts - this has enabled the Bank to target its QE program. In particular we know that both insurance companies and pension funds hold large quantities of gilts. Please take the link below to a table on the website of the Debt Management Office which shows the amount of gilts held by each sector in percentage terms. (From cell V4 onwards) As you will be able to see the share of gilts held by insurance companies and pension funds have fallen markedly since 2009.
234 These are net figures, and so the effects are not as pronounced as they might have been because of the large scale issuance of additional gilts by the Debt Management Office partly bought up by insurance companies and pension funds.
235 With respect to the effects of QE, the impact on broad money is not mechanistic and reflects the behaviour of the seller of the stock and what they do with the proceeds of the sale.
236 If a company who has sold stock changes the proceeds of the sale into another currency, then the value of sterling is likely to fall which would be of benefit to the UK economy at this time. Meanwhile the additional sterling created can be put to work within the UK economy.
Mr Kay’s email to the Bank of England - 28 September 2012
237 I refer to your letter dated 21 September 2012 which purportedly responds to my emailed FoI request dated 23 August, I am most disappointed and surprised to discover that the Bank has totally failed to reply to the penultimate paragraph of that email which reads:
238 "In relation to the agreed fact that the actual owners who sold gilts to the Bank are unknown, please identify all public documents and other references by way of Bank and MPC publications, reports and speeches (including by members for the time being of the MPC and the Court of Directors) including statements by Treasury and other ministers to Parliament (including replies to PQs) and Parliamentary Committees amounting to full or even partial disclosure of the fact that the Bank has no record or idea as to the identity of the actual owners of the gilts it has acquired under the Asset Purchase (QE) scheme."
239 Please provide the above information which is now seriously overdue. Please also acknowledge receipt of this email, giving an indication of when I might expect your completed reply.
Bank of England's email to Mr Kay dated 1 October 2012
240 We acknowledge receipt of your email dated 28 September (our ref FF 27239). We will reply in due course.
241 If you have any queries please contact the Bank’s Public Information and Enquiries Group on 020 7601 4878.
Bank of England's letter to Mr Kay dated 10 October 2012
242 Thank you for your email of 28 September in response to our letter dated 21 September to your Freedom of Information ('Fol') request of 23 August.
243 I was very glad to hear that you had a helpful discussion on 2 October with my colleague ****** about QE and I understand that he also explained why the effects of QE could not benefit overseas economies.
244 With regards to your Fol request and our subsequent response, as ****** explained, we never claimed to know the beneficial owners of the gilts we purchased. I hope therefore that this now clarifies why we said it was extremely unlikely that we held such material as set out in your request.
245 We do very much appreciate the time you have taken to engage with us about QE. May I reiterate *****'s invitation to call at any time if there are further matters upon which you would like clarification.
Mr Kay’s email to the Bank of England dated 24 October 2012
246 Thank you for your emailed letter dated 10 October 2012.
247 I much appreciate ******'s time. Whilst I fully understand that the Bank's electronic QE money cannot leave the sterling banking system, we did not reach common ground on the relevance of the seller of the gilts converting the GDP into foreign currency and investing or lending the FX elsewhere in the global economy.
248 A number of respected economists support my view that the benefit of the QE money has leaked overseas via FX. This includes a former member of the MPC.
249 I appreciate *****'s invitation to continue the conversation and look forward to doing so in the near future when my current enquiries are more advanced.
________________________________
250 Appendix A/3 – Freedom of Information requests & correspondence – HM Treasury 2009
Mr Kay's email to HM Treasury on 24 August 2009
251 In connection with the Bank of England's Quantitative Easing programme and the provisions of the Freedom of Information Act, 2000, you are requested to:
1. Disclose all significant documentation (in existence prior to this request) related to any consideration by the Treasury or others as to the potential or intended beneficiaries of the funds made available by the QE programme. This includes both primary / initial beneficiaries and secondary beneficiaries (eg parties to whom the benefit of the funds released have been passed).
2. Disclose all analyses or reports produced by or for the Treasury setting out by either name or type (eg UK retail bank, UK non-retail bank, non-UK bank, other UK financial institution or corporate, non-UK financial institution or corporate) the total QE funds paid out by the latest possible date. If no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response.
3. Disclose all analyses or reports produced by or for the Treasury setting out where the QE funds have been applied, paid out or onward lent by the parties or institutions specified in request 2 above. Again, if no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response.
4. Disclose what contractual or other arrangements have been implemented by the Treasury prior to the date of this request to ensure / maximise that the QE funds are applied for the general benefit of the UK economy.
252 Thank you in advance for your assistance in this matter.
HM Treasury letter to Mr Kay dated 22 December 2009
253 Further to our letter dated 22 September [acknowledging], we have now completed our consideration of the public interest in this case. I am sorry not to have provided our conclusion earlier.
254 You had asked us to disclose:
· all significant documentation (in existence prior to this request) related to any consideration by the Treasury or others as to the potential or intended beneficiaries of the funds made available by the QE programme. This includes both primary I initial beneficiaries and secondary beneficiaries (eg parties to whom the benefit of the funds released have been passed);
· all analyses or reports produced by or for the Treasury setting out by either name or type (eg UK retail bank, UK non-retail bank, non-UK bank, other UK financial institution or corporate, non-UK financial institution or corporate) the total QE funds paid out by the latest possible date. If no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response;
· all analyses or reports produced by or for the Treasury setting out where the QE funds have been applied, paid out or onward lent by the parties or institutions specified in request 2 above. Again, if no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response; and
· what contractual or other arrangements have been implemented by the Treasury prior to the date of this request to ensure I maximise that the QE funds are applied for the general benefit of the UK economy.
255 A great deal of information on quantitative easing has already been published. Information on the monetary policy framework and recent interventions is gathered at the following web page on the Treasury public website, which includes key correspondence cited in the following paragraphs. htto://www.hm-treasury.gov.uk/ukecon_mon_index.htm
256 Key exchanges include the letters between the Chancellor of the Exchequer and the Governor of the Bank of England in which the Chancellor authorised the use of the Asset Purchase Facility (APF) for monetary policy purposes: http://www.hrn-treasury.gov.uk/d/boetetter_chx_050309. pdf http://www.hm-treasury.gov.uk/d/chxletter boe050309.pdf
257 Policy colleagues have provided the following comments. The Bank of England uses monetary policy to ensure it meets the inflation target. Normally, it does so by varying its target for the overnight interest rate, Bank Rate. When the financial system is functioning well, changes in Bank Rate are passed through the financial system, influencing interest rates faced by households and companies.
258 The severity of the global downturn led to a real risk of deflation where the price levels fall for a sustained period, with potentially strong negative effects on output and jobs.
259 On 19 January 2009, the Government established the Asset Purchase Facility (APF) in order to help increase the availability of corporate credit and to provide a framework for the Monetary Policy Committee of the Bank of England to use asset purchases for monetary policy purposes. A published exchange of letters on 29 January 2009 established the APF and the operational framework for asset purchases: http://www.hm-treasury.gov.uk/d/cx letter boe290109.pdf http://www.hm-treasury.gov.uk/d/a pfgov Ietter090129 pdf
260 The MPC cut Bank Rate from 5 per cent in September 2008 to 0.5 per cent in March 2009. At its February meeting, the MPC judged that although "the Committee's projections implied that further monetary easing was likely to be needed in order to meet the inflation target in the medium term, "it seemed unlikely that the inflation target could be met solely by cutting Bank Rate". "The short-term market interest rates that Bank Rate sought to influence could not go far, if at all, below zero." (MPC minutes, February 2009). The MPC voted unanimously in their February meeting that the Governor write to the Chancellor to request the use of the APF for monetary policy purposes. On 3 March the Chancellor authorised the use of the APF for monetary policy purposes, with asset purchases of up to £ 150 billion, stating that "I agree it is appropriate to consider additional instruments for ensuring that the Monetary Policy Framework can continue to deliver its objective of ensuring price stability." (Chancellor's letter to the Governor, http://www.hmtreasury.gov.ulddlchxletter_boe050309.pdf).
261 In his letter, the Chancellor highlighted that the objectives of the monetary policy framework remained unchanged; the MPC should continue to maintain price stability and, subject to that, to support the Government's economic policy, in particular its objectives for growth and employment. The introduction of the APF is consistent with the principles of full operational independence, openness, transparency and accountability that underpin the monetary policy framework.
262 Using the APF, the MPC is able to ease policy further by injecting money into the economy. Minutes of the March MPC meeting in which the Committee considered the necessity of using the APF for monetary policy purposes and its possible impacts can be found at http://www.bankofengland.co.ukipublications/minutes/mpc/pdf/2009/mpc0903.pdf.
263 Minutes for other MPC meetings are also available on the Bank of England's website.
264 The MPC has set out that its intention with quantitative easing is to raise the rate of growth of nominal spending in the economy to a level that is consistent with inflation at target and growth at trend. The MPC is concerned with the growth of nominal spending because it is a primary determinant of inflation in the medium term. The intended beneficiary of these asset purchases under the APF is therefore the wider economy, through the benefits it derives from price stability.
265 The Bank of England has also published several documents explaining the objectives of quantitative easing and how it is expected to work, including Quantitative Easing Explained. This and other documents are available on the Bank of England's website at the following address: http://www.bankofengland.co.uk/monetarypolicy/assetpurchases.htm.
266 Box 2.2 in Budget 2009 also provides information about the use of quantitative easing for monetary policy purposes, and paragraph 2.44 of Pre-Budget Report 2009 notes that the actions taken by the MPC will continue to provide a powerful stimulus to spending by businesses and individuals, as financial market conditions continue to improve.
267 Asset purchases financed by the issuance of central bank reserves expand the monetary base, and allow the MPC to ease monetary conditions by raising the quantity of money in circulation, at a time when it has not been feasible to reduce further the price of money. It does so through the purchase of securities issued by the private sector or the Government with central bank money. That raises the money holdings of the private sector. Investors buy other assets with the money they receive from the Bank of England, bidding up their price, and lowering the yield of those assets. Higher asset prices generate an increase in wealth and support higher spending. Lower yields reduce the cost of finance. Over time, a lower cost of finance should encourage firms to raise capital to pursue profitable opportunities. In turn, this process should stimulate demand in the economy, ensuring that the inflation target can be met.
268 The Bank is purchasing commercial paper and corporate debt directly in an attempt to restore liquidity in these markets and reduce credit spreads and the cost of borrowing. The Bank of England is also consulting on whether the liquidity of secondary corporate debt markets could be further improved if it were to sell as well as buy corporate bonds in its APF portfolio. Further details are contained within the Bank of England's Market Notice of 3 December, which is available at http://www.bankofengland.co.uk/markets/marketnotice091203.pdf.
269 Corporate bond and gilt yields fell significantly following the announcement of the APF's use for monetary policy purposes in March, with the decline in corporate bond yields exceeding the fall in gilt yields. Issuance of bonds by UK non-financial companies rose sharply in the first half of 2009, reflecting the lower cost of bond finance. Asset purchases by the Bank of England therefore appear to have made raising alternative sources of finance easier, and are helping to revive the flow of credit in the economy.
270 Quantitative easing also boosts confidence and spending by shaping private sector expectations, providing assurance that a period of deflation will be avoided.
271 At the request of the Monetary Policy Committee (MPC), the Chancellor authorised an increase in the upper limit of the APF to £175 billion in August, and then to £200 billion on 5 November. The MPC is expected to complete its planned schedule of asset purchases by the end of January.
272 Central banks in other major economies have undertaken similar measures. The Federal Reserve in the US has maintained the target range for the federal funds rate at 0-0.25% since December 2008, and has also increased the monetary base through its purchases of US government bonds and $175 billion of agency debt. The ECB has also cut its main policy rate by a total of 325bp since October 2008 to 1%, and is purchasing euro-denominated covered bonds to boost liquidity in credit markets.
273 Timely and effective action by governments around the world has helped to avoid a significantly worse economic outcome following the global shocks, and there are tentative signs of recovery in the world and UK economies. A substantial macroeconomic stimulus has been put in place to help the economy through the recovery. The Government is delivering fiscal support worth 5 per cent of GDP in 2009-10 from the measures announced since the 2008 Pre-Budget Report, and the operation of the automatic stabilisers. The Government's action has been successful in averting the more severe downside risks to the economy, and has limited the severity of the downturn and its impact on businesses and individuals.
274 The MPC's decisions on the level of Bank Rate and on the level of asset purchases, and the minutes relating to them continue to be published in accordance with the stipulations of the Bank of England Act 1998. The Committee also explains its monetary policy decisions through the Inflation Report (http://www.bankofengland.cauk/publications/inflationreport/2009.htm), and its evidence to the Treasury Select Committee, as well as publishing a quarterly report on the APF shortly after the end of each quarter. The latest APF quarterly report can be found at http://www.bankofengland.co.ukipublicationsiother/markets/apf/quarterlyreport.htm.
275 [Paragraph setting out FoI request limitations omitted]
276 We recognised that there is a general public interest in transparency to promote accountability, trust and engagement. We also recognise that there is a particularly acute public interest in current economic policy, because of prevailing economic conditions and the impact on citizens. However, since the onset of the credit crunch and the ensuing recession, the government has been at pains to communicate their stance and proposed interventions at every stage, to the maximum extent consistent with market sensitivity. Specifically in relation to quantitative easing, a large amount of information has already been published that explains the decision to undertake quantitative easing and the reasoning behind this decision. We concluded that the published information already published adequately addresses the public interest.
277 [Paragraph setting out FoI request limitations omitted]
278 The exemption for policy formulation and development (section 35(1)(a) exists in recognition of the damage that would be done to the policy process if there were no private space for Ministers and officials to consider and test their thinking free from premature scrutiny. If that private space were not protected, policy making would suffer accordingly; and given the continuing sensitivities attaching to policy in this area, we concluded that there is every justification for such protection being maintained.
279 In the second and third parts of your request you also ask for information on the total funds paid out under the APF by the name or type of UK financial institution including where these funds have been onward lent. We are interpreting your request as asking for details of the participants in the reverse auctions conducted by the Bank of England, and the institutions to whom the funds created through the APF have been passed onto.
280 HM Treasury does not hold any report setting out the total of funds paid out under the APF by the name or type of UK financial institution. The Bank of England does not make this information available due to the potential risk of deterring investors from participating in these programmes. Also, as it is not possible to know with any certainty where and how these funds work their way through the economy, HM Treasury does not hold any information on where funds have been onward lent. Monetary policy operations by their very nature are designed to affect the economy as a whole, and not individual companies. The initial incidence of monetary policy is not the ultimate incidence as the central banks counterparties are themselves counterparties for the wider financial system. It is the wider financial system that will have been the ultimate owner of most of the assets that the Bank of England has purchased.
281 As stated earlier, HM Treasury believes that asset purchases will benefit the wider economy through the maintenance of price stability. Measures of households' inflation expectations for the medium term remained stable at levels that appear broadly consistent with inflation at target, and lower yields on corporate bonds and interest rates faced by consumers are providing a stimulus to spending by firms and households. The Bank of England regularly updates its website with information regarding the use of the Asset Purchase Facility, including a breakdown of asset purchases by asset type. Details regarding the Bank of England's asset purchases can be found at - http://www.bankofengland.co.uk/markets/apf/index.htm
282 The schedule of APF operations can be found at -http://www.bankofengland.co.uk/markets/apf/schedule.htm
283 As stated on the Bank of England's website, the Bank of England has used the APF to purchase £190.1bn of assets (as at 17 Dec 2009), comprising commercial paper, corporate bonds, and gilts. The market notices for each facility, issued by the Bank of England, contain the operational details by which the Bank of England undertakes the various facilities. They can be found at - http://www.bankofengland.co.uk/markets/apf/notices.htm.
284 The Bank of England website states that, as at close Thursday 17 December, the outstanding stock holdings for each facility were as follows:
· Commercial Paper £519m
· Corporate Bonds £1,549m
· Gilts £188,076m
· Secured Commercial Paper £0m
285 With regard to the fourth part of your request, HM Treasury does not hold any information on contractual or other arrangements to ensure/maximise that the QE funds are applied for the general benefit of the UK economy. As discussed above, and set out in the Chancellor's most recent letter to the Governor of the Bank of England on 5 November, the APF "has enabled the MPC to influence monetary conditions in the United Kingdom by influencing the quantity of money in the economy as well as by setting the level of Bank Rate." The use of the APF for monetary policy purposes demonstrates the MPC's continuing commitment to the 2 per cent CPI inflation target.
286 The Bank of England Act 1998 stipulates the monetary policy framework in the UK. The MPC has operational independence in setting monetary policy to meet the Government's 2 per cent inflation target, as measured by the 12-month increase in the Consumer Prices Index (CPI). On 22 April 2009, the Chancellor wrote to the Governor of the Bank of England restating the monetary policy remit. The monetary policy framework remains unchanged with the introduction of the Asset Purchase Facility for monetary policy purposes. The Committee continues to explain its monetary policy decisions through the publication of the minutes of its meetings and the quarterly Inflation Report, and its evidence to the Treasury Select Committee.
________________________________
287 Appendix A/4 – Freedom of Information requests & correspondence – HM Treasury 2012
HM Treasury response - 24 July 2012
288 Thank you for your Freedom of Information enquiry dated 27 June 2012.
289 You asked for us to disclose:
a. All significant documentation (in existence prior to this request) related to any consideration by the Treasury or others as to the potential or intended beneficiaries of the funds made available by the QE programme. This includes both primary initial beneficiaries and secondary beneficiaries (eg parties to whom the benefit of the funds released have been passed);
b. All analyses or reports produced by or for the Treasury setting out by either name or type (eg UK retail bank, UK non-retail bank, non-UK bank, other UK financial institution or corporate, non-UK financial institution or corporate) the total QE funds paid out by the latest possible date. If no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response.
c. All analyses or reports produced by or for the Treasury setting out where the QE funds have been applied, paid out or onward lent by the parties or institutions specified in request 2 above. Again, if no such analysis or report exists at the time of this request, please say so as it is not part of this request that such a report be produced in response.
d. What contractual or other arrangements have been implemented by the Treasury prior to the date of this request to ensure and maximise that the QE funds are applied for the general benefit of the UK economy.
290 You asked whether the situation had changed since our reply to your previous request [in 2009]. I can tell you that the situation is largely the same. As such, some of this letter will cover similar ground to our other reply, but also contains some new information towards the end.
291 As noted in our correspondence with you dated 22 December 2009 the Treasury does hold specific documentation relating to the first part of your request. However, we still consider that this falls under the exemptions in sections 29 (the economy) and section 35(1)(a) (policy development). As you know, these are exemptions that require us to balance the public interest between maintaining the exemptions or disclosing information despite the exemption. Having reconsidered the public interest arguments, we believe that they still favour withholding this information.
292 The economy exemption of the FOI Act section (section 29) exists in recognition of the damage to the wider economy or to the Government's fiscal management that can be caused by the disclosure of some information. Our view, despite the passing of time since your previous request, remains that releasing information on interest rate decisions and the monetary policy framework could stand to cause such damage. The Government avoids public comment on monetary policy decisions, as this could undermine the independent authority of the Monetary Policy Committee, resulting in adverse market perceptions and damage market sentiment.
293 The exemption for policy formulation and development section 35(1)(a) exists in recognition of the damage that would be done to the policy process if there were no private space for Ministers and officials to consider and test their thinking free from premature scrutiny. If that private space were not protected, policy making would suffer accordingly; and given the continuing sensitivities attached to policy in this area, we have concluded that there is sufficient justification for such protection being maintained.
294 In the second and third parts of your request you asked for information about the total funds paid out under APF by the name or type of UK financial institution, including where these funds have been onward lent. We have again interpreted your request as asking for details of the participants of the reverse auctions conducted by the Bank of England, and the institutions to whom the funds created through the APF have been passed onto.
295 HM Treasury does not hold any report setting out the total amount of funds paid out under APF by the name or type of UK financial institution. The Bank of England does not make this information available, due to the potential risk of deterring investors from participating in these programmes. Also, as it is not possible to know where and how these funds work their way through the economy, HM Treasury does not hold any information on where funds have been onward lent.
296 Your fourth request asks what measures have been taken to ensure that QE funds are applied to the general benefit of the UK economy. The Financial and Risk Management Framework between the Bank and HM Treasury ensures that risks on assets purchased on this facility are managed appropriately. The Framework outlines the eligible asset classes and high-level risk parameters that guide the purchase and sale of assets by the Bank.
297 In our previous correspondence, we provided detailed information on quantitative easing and gave you links to where further information could be found on the internet. We recognise that there is a general public interest in transparency to promote accountability, trust and engagement.
298 It may help if I further clarify the purpose of QE. QE provides the independent Monetary Policy Committee (MPC) of the Bank of England with an additional policy tool to interest rates. It is a macroeconomic policy tool, which is designed to raise the level of spending in the economy by increasing the amount of money in circulation. Under this policy, the Bank of England purchases assets, primarily gilts from the private sector, financing this from the creation of new money or central bank reserves. This is not financed by the taxpayer and does not change the level of government borrowing or government debt. The MPC can use QE, along with low interest rates, to stimulate activity in the economy to a level consistent with meeting the inflation target in the medium term. Price stability remains the MPC's primary objective.
299 http://www.bankofengland.co.uk/markets/Documentsimarketnotice120301con.pdf
states that: Those eligible to apply to participate as counterparties in the competitive auctions will be those firms that are participants in the Bank's gilt-purchase open market operations (OMOs), and firms that are Gilt-edged Market Makers (GEMMs) as listed on the website of the Debt Management Office (DMO). Those eligible to apply to participate as counterparties in the non-competitive element of the auction will be all firms that are appropriately authorised for the purposes of the Financial Services and Markets Act (FSMA), with the exception of firms that are participants in the Bank's gilt-purchase OMOs. The Bank of England's asset purchases during QE have largely been from non-bank financial institutions, including insurance companies and pension funds, which use the money received to purchase other assets such as corporate bonds and equities. It is important to note that those from whom the Bank purchases the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners.
300 There are a number of ways through which injections of money into the economy via asset purchases funded by reserves might be expected to affect nominal spending growth and inflation. One important route is through higher asset prices, which should reduce the cost of obtaining funding and increase the wealth of asset holders, thus boosting spending and increasing nominal demand.
301 Bank analysis to date on the effectiveness of QE covers the first round of asset purchases from March 2009 to January 2010. Analysis in the Bank's May 2010 Inflation Report suggested that gilt yields are around 1 percentage point lower than would otherwise have been the case in the absence of the Bank's programme of asset purchases. The report states that significant increases in equity and corporate bond prices since early 2009 are "likely, in part, to reflect the exceptional monetary stimulus."
302 The Bank's 2011 Q1 Quarterly Bulletin concluded that asset purchases during the first round of QE have had a positive impact on broad money and there is evidence that the policy is working via the balance sheets of households and companies to contribute to an increase in nominal spending.
303 The Bank's 2011 Q3 Quarterly Bulletin analysed in detail the effectiveness of the f200bn of asset purchases carried out between March 2009 and January 2010 and, for the first time, attempted to numerically calibrate their impact on the economy. Bank staff surveyed various types of econometric model and from these calculated a range for the potential impact on GDP and inflation. They estimate QE raised UK inflation by around 3/4 to11/2 percentage points and increased real GDP by around 11/2 to 2 per cent.
304 Between March 2009 and January 2010, asset purchases up to f200 billion were financed by the issuance of central bank reserves. Following this first round of asset purchases, in October 2011, the MPC decided to undertake a second round of QE, voting to raise the total by £75 billion to £275 billion. At its February 2012 meeting, the MPC decided to extend QE by a further £50 billion, bringing the total to f325 billion. The MPC judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term.
305 At its meeting held on 4-5th July, the MPC decided to extend QE by another £50 billion. This was based on its judgment that "against the background of continuing tight credit conditions and fiscal consolidation, the increased drag from the heightened tensions within the euro area meant that, without additional monetary stimulus, it was more likely than not that inflation would undershoot the target in the medium term".
306 The MPC has stated several times that there "appeared to be no strong reason to expect the economic effect of further asset purchases to be materially different but their impact would need to be kept under review. The size of the asset purchase programme could be adjusted if there were evidence that its marginal effects were different than past experience suggested." (MPC minutes, October 2011).
307 May's [2012] MPC minutes continue to note that, as yet, there is no compelling evidence that the impact on nominal demand of the additional round of asset purchases completed in May, to be materially different from previous asset purchases. Recent market intelligence, low gilt yields and a pickup in sterling deposits by both residents and non-residents were consistent with asset purchases working as expected through the portfolio rebalancing channel with a lag.
308 As outlined in Budget 2012, monetary policy has a critical role in supporting the economy as the Government delivers on its commitment to necessary fiscal consolidation. The credibility of the Government's fiscal plan allows the independent MPC to keep Bank Rate lower than it would otherwise have been and to deliver additional monetary stimulus through quantitative easing (QE).
309 As part of monetary activism, to aid the flow of credit to smaller businesses, the Government launched the £20 billion National Loan Guarantee Scheme (NLGS) on 20 March to lower the cost of bank loans for smaller businesses and expanded the Business Finance Partnership to £1.2 billion at Budget 2012 to encourage the development of non-bank lending channels for SMEs and mid-sized businesses.
310 The new Funding for Lending scheme, launched by the Bank of England and HM Treasury on 13 July, complements the NLGS, and will support credit for the whole economy by making it easier for banks to lend to businesses and families.
311 I hope you have found this information useful and please remember to quote the reference number above in any future communications.
Mr Kay’s email to HM Treasury - 24 July 2012
312 Receipt of your formal response dated 23 July 2012 is acknowledged.
313 Certain statements required clarification and confirmation as they appear to be in conflict:
314 1 Unknown vendor:
315 "May I point out however, that those from whom we purchase the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners."
316 Please confirm my understanding of this statement that the Bank, not knowing the identity of the 'original owners' has no possible way of knowing where the funds are ultimately banked.
317
2 Increase in UK money in circulation:
"Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been."
318 Having just confirmed that the Bank does not know who the ultimate beneficiaries of the QE funds were, please explain how the Bank has any evidence supporting the above assertion on the amount of QE money in circulation in the UK.
319
3 Identity / location of bank receiving the QE funds:
"Ultimately, that money needs to be placed on deposit somewhere within the banking system at a commercial bank."
320 This is an unhelpful statement of the obvious. The QE cash would have been credited presumably to the account of the agent representing the original owner. That agent, as trustee, will apply those funds in accordance with the owner's directions. On this basis, the funds will either wind up in the owner's bank or be invested as directed by the owner. The owner's commercial bank is totally unknown to the Bank and could be located anywhere in the world.
321 Please confirm whether my understanding is correct.
322
4 Encourage greater lending:
"It is possible that these additional deposits might encourage greater lending by the commercial banking system ..."
323 The Bank has previously admitted that it does not know the identity or banking / investment arrangements of the original owner. The QE funds could well have encouraged greater commercial bank lending. However, as the Bank does not know where the funds actually went, this lending could have taken place anywhere in the world. Worse, the funds could have supported the growth and success of the UK's overseas competitors.
324 Please confirm whether my understanding is correct.
Letter from Kay to HM Treasury dated 23 August 2012
325 Thank you for your email and letter dated 24 July 2012.
326 You stated in your letter that "Also, as it is not possible to know where and how these funds work their way through the economy, HM Treasury does not hold any information on where funds have been onward lent".
327 The Bank of England has made a similar disclosure. The attention of the Bank has now been drawn to its own published Working Paper 442 dated January 2012 which contains a number of conclusions which confirm that QE money could move outside the UK economy by being exchanged into foreign currency. I attach an extract from WP 442 for your consideration. As the identity of the actual sellers of the gilts is unknown to both the Treasury and the Bank so the actual destiny of the benefit of the QE money is wholly unknown.
328 Failure by the Bank to monitor and control where the QE money actually went, goes a long way to explaining why £375bn has had so little impact on the UK economy. The UK has been providing an unknown amount of help to the rest of the world! In the light of WP 442, hopefully you can provide a plausible explanation as how both the the Bank's authors of WP 442 and I are wrong.
329 In further response to and clarification of the above disclosure and the Bank's confirmation that the actual owners who sold gilts to the Bank are unknown, please identify all public documents and other references by way of HM Treasury announcements, press releases, publications, reports and speeches including statements by Treasury and other ministers to Parliament (including replies to PQs) as well as Parliamentary Committees or otherwise amounting to full or even partial disclosure of the fact that the Bank and thus the Treasury has no record or idea as to the identity of the actual owners of the gilts which have been acquired under the Asset Purchase (QE) scheme.
330 Please confirm receipt of this email and advise whether you are providing the requested information as part of your response to the current FoI request. If you are unwilling or unable to do so then please treat this as a further FoI request and confirm that you will respond according.
HM Treasury reply to email from Mr Kay dated 23 August 2012
331 Thank you for your Freedom of Information enquiry of 23 August 2012 which we received on 24th August.
332 You referred to our response to your earlier request and to the Bank of England's response to your request to them about the actual owners who sold gilts to the Bank and asked for information covering:
333 "please identify all public documents and other references by way of HM Treasury announcements, press releases, publications, reports and speeches including statements by Treasury and other ministers to Parliament (including replies to PQs) as well as Parliamentary Committees or otherwise amounting to full or even partial disclosure of the fact that the Bank and thus the Treasury has no record or idea as to the identity of the actual owners of the gilts which have been acquired under the Asset Purchase (QE) scheme."
334 You also enclosed a copy of an extract from the Bank of England Working Paper 442 dated January 2012 for our consideration.
335 As noted in our previous correspondence, HM Treasury does not hold any report setting out the total amount of funds paid out under the Asset Purchase Facility by the name or type of UK financial institution. The Bank of England does not make this information available, due to the potential risk of deterring investors from participating in these programmes. As the participating institutions in large part act as intermediaries, it is not possible to know the ultimate sellers of the assets purchased. Furthermore, the Government does not track and record the large number of transactions that take place as investors' portfolios are adjusted and these funds work their way through the economy. As such, HM Treasury does not hold any information on where funds have been onward lent.
336 The FOl Act exists to provide access to recorded information. Information counts as 'recorded' for the purposes of the FOI Act where a record is already held by the public authority. We are not required to produce new work under the Act and so we will not be commenting on the Bank's Working Paper.
337 If you have any queries about this letter, please contact me. It will be helpful to us if you remember to quote the reference number above in any future communications.
Email from Mr Kay to HM Treasury dated 23 August 2012
338 The Treasury has a statutory obligation to reply within 20 working days to my emailed FoI request dated 23 August 2012. Your reply is over a week late, made worse by the fact that you have totally failed to deal with the penultimate paragraph on my email of 23 August which reads:
339 "In further response to and clarification of the above disclosure and the Bank's confirmation that the actual owners who sold gilts to the Bank are unknown, please identify all public documents and other references by way of HM Treasury announcements, press releases, publications, reports and speeches including statements by Treasury and other ministers to Parliament (including replies to PQs) as well as Parliamentary Committees or otherwise amounting to full or even partial disclosure of the fact that the Bank and thus the Treasury has no record or idea as to the identity of the actual owners of the gilts which have been acquired under the Asset Purchase (QE) scheme."
340 As your reply was overdue and is defective, please address the ignored part of my request without any further delay.
Letter to Mr Kay from HM Treasury dated 27 September 2012
341 Thank you for your message of 24 September regarding our response to your request of 23 August 2012.
342 You have complained that the response to your request … does not answer your request to the Treasury to:
343 "identify all public documents and other references by way of HM Treasury announcements, press releases, publications, reports and speeches including statements by Treasury and other ministers to Parliament (including replies to PQs) as well as Parliamentary Committees or otherwise amounting to full or even partial disclosure of the fact that the Bank and thus the Treasury has no record or idea as to the identity of the actual owners of the gilts which have been acquired under the Asset Purchase (QE) scheme".
344 With regard to your complaint about the substance of the response, I agree that the reply sent does not properly address your request and I apologise for this.
345 With regard to your request, the Act provides a right of access to recorded information held by public authorities. However authorities are not obliged, by virtue of the exemption at section 21 of the Act, to identify and provide information if it is already reasonably accessible to requesters. The thinking behind the exemption is that if there is another route by which someone can obtain information, there is no need for the Act to provide the means of access. As your request relates to information in the public domain, the exemption at section 21 applies. We have therefore not carried out searches for this information but, to be helpful, can inform you that the department is not aware of information in the public domain that would meet the terms of this request.
346 I understand that you may be disappointed by the outcome of the review, but I hope this account demonstrates that your complaint has received appropriate consideration.
Email from Mr Kay to HM Treasury dated 27 September 2012
347 Thank for your letter dated [27] September 2012.
348 My prior correspondence asked for details of any public disclosure of the fact that the owners of the purchased QE are unknown. I note that you have helpfully confirmed that the Treasury is not aware of any information in the public domain that would meet the terms of this request.
349 Accordingly, as our extensive internet search has also found, it concluded that this material fact has been concealed either by ignorance or design from proper scrutiny by either Parliament or the public.
January 2013
[1] Harriett Baldwin MP met Mr Kay’s in her capacity as his constituency MP. She joined the investment bank JP Morgan Chase in 1986, becoming MD and Head of Currency Management at their London office in 1998. She left the bank in 2008, after over twenty years with the bank.