No point selling £375bn of gilts, unless you make profit!

The FT today has two pieces today talking about the effects of the £375bn of existing QE, when the Bank of England between 2009 and 2012 purchased £375bn of gilts (UK government bonds) from the markets.

One, by Giles Wilkes in the FT makes the case for an audit by the National Audit Office of the gilt holding of the Bank of England, and for it to become more open, the other by Frances Coppola rightly says, that the previous QE was also a People’s QE, just not for the kind of people which the new Labour leader Corbyn wants to represent. The 375bn was a QE for the rich.

How do gilt markets work

Neither of the FT articles say that the banks benefited from the QE, although Frances Coppola acknowledges, rightly, that the gilts will have to be sold to market makers of gilts first, who would then pass them onto the government. (If you thought that financial markets are efficient, think again, whereas you can sell anything on ebay, you cannot do so if you have gilts, that has to be passed through an officially licensed market maker).

Now, the market makers also have a stock of gilts on their own books, as they can then trade without first having to buy them. So in a way they ensure the liquidity of the market. But, in return, they will also want a commission for selling it to you. That will be reflected in the fact that they sell for a higher price than they bought the gilts for.

We also know, that the gilt turnover is relatively high, compared to the gilts outstanding. About £15bn were traded daily in 2008-09.  Now, an additional demand of 375bn, even spread over a few years, will certainly have had an influence on the price of these gilts.

In addition, we have to remember, that in times after a crash (which happened 7 years ago this week in September 2008, after the Lehman Brothers collapse) interest rates were likely to fall.

Further, in a financial crisis, markets liquidity usually dries up. That is why we see huge falls in share prices, and other asset prices. Nobody wants to buy. Even bond markets should be affected.

After a crash, interest rates did indeed fall. That is a normal policy response by central banks, and rates dropped from about 5.5% to about 0.5% in the space of a few months. As a gilt trader you know that this is a great opportunity, and if you can get enough gilts early before interest rates drop, you know that you will be able to sell them at a profit, as gilt prices will rise, as interest rates fall.

But the market was still extremely uncertain, and liquidity probably still low. That is where the Bank of England steps in with its first QE programme, announced in January 2009 and started in March 2009.

Now, obviously somebody had the £375bn of gilts before they were sold to the Bank of England, and they will have sold them at the profit.

How will banks have benefited?

So, to claim that the £375bn of QE was a “rich people’s QE” is correct

But to say that the banks did not profit, is incorrect. Being market makers will have made very handsome profits, and will definitely have benefited from the £375 directly.

To what extent we do not know. If they made 10% profit on all the gilts they sold, they will have made £38bn. If they held them from Summer 2008 (high interest rates) and sold them in March 2009 (very low interest rates)  huge profits would have been possible. Perhaps 30% profit.

I would argue, the main beneficiaries of the Bank of England’s Quantitative Easing will have been banks, whose market making divisions will have benefited handsomely from the QE programme. They would only have sold to the Bank of England at a profit.

So not only the rich benefited from QE, as Frances Coppola argued, but mainly the banks, through their bond trading departments, as market makers for gilts.

Who should investigate what that profit to banks  was? Giles Wilkes makes the case for a National Audit Office review, and the profits to the banking sector from the sales should be subject of that review, too.

Also, the Treasury Committee has powers to demand information from the Bank of England about their monetary policy, and the Bank of England governor is questioned by them at regular intervals. They could get that information from the Bank of England, if they wanted to. And if they wanted to hold the Bank of England, and its monetary policy to account.

We would at least know fully who the main beneficiaries of the £375bn QE were, and it would of course confirm that it would have been the banks and the rich.

To re-balance that redistribution of wealth, it seems right that a People’s QE is introduced, spending money on much needed infrastructure for everyone


One thought on “No point selling £375bn of gilts, unless you make profit!

  1. Would be lovely to see a (summarised) T-accounts format of the flows/outcomes from QE – BoE analysis I’ve seen tends to be just line graphs, – is it so difficult to isolate, or just something that they feel should remain under the counter?

    There’s also the indirect effect of QE on propping up asset values, which helps the asset holders (banks), but also contributes to the generational debt shift.


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