Amid the musical chairs in Downing Street the wisdom of an eight-year term for the governor of the Bank of England looks to make more sense.
As was heard over and over again at the annual meetings of the International Monetary Fund, institutional arrangements in the shape of a respected central bank, a reliable Treasury and an independent fiscal scrutineer – the Office for Budget Responsibility – matter.
Andrew Bailey has found himself at the vortex of the storm. He battled on two fronts. Underlining the credibility of the UK's institutions and seeking to fix the eruption in the gilts market which threatened pensions.
Stupidity: It was an unnecessary risk for Liz Truss to fly blind with an unfunded 'fiscal event'
The stupidity of all this is that it was an unnecessary risk for Liz Truss to fly blind with an unfunded 'fiscal event' with huge global problems to fix. Most notable is the impact of the war in Ukraine – its ferocious effect on advanced countries and soaring debt in the developing world which threatens global banking.
The rescue of the UK's defined salary pensions system from the gyrations in the gilts market is a huge preoccupation. The use of liquidity-driven investments (LDIs) to bolster the performance of pension funds threatened to drive the whole financial system over a cliff.
If the Bank of England had not acted, with its time-limited £65billion intervention, then the lenders to these funds could have sustained enormous loans losses testing their balance sheets to destruction.
Bailey is confident the crisis has been averted, especially for the smaller 'pooled' pension funds which lacked the resilience of the bigger players in the market. The irony is that the bail-out, paid for with Bank (taxpayers' money) has actually improved the underlying position of the funds, since as gilt yields fell the value of the bonds climbed.
The Bank has had a communications problem in convincing the markets and the broader public that what has been a financial stability bail-out has nothing to do with its monetary stance. Disentangling the situation is impossible. At the very least the pension rescue has delayed the Bank's pledged £100billion of quantitative tightening (QT) – the reversal of the Bank's money printing programme.
The blunder of the fast-disappearing mini-Budget will mean higher interest rates for all and some startling increases in the cost of fixed-rate mortgages, which could bring house prices to a shuddering halt or worse.
So what are we learning from the great pensions gamble? When former governor Mark Carney and other financial leaders rendered the banking system safe after the financial crisis of 2007 to 2009 (through the Financial Stability Board) they created another unchecked financial monster. In the years since, non-bank finance, largely out of the control of regulators, has ballooned, and is now larger than the banking system itself.
As monetary conditions have tightened, there have been several explosions. Among them was the detonation in commodity markets immediately after Russia began its invasion. Far more dangerous has been the pensions/LDI affair, which rocked Britain after the mini-Budget with non-banks taking massive risks beyond previous stress testing.
Off the UK's radar is the Chinese property bubble, again fuelled by unregulated nonbank borrowing, which has triggered a chain reaction of insolvencies and smashed the country's growth rate with consequences for world output.
The still-not-fully-unresolved LDI crisis could be the canary in the mine as surging global interest rates blows up non-banking lending with contagion for the whole financial system.
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2022-10-16 20:50:09Z
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