Don Quijones: Brexit Meltdown at the Bank of England

By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street

Project Fear — the massive PR campaign aimed at sowing and watering the seeds of dread about the potential consequences of a YES vote in the upcoming referendum on a British exit from the EU — is in full bloom. In the event of a wrong answer, all manner of biblical disasters can be expected to befall the nation, the British public is constantly being warned.

The country’s national income will shrink, hundreds of thousands if not millions of jobs will vanish, the City of London’s core industry — financial engineering — will migrate across the channel, the currency will collapse, house prices will plummet, European firms will stop selling products to Brits, the U.S. government will impose massive tariffs on British imports, and even Britain’s already dismal climate will get worse.

Project Fear’s shrillest shills include the British government and institutions of State, the UK’s most powerful business lobby group The Confederation of British Industry, the City of London Corporation (and all the too-big-to-fail financial institutions whose interests it faithfully serves), the European Union, the International Monetary Fund, and the world’s biggest fund manager BlackRock.

Another prominent prophet of Brexit doom and gloom is the Bank of England, an institution that, according to its charter at least, is supposed to be “independent” from national politics, but which has done nothing but feed the fear. In testimony to the UK government’s Treasury Select Committee earlier this month, the central bank’s Canadian and former Goldmanite Chairman Mark Carney warned that Brexit is the “biggest domestic risk to financial stability,” with potentially dire consequences for Britain’s balance of payments, its housing market, foreign investment, and its banks.

It’s a shame no one bothered to ask Carney to identify the biggest non-domestic threat to Britain financial stability — he might have admitted that it was the euro, as his predecessor as Bank of England governor, Mervyn King, recently acknowledged.

“Put bluntly, monetary union has created a conflict between a centralized elite on the one hand, and the forces of democracy at the national level on the other,” King writes in his new book, The End of Alchemy. “This is extraordinarily dangerous.”

While King hasn’t explicitly come out in favor of Brexit, he hasn’t ruled it out either, and it doesn’t take much reading between the lines of his new book to divine more or less where he stands — i.e., as far away as possible from Carney.

This glaring difference of opinion between Britain’s former and current central bank governors leaves wavering British voters with a dilemma. Should they believe the words of a former central banker who’s desperately plugging his memoirs, or those of a current central banker who before dedicating his energies to central banking — first in Canada and now in the UK — spent 13 years with Goldman Sachs, which arguably holds more sway over Europe’s financial markets than any other systemically important global financial institution?

While the British public weighs up the potential benefits and drawbacks of life outside the EU, Bank of England officials are “agonizing,” as Bloomberg put it, over “the dangers” from the vote to leave. The central bank is already drawing up contingency plans for a British exit from the EU and will offer extra liquidity to the financial system around the referendum.

British banks are about to be offered billions of pounds of extra cash, just in case the markets seize up. Here’s more from The Daily Telegraph:

The process sees banks offer the Bank of England assets such as mortgage loans, in exchange for cash. The Bank of England offers this facility to banks once per month, but will give banks four chances to take extra cash in June.
Banks can use the scheme if the market for their own assets is very illiquid, giving banks more liquidity and so enabling them to carry on lending even when markets are stressed.

Similar action was allegedly considered during the Scottish referendum, but since the scheme was never required, it was not made public until after the event. This time, officials are “offering the scheme in advance,” presumably because: a) the Bank of England actually wants the people of Britain to think that they are preparing for an “extreme crisis”; and/or b) the banks could probably do with a little extra dose of liquidity anyway.

As the banks prepare for yet another free-money picnic, the Bank of England continues to jack up the fear factor.

In a speech to the OMFIF finance industry group in London, BoE Policy Maker Kristin Forbes said that Britain’s cross-border investments should offer some respite against a jump in uncertainty, but the relief would only be partial and would be “unlikely to fully counteract the many negative effects from increased uncertainty on the broader UK economy.”

For the moment the most visible negative economic consequence of Brexit uncertainty is the acute volatility in the UK currency. As the FT reported, the implied volatility on a three-month timeline — a measure of traders’ and investors’ perceived likelihood of big shakes in the currency over the next three months — is now higher than at any other time over the last six years, suggesting that the market sees bigger risks for Sterling now than it did over the 2014 Scottish referendum, and indeed bigger risks than at any time since the darkest days of the 2008 financial crisis.

With Project Fear now in full swing, that volatility is almost certainly here to stay, at least until the referendum. What happens after that depends on the outcome of the vote, and that will ultimately depend on the ability of the British and European establishment to convince voters that the preservation of the status quo is far more preferable than the risk of the unknown — at least for the establishment!

For now just about the only thing we can be sure of is that the banks on both sides of the English Channel will continue to wet their beaks in the fountain of unlimited, virtually free money. By Don Quijones, Raging Bull-Shit.

Then there’s the dreaded Contagion Effect. Read…  Brexit Panic Sets In

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    1. Andrew Anderson

      No need for it either since the monetary sovereign can create fiat for nothing (backed by the taxation authority and power of government), distribute it equally to all citizens via individual citizen accounts at the central bank and let depository institutions, aka “banks”, have to borrow or buy it from citizens and others and not from the central bank.

      And if interest rates are too high then just distribute more fiat till they come down or till price inflation indicates the system is working at capacity.

      1. Jerry Hamrick

        Or you could give every American citizen $3,000 per month from birth to death. The money could, as you suggest, be deposited in each citizen’s accounts in the Universal Bank of the United States (Uni). There could be three accounts in the Uni for each citizen: Two thousand dollars in the UniCheck which could be used to make payments for all legal purposes, just like checking accounts today. One thousand dollars which would be deposited in the citizen’s UniLife account, which would accumulate at a guaranteed rate of interest that would be set by actuaries, not the bank.

        UniSave which would be used to purchase certificates of deposit with transfers from UniCheck accounts. UniSave would would earn interest.

        The UniLife funds are to be used for the special needs of life: higher education, buying a home, starting a family, starting a business, and the like. There would be no interest. The goal of the monthly deposits (let’s call them collectively the Social Security Lifetime Stipend), would be to enable the citizen to live a long life worth living, with a special emphasis on building a secure, comfortable retirement.

        Of course, our national and state governments and our economic systems would have to undergo some changes in which our election systems would vanish in favor of other more democratic methods of representation, and while profits would be important, especially for the founder of a successful corporation, they would be no more important for the rest of us than good salaries, good jobs, good benefits, etc.

        If you noodle on these basic ideas for a little while, good possibilities emerge.

    2. RBHoughton

      Agreed. The independent central bank is useful for making an end run around the elected authorities of a country. Its an important part of the loss of national control that democratic governments are required to accept under the new rules.

  1. vidimi

    i’ve been saying it for a while that a brexit would devastate the city of london’s financial monopoly and dublin will probably pick up the slack. if i were the british public, i’d say ‘good riddance’.

  2. Clive

    (reply to vidimi, above)

    While I applaud the sentiment, don’t be so sure. Big finance, as exemplified by The City of London is a direct result of government policy blowback and what were unintended consequences (they were unintended originally but now they’ve morphed into what are seen by governments as desirable). Big finance’s longevity is no accident. It serves the elite agenda. It is indispensable to neoliberalism’s implementation. And it pays off the political classes.

    Why would all of that suddenly come undone?

    Given everything we’ve been through and the consistent, demonstrable and total willingness of (in this case the British government but it is hardly the only one) to provide unstinting support to finance — and screw the rest of the economy, if that’s what’s got to happen — no matter what it is hard to argue that just because of a Brexit the British government would suddenly now throw in the towel and allow big finance to be kicked into the ditch.

    And as for having to leave town in a hurry, the government enablement of big finance is one part of it, but the government in question has to have the requisite size to provide a credible backstop. For the Repbublic to try to stand behind the liabilities of the City, it would end up making Iceland in the bubble era look like Iike it was responsibly and modestly geared.

    The liabilities would have to shrink by an order of magnitude. Which is where I came in at the top… it ain’t gonna happen.

    1. Left in Wisconsin

      Here is what I wonder from the US: If a country’s political class has staked its economy to finance, even if that eventually leads to finance eating away at the productive domestic economy, is there ever an out, or does the end game require riding finance all the way down?

      It seems obvious from this side of the pond that our leaders decided (consciously or not) that finance capitalism was and is our global competitive advantage, and so believed driving to make the world economy more open to finance capitalism would work to our advantage vs. those other national economies that had “less developed” finance sectors (i.e. continental Europe, Japan, eventually China). The economists aided this strategy by “demonstrating” how international “trade” would benefit us, and how the more “idiotically” mercantilist other countries were the more it would redound to our advantage.

      And it seems like the UK is even more down with this strategy that we are. Which leads to the current “predicament”.

      1. Clive

        I think the nub of your (very profound) question is how do societies collapse and — if possible — how do they avoid collapsing once they’ve started down the road of collapse. Hope you’re still with me after that last sentence!

        Yves has posted on this before, I’ve commented (and then other bloggers have commented too so I think it’s fair to say that while I agree with Yves’ take, others think it’s more nuanced (but I do not really buy what I think is an overstatement and over attributed factor in reflexiones finales’ piece, however, I list it here to show all sides of this debate)).

        But I think this will be one of the key dynamics which we will collectively play out — one way or another — in the next generation or two.

        1. Left in Wisconsin

          Thanks for links. i was out of commission last August so did not see original post.

          In a slightly less ultimate mode, my simpler question(s): what are the costs/risks and benefits/opportunities of Brexit to UK? And, given the extreme financialization of UK economy, might one conclude staying in EU was worth it to maintain privileged position of City of London, even though City of London is eating the rest of the UK?

          1. Clive

            Stay tuned, I’ve got a whole post which I hope addressed these points waiting for our gracious but chronically time-impoverished editor to grapple with WordPress into being.

            (ps glad you’re back here :-) too FWIW)

            1. Paul Handover

              As a Brit living very happily in Southern Oregon I found the dialogue between LIW and Clive interesting. Both the USA and Britain seem to be in very strange places just now, and that’s putting it mildly!

            2. anon

              I’ll be very interested in that post. As a US expat living overseas for a number of years now, many of them in the UK, I really see it as much ado about nothing. The only real impacts will be UK expats living in Europe and European immigrants to the UK. Oh, and the horrendous Heathrow immigration process becoming even worse than it is today. But if there is any gov that can make the atrocious even more complex, I would put my money on the Brits all day long. :)

              The UK regulators have been practicing isolationism since they were essentially forced to wind down Lehmans. The UK banks have been exiting Euro based bonds as quickly as their balance sheets will allow for years now. And saying the City of London is going to let financial engineering move to Dublin is like saying Washington DC is going to shutdown Wall Street and move it to Caymen Is. Ain’t gonna happen. Seems like status quo to me.

              Perhaps I am naive about this, but given the timelines there is ample runway to work through Swiss like arrangements for existing expats and critical trade on both sides. IMHO, the Brits will pay a higher price in trade to maintain sovereignty. The trade off wouldn’t even be close.

      2. John


        You’re assuming that neoliberalism is in our national interest. It is not. The vast majority of Americans lose out. However, capital and the professional class benefits, and this is pretty much the same all over the world. Elites everywhere have bought in to neoliberalism and are more allied with each other than they are with the majority of their own countrymen. Transnational capital is emerging as the most powerful class, and they have the professional classes on their side to provide them with strong voter/organizer bases. They push their national governments to put aside national interests and cede more of their sovereignty to supranational institutions that are not beholden to the public at large, but rather to these transnational classes.

  3. susan the other

    US banks are uneasy about Brexit because they use London as their go-between, and do lots of bz in the EU. If there were no longer an exceptional conduit betw NYC, EU, and London what does it translate into for the industry? No more skimming? And the new proposed regulation by the BIS that a “government has to have the requisite size to provide a backstop” almost requires the UK to partner up with someone – either the US or the EU. Bad for taxpayers; good for financiers. They say the EU didn’t give Cameron an inch… more like take it or leave it. Does this also mean that the EU refuses to partner the risks? Yet wants the UK to remain in the EU? It would be nice to know the details.

  4. ks

    I recently ran across a 1992 London Review of Books essay on the Maastricht Treaty.

    Although I support the move towards political integration in Europe, I think that the Maastricht proposals as they stand are seriously defective, and also that public discussion of them has been curiously impoverished. With a Danish rejection, a near-miss in France, and the very existence of the ERM in question after the depredations by currency markets, it is a good moment to take stock.

    The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn’t need any management at all.

    European leaders were warned of what to expect:

    But as Professor Martin Feldstein pointed out in a major article in the Economist (13 June), this argument is very dangerously mistaken. If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.

    But maybe the problem was that

    It took a group largely composed of bankers (the Delors Committee) to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated, supra-national Europe.

    1. Left in Wisconsin

      I was in Germany for a time in the 90s and what the smart people said to me was, I paraphrase: “This is how Europeanization proceeds. Make an economic deal. Then, when economic problems from that deal arise, political solutions are invariably called for(th). The political integration always follow the economic.”

      Now there was a whole other argument about the need for an independent central bank, but that always seemed to me with the understanding that ultimately a real political union (of unspecified sort) would emerge, and the independent central bank would operate, a la Germany, as a counter to that political union.

      1. emptyfull

        That reminds me of how people talked about China in the 90s. If only we fully opened our borders to “free” trade with China, then INEVITABLY China would democratize. After all, it was impossible for a capitalist economy to exist without making people want democracy enough that their leaders had to give it to them.

        It really strikes me how much neoliberals ended up mimicking ideas they had mocked in communism. Once you have the one true economic system then everything else will just fall perfectly into place….

  5. templar555510

    As a Brit I will be voting to leave as will all my friends and relatives . Why ? It’s the ‘ S ‘ word – sovereignty . Gordon Brown’s ego prevented us from becoming part of the Eurozone and so we have had a semi-detached relationship with all those countries inside it and all the fear mongering in the world will not persuade us Brexiters that staying in will provide anything worthwhile for our country going forward. If TTIP is pushed through then having exited the EU we will not be bound by it and potentially no longer Washington’s poodle, although don’t hold your breath there because TTIP or no TTIP our elected representatives can’t wait to fall at the feet of Goldman Sachs ( see Royal Mail privatisation ) etc . The vote will come down to a play-off between the fearmongerers and those like me who are old enough to remember a time when we were self confident enough to stand on our own two feet .

  6. John Wright

    I confess I do not understand why the UK would decline much as a financial center with a Brexit.

    Isn’t the UK somewhat like the current Switzerland in that it has a large financial industry and its own currency?

    But Switzerland is not part of the EU, and appears to not have suffered greatly because of that.

    It would be far more trouble if the UK were on the Euro, with the UK government having issued many Euro denominated securities in the past and then had to re-establish its own currency (Grexit for example).

    But that is not the case.

    Given that the residents of the UK will continue to use their own currency, Brexit or not, should make it difficult for the authorities to ramp up the “sky is falling” fear factor in the population.

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