The Rise of the Bank: How its stories shape your life
The Governor of the Bank of England
By Tim Thorlby
5 mins
This is a blog about power. I’m going to tell you three short (true) stories about what the Bank of England has been doing in recent years and the stories that it has been telling about this. Each example illustrates how the Bank - and its stories - impact in important ways on our lives. This is not really a blog about central banks, it is a blog about the power of storytelling, how we need to hear these stories much more critically and the importance of telling new stories if we want a healthy democracy and a fair economy.
The First Story: The Financial Crash 2007-9
The Global Financial Crash of 2007-8 may be 15 years ago, but its implications are still with us. The stories that have been told about it are worth pondering.
As a brief reminder, the financial turmoil began in America in mid-2007 when it became clear that something was not right in the banking world. ‘Bad debts’ began to rise as more ordinary people found they could not repay their mortgages and banks realised that the houses (the ‘collateral’ for the loans) actually weren’t worth as much as they thought. Banks found they were sitting on significant losses.
The implications quickly spread around the world, as so many loans and investments had been passed from bank to bank – even across country boundaries - and it became quite clear that the whole global financial system was in deep trouble. Problems began to multiply.
It was, fundamentally, a colossal banking failure. Too many banks had loaned too much money to too many people who weren’t well placed to pay it all back. Regulation of banks had become lax over the years and investment behaviour more reckless. Because so many loans and investments were interrelated, when one began to fail, they all started to fall like dominoes.
In the UK, it hit the headlines in September 2007 when the previously dull Northern Rock Building Society found it was running out of money and asked the Bank of England for help. This prompted panic amongst savers and led to the first ‘run’ on a bank in the UK for 150 years (when people rush to take their money out, for fear of losing it). In the end, the bank was nationalised by the government in February 2008 to prevent it from collapse.
The UK government nationalised, either in part or in whole, five large private banks. Even today, this is quite a shocking thing to write. It was that bad. It was a very expensive ‘bail out’ by the UK Taxpayer, who paid for it all and who still – 15 years later – owns big chunks of several UK banks.
The climax of the crisis came when the venerable American investment bank, Lehman Brothers Inc – one of the largest investment banks in the world – went bust in September 2008. There was widespread shock and a huge global impact as $600 billion of investments unravelled.
This was the situation in late 2008. It was clear by late 2008/early 2009 that drastic action was needed to try to prevent a deep global depression.
At this point, the Central Banks of the USA and UK stepped forward and took charge, with some unusual interventions. The Central Banks found a new tool to try to fix the problem – ‘quantitative easing’. It was unprecedented in its scale. It was surprising. An enormous experiment was unleashed upon the world. (We will come to this in our second story)
Thinking about this story
What is surprising about the story of the Financial Crash is that a major international banking failure has resulted in some rather unexpected consequences.
Few of the people or organisations responsible for the crash have been held to account, banking regulations remain surprisingly light touch and many of the key players went back to work.
On the other hand, governments (i.e. taxpayers) largely picked up the costs of the banking failures and have imposed a long age of ‘austerity’ with reduced public spending and smaller welfare programmes. Government spending was in no way the cause of the Crash but it has been the main casualty, ushering in a decade of underinvestment; the UK economy has been stagnant ever since.
At some point, a story about a major global banking failure became a story about how governments should spend less money.
The Bank of England also emerged from the crisis with its reach and power enhanced, to an historically unprecedented degree. This was not inevitable. Our elected government ceded control of crisis management to its arms-length bank, because it believed the emerging story about how the Bank could save the day.
The Second Story: Quantitative Easing
In 2008, America’s Central Bank, the Federal Reserve, decided to use a little known and seldom used ‘policy tool’ to try to save the American economy; ‘quantitative easing’. In March 2009, the Bank of England followed suit and tried the same thing.
Few people understood it at the time, and few people do now. I will explain the basics.
The stated aim of quantitative easing (‘QE’) is to try to prop up economic activity in a recession, reducing the depth and length of the recession and keeping unemployment to a minimum. But instead of the more traditional direct approach of governments funding infrastructure projects to create jobs and generally spending more to try to keep economic activity up, quantitative easing takes an indirect approach, behind the scenes.
The Bank of England created brand new money (all electronic of course, no new coins minted) and used this to buy financial assets from banks and financial institutions. They mainly bought government bonds. The end result is that these banks ended up with lots of new money to play with, having just sold lots of ‘stuff’ to the Bank of England.
The Bank of England’s hope was that the banks would then use this new, spare money to lend to businesses, helping them to grow and create jobs. By pumping new money into the UK economy in this way, the Bank of England hoped to keep bank lending flowing and keep the cost of borrowing down. This was the plan.
Since 2009, the Bank of England has bought nearly £900 billion of assets from the UK’s banks. It is a huge intervention. It is not government money and does not show up in our national debt. It is new money, invented out of fresh air by the Bank of England.
The programme has now stopped and in 2022 the Bank of England began a new experiment of trying to unwind what it has been doing, a process imaginatively called ‘quantitative tightening’ (QT). So, having bought £900 billion of assets it is now trying to sell them back into the market, bit by bit, to get its £900 billion back.
So, that is QE (and QT).
Thinking about the story
What’s the story? The official story is that the Bank of England is protecting the economy and it doesn’t really matter if you don’t understand how they are doing it.
The wider story is that our Central Bank created almost £1 trillion of new money to buy assets from banks over a decade, in an intervention of unprecedented scale. It was a high-risk experiment, based entirely on theory, undertaken by a state institution with little idea of how it would work out in practice. And few people understand it, even today.
The Third Story: The impact of Quantitative Easing
So, what happened? What was the impact of quantitative easing? Did it work?
There are three things to say:
QE did not work in the way it was meant to
QE was supposed to support the economy, but banks didn’t quite follow the Memo and used their new found money to rush out and buy lots of assets, like property and shares, rather than loaning it to businesses to support jobs and industry. So, the Bank of England’s own analysis has shown that for every £1 of QE, only 8p found it its way into the real economy[1]. That is a poor performance and not what was intended. The financial markets had ideas of their own and appear to have been allowed to follow them.
QE has widened wealth inequalities
The House of Lords Select Committee on Economic Affairs looked into the impact of QE in 2021[2]. Their report was (politely) scathing of the Bank of England. It found two things. Firstly, that the impact of QE on economic growth was small because the financial institutions who benefited from all of the new money had largely failed to pass it on in the form of increased lending or investment in business growth. Secondly, the amount of new money has “artificially inflated asset prices”, meaning that the wealthy people and organisations who already own property and shares found their values rising, adding to their wealth. The House of Lords Committee concluded that “quantitative easing has exacerbated wealth inequalities”.
Even more concerningly, the Committee were surprised that after a decade, the Bank of England appeared to have done little research on this, much of its work seemed poorly evidenced and that their approach was “defensive”.
Liz Truss made it worse
The way that QE works in practice is a little complicated, but after Prime Minister Truss’ disastrous 44 days in office and the sudden rise in bond prices (and interest rates), the cost of QE for the Bank of England rose dramatically. Any net losses as the Bank of England seeks to unwind QE with QT will be borne by the taxpayer. They had thought they might make a profit on QE, but this now looks like it will be a loss, and it would impact on government finances. This is an ongoing issue today.
Thinking about the story
I think this third and final economic story is the wake-up call.
After a huge intervention over a decade, our Central Bank is unable, or unwilling, to really explain what has happened. What has become clear to outside observers is that an intervention to boost economic growth has largely failed to do so and has instead boosted things like house prices, adding to the wealth of those who ‘have’ and leaving those ‘do not have’ further behind. This was never meant to happen. Perhaps it is not surprising that the Bank of England is not keen to research it. Yet there is no clamour for accountability or a change of direction.
The narrative remains that the Bank ‘is dealing with it, no need to worry’.
Conclusion: The Bank’s stories are shaping your life
This is not really a blog about central banking, it is a blog about power and the importance of storytelling to securing and wielding that power.
The three stories I have just told – about the financial crash, quantitative easing and its subsequent impact – are about real events which have shaped many of our lives over the last 15 years. Those events are hugely important and consequential and are still relevant today. They have led to less public spending, growing wealth inequality and growing risks that a crash may happen again.
Yet the conventional narrative about these events from the Bank of England, from government and even from the media, is that:
a) this was all necessary and inevitable and we had little choice but to do it
b) you shouldn’t worry if you don’t understand it, the institutions are taking care of it for you
c) this is all for the best and in your best interests
These are all stories but none of them are true.
This policy response was not inevitable, there are important questions to ask about how these schemes operate in practice and it is clear that some of us have lost out quite significantly over the last decade or so, so they have not been in everyone’s best interest.
Yet many people believe these stories. The Bank of England has done a class job in telling reassuring stories about its work, ensuring that it can get on with its agenda without distraction or having to explain itself too much.
Waking up to new stories?
How has this happened?
I have long been of the view that economics is far too important to be left to economists, or bankers or government ministers. Economic policy has a social impact which affects all of us, so it is important that we all understand it.
The level of economic literacy in this country is low. Most people leave school with little understanding of how the UK’s economy works. I fear that the media often don’t help, parroting institutional narratives with little critique or real explanation. I think our national storytelling about these important subjects is therefore often wrong.
If we are going to live up to our responsibilities as citizens, protect our interests and hold powerful state institutions to account, then – somehow – we collectively need to learn how to tell better informed stories about the UK’s economy.
This responsibility is shared by the state and its intitutions as well as its citizens (us). The Bank of England has a social purpose - to serve society - and should be open and truthful in its accounts of how it works. Telling stories which are transparent and honest is fundamental to the functioning of a healthy society. Similarly, for citizens to be able to hold power to account also requires evidenced, honest storytelling - this is fundamental to social justice and the building of a fair economy.
So, here are some new stories:
The Bank of England has a democratic deficit - The Bank of England may require day-to-day operational independence, but it should still be fully accountable to Parliament as a state bank, providing evidence for its policies and its impacts. Currently, it is not being held properly to account nor does it always explain itself. It should be required to do so.
Austerity has never worked - Austerity has undermined economic growth for over a decade and has failed in all of its objectives. It should now be abandoned as government policy. It was never really required in the first place.
The banking sector owes the taxpayer – The UK banking sector is back to making huge profits again. Given that its existence today is largely down to massive public sector bail outs and public financial engineering, it does not seem unreasonable that – now that the sun is shining for some again – some of the costs of government intervention are recompensed. The sector also remains lightly regulated with growing concern that another crash may be on its way. Firmer regulation and more robust taxation seem only fair.
We are entitled to know what is happening in our economy - Our central banks and governments are often disempowering in how they talk about their interventions; implying that they have a monopoly on competence, failing to providing information, obfuscating their actions and distracting attention with short term gimmicks. If they will not tell better stories, we should work out how to research and tell those stories ourselves, so that the public is better informed.
How we will find a way to tell better, more honest stories about our economy? Someone needs to lead the charge on this – a charity or think tank or media institution perhaps. I’m not really sure how it might happen, but I’m sure it could. It’s important that it does. We would all be better off.
In the meantime, there are places to go to find out more about how economic issues affect our lives. The Institute for Fiscal Studies provides good, non-technical and independent explanations of many issues. The New Economy Brief also provides explanations of topic economic issues, together with a weekly (free) emailed digest to keep you up to date. There are others too. Let’s learn to tell better stories.
This blog was written by Tim Thorlby. Please sign up for the free monthly email alert if you’d like to know about future blogs.
Notes
[1] Bank of England Working Paper, 2018 | Access here: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/the-distributional-impact-of-monetary-policy-easing-in-the-uk-between-2008-and-2014.pdf
[2] House of Lords Economic Affairs Committee, Quantitative easing: a dangerous addiction? 1st Report of Session 2019-21, Published 16 July 2021 - HL Paper 42