Bank of England launches emergency operation to avert financial collapse

The Bank of England (BoE) launched an emergency operation to avoid a collapse of the British bond market. This threatened to render pension funds insolvent and trigger a meltdown in the financial system similar to the “Lehman moment” that triggered the 2008 global financial crisis.

The BoE’s intervention came on Wednesday morning when its Monetary Policy Committee (MPC) said it was reversing its previously announced policy of selling long-term bonds, or gilts, which was due to begin next month, and that he would resume the purchases.

People wait to enter the Bank of England in London, Tuesday September 27, 2022. [AP Photo/Frank Augstein]

The sell-off in the bond market began following the Conservative government’s smash mini-budget last Friday, which handed out £45billion in tax cuts to businesses and the super-rich, funded by a £72billion raise public debt.

He said the central bank would make “temporary purchases” of long-term government bonds to “restore orderly market conditions”, on “any scale necessary to achieve that result” and that the operation would be ” fully compensated” by the Treasury.

The BoE later confirmed that it expects the bond buying program to total £65bn at the rate of £5bn per day for the next 13 days.

The move came after it became clear that pension funds, which form the basis of the long-term bond market, were facing insolvency. As part of their activities, these funds use derivatives to hedge their financial positions.

With the fall in bond prices, they had to face increased margin calls from investment funds that finance their operations for which they did not have the cash available. They began selling off some of their holdings to meet these demands, threatening to trigger a vicious cycle in which these sales would further drive down bond prices and drive up yields.

Comments from senior officials in the banking and financial system indicate the extent of the crisis. An unnamed London-based senior banker told the FinancialTimes (FT) that at one point on Wednesday morning there were no buyers of long-term UK government bonds.

“At some point this morning, I was afraid this was the beginning of the end. It wasn’t quite a Lehman moment. But it came close,” the banker said.

Kevin Rosenberg, managing director of Cardano Investment, which manages the strategies of around 30 UK pension schemes, with a total of around £50bn, told the FT that the organization had written to the BoE for the warn of the developing crisis.

“If there had been no intervention today, gilt yields could have climbed to 7-8% from 4.5% this morning and in this situation around 90% of UK pension funds would have ran out of collateral. They would have been wiped out,” he said.

The BoE seems to believe that the immediate crisis can be resolved by its intervention in the bond market over the next two weeks.

But there is no guarantee of that. His policy is shot through with contradictions and invented in a hurry. As recently as last Thursday, he confirmed that gilt sales would begin on October 3.

The liquidation of long-term government bonds, now reversed, was part of the BoE’s monetary policy tightening program, which led to interest rate hikes.

He says that part of his agenda will remain. The bank said in its announcement yesterday that the “MPC will not hesitate to change interest rates as much as necessary to bring inflation back to the 2% target on a sustainable basis over the medium term.”

But his intervention in the bond market, through which he effectively funds the Conservative government’s handout to the wealthy and corporations, is inherently inflationary.

The BoE and the government have said they will coordinate their policies. But as GNP economist Paul Hollingsworth has noted, “It’s hard to appear coordinated when fiscal policy is on the accelerator and monetary policy on the brake.

Even before the crisis engulfed pension funds, there was evidence of growing problems in the financial system. A significant number of banks, including HSBC and Santander, have suspended the issuance of new mortgages, along with a range of other lenders, including Virgin Money and Halifax, because they did not know what the cost of financing would be.

Regardless of the immediate outcome of the current crisis, the cost of mortgages will rise significantly with warnings that the worst-case scenario of a housing market crash is now becoming the ‘primary assumption’, according to a quoted industry analyst in the FT.

Following the BoE’s intervention, bond prices started to rise and there was a slight increase in the value of the pound against the US dollar.

The most significant reaction came from the United States where, after an initial fall in the futures market, Wall Street surged as the market opened. The Dow Jones ended up 550 points for the day, or 1.9%, the S&P 500 rose 2%, the NASDAQ rose 2.1%.

The market surge, which comes after a “near-death” experience in the UK financial system, appears to have been driven by the belief that it will put further pressure on the Fed to ease its monetary tightening measures. But there are growing concerns about the state of the US economy as sentiment on Wall Street swings wildly between fear and greed.

“There is concern that the whole system will collapse and demand will not be able to support this number of rate hikes,” said Agnes Belaisch, strategist at Barings Investment Institute. The Wall Street Journal, noting that there was evidence of a recession.

The immediate origins of Britain’s crisis lie in the unbridled greed of the financial elites, represented by the grotesque figure of Prime Minister Liz Truss and her treasurer Kwasi Kwarteng. But the underlying driving forces lie in the explosion of free riding in the global financial system over the decades, which accelerated after the 2008 crisis.

The guiding philosophy of Fed Chief Jerome Powell and other central bankers is that inflation can be brought under control the same way it was under Fed Chairman Paul Volcker in the years 1980.

They aim to drive up interest rates and induce a recession to crush the wage demands of the working class facing daily declines in living standards resulting from the highest rate of inflation in four decades.

But a lot has changed since the 1980s, especially in the level of debt and the mechanisms of the global financial system. And central bankers face a resurgent working class.

In 1982, at the height of Volcker’s class war under the Reagan administration, gross public debt was 34.3% of gross domestic product. It had risen to 127% in 2021.

Globally, following corporate bailouts during the pandemic, total public and non-financial debt rose 28 percentage points to 256% of global GDP in 2020, according to the International Monetary Fund.

The public debt market has undergone a vast transformation. According to the Bank for International Settlements, as much as 30-50% of marketable government debt is now held overnight. This means that the bond market, in which this debt is traded, is very vulnerable to changes in financial conditions that can precipitate a full-scale crisis, as seen in the UK.

This situation has wide implications for the working class everywhere.

He lives in conditions where a sword of Damocles hangs over his head as the insatiable pursuit of enrichment by the financial elites and their political representatives threatens, almost overnight, to cause mass unemployment, the annihilation of pension funds and a crisis for home buyers. , on top of the blows already inflicted by runaway inflation and social service spending cuts.

The only way to end this madness is the international struggle for socialism led by the working class to take the economy and its financial system out of the hands of a rapacious ruling class and establish an economy based on human needs and not on the dictates of private profit.