The Bank of England has revealed details of its corporate bond buying – it is to buy bonds in Apple, British American Tobacco, Imperial Brands, McDonald's and less controversially, GlaxoSmithKline, AstraZeneca and several other companies. But why?
Sometimes £435 billion isn’t enough. So far the Bank of England has spent, or is in the process of spending, £435 billion on government bonds via its quantitative easing programme or QE. But now the Bank of England is topping this up with £10 billion on corporate bond purchases.
The problem with QE is that it involves indirectly lending to an organisation that is trying to cut borrowing – namely the UK government. So all that QE really does is push up on asset prices, making bonds really expensive, and in turn forcing other asset prices, such as property or shares, up.
But despite all that QE, the economy has been limping forward.
Now the Bank of England is adding to it, with £10 billion in corporate bond purchases.
There are some rules.
Rule number one: lend to companies that are as a steady as rocks, take no risks whatsoever.
Rule number two: don’t lend to entrepreneurs or businesses that really could do with the cash.
Rule number three: lend to companies that contribute to the UK Economy.
Rule number four: don’t lend to entrepreneurs or businesses that really could do with the cash.
Rule number five: lend to companies that are so successful they don’t need any help whatsoever in their borrowing such as Apple, that has more money sitting in its bank accounts – avoiding tax – than it borrows – and by quite a big margin.
Rule numbers six and seven: don’t lend to entrepreneurs or businesses that really could do with the cash.
And so in the interests of lending to companies that are good for the UK economy, the Bank of England is looking at buying bonds in Apple, British American Tobacco, Imperial Brands, McDonald's, as well as GlaxoSmithKline, AstraZeneca, Anglia Water, BMW, Centrica, Deutsche Telecom, Eon, IBM, Marks and Spencer, Sky, Pfizer, Vodafone and a few others.
So why these firms?
The Banks says “To maximise the effectiveness and efficiency of the economic stimulus provided, the Bank will purchase investment grade bonds issued by companies that make a material contribution to economic activity in the UK. Companies, which may be incorporated in the UK or other jurisdictions, with a genuine business in the UK will normally be regarded as meeting this requirement. Eligibility decisions will be made by the Bank’s risk management staff, taking into account a number of different factors. Companies with significant employment in the UK or with their headquarters in the UK will normally be regarded as meeting this requirement. The Bank will also take into consideration whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK.”
So what’s wrong with the plan?
There is a difference between systemic risk and normal risk. Lending to large companies, who frankly don’t need special terms in their borrowing, is considered low risk. But, we live in an age when corporate profits to GDP are close to an all-time high, wages to GDP near an all-time low. We live in an age when productivity growth is lousy. The biggest risk we can take with the economy as a whole, long-term, is that we let things carry on as they are.
Maybe the Bank of England should consider removing rules two, four, six and seven.