In the great game of Sleuth where we try to discover the architect of Liz Truss’ downfall, we are presented with a version of what happened last summer that suggests she was brought down by the “left-wing ec0nomic establishment”. If – as a former member of the Liberal Democrats, Liz Truss was referring to herself, we might find this a credible statement. But Truss does not count herself the architect of her own downfall but blames everyone else that didn’t tell her she was steering the ship of state straight at the harbour wall.
In an interview, former PM Liz Truss says no-one warned her about the risks of the “mini”-Budget to the pension #LDI market. The statement unleashed chaos in the bond market. pic.twitter.com/e0S8j5TqXC
— Josephine Cumbo (@JosephineCumbo) February 5, 2023
It is of course hard to heed warnings when you have sacked your main Treasury adviser and spend your time in Government not commissioning the views of the Office of Budget Responsibility, let alone the Bank of England or the PRA.
While the Bank was preparing for and implementing Quantitative Tightening, Truss and her Chancellor were embarking on a reckless spend of money that she clearly hadn’t got in the hope that the Government would get away with it by borrowing in the short term and recouping revenue from the fast-growing economy to pay this money back.
But this reckoned without the banks who saw a flaw in the plan, it wasn’t costed and had seemed to have been dreamt up by Liz Truss and her Chancellor, they called it Truss-moronic. So did I.
When John Profumo was found out for his Ugandan discussions with some hotties , he went to the East End of London and spent 20 years expatiating his sins by doing good works. Liz Truss by comparison has spent 6 months justifying herself to herself and the result is an article in the Daily Telegraph, designed to win back the hearts of her former supporters.
In case anyone has forgotten we have Jo Cumbo to remind us
The Truss government’s bungled “mini-Budget” triggered chaos in the bond market and a liquidity crisis pension sector. The Bank of England was forced to intervene with a £65bn emergency rescue package to restore calm to markets. https://t.co/hdSFUIrlPP
— Josephine Cumbo (@JosephineCumbo) February 5, 2023
That there was a £4bn windfall in it for the Bank of England is a side matter, The £4bn was the cost to our pension system of selling gilts when the only buyer was the Bank of England and the cost of buying those gilts back three months later when the Bank was the only seller.
You might say this was “manipulation of the markets” but that would be to ignore the fact that had the Bank not intervened, many pension funds could not have sold at any price and the positions built up from tax-incentivised deficit contributions would have been lost, and with it much of the asset base of the DB pension system.
As it is, the PPF estimate that the net value of DB pensions measured by assets is down over £400bn over 2022 with a high proportion of this attributable to the fire sales of assets that happened because of the market turbulence caused by Liz Truss.
Lest anyone be any doubt whatsoever, it was Liz wot dunnit, with a lead pipe in the Treasury and it was us that was dun.
it cannot be credibly argued that The BoE intervention was manipulation of the markets in the sense of being a cost on others due to the manner in which they operated. Market participants were invited to make offers specifying their size and price, which the Bank would accept or decline.
It could of course be argued that this intervention was manipulation, but manipulation in pursuit of a common good.
The LDI was to blame here wasn’t it?
The BofE provided liquidity so the LDI “market” could function in conditions where yields rose fast… not something unheard of in the history of Gilts.
The cost to society was tiny vs the potential losses. The £65bn headline figure sounds scary big, but wasn’t the maximum used around £12bn. The total cost £4bn.
The subsequent gilt value and yield changes would have occurred irrespective of Truss’ plans.
These LDI were a product of safe yield seeking in a regulatory environment where interest rates had been suppressed for over a decade, while exposure to the burgeoning stock/asset markets (stimulated by QE for a decade) couldn’t be used.
Who is to blame? I point my finger at the BofE and pension regulators for enabling such stupid contradictions to exist, which gave birth to LDI over the last decade.
In hindsight it was bloody obvious, but so were all previous financial calamities. And yet they speak with such authority in hindsight AND foresight… but in most cases are correct in neither.
The current BofE projections on inflation and base rate being constantly proven massively wrong are a case in point.
Yet Truss is to blame.
A useful idiot, or a willing participant?
We now have the average person viewing financial stimulus and Truss as the baddie, and Sunak and Hunt’s brutal austerity that’ll hammer the average person more than they can imagine, as economic saviours.
The total spent was £19.3 billion and the profit realised £3.8 billion. This is just about the smallest of the losses associated with the episode. The losses of schemes using pooled funds appear to have been around £100 billion since the beginning of 2022 – and these were realised in that these funds de-levered and de-risked.
The tax-payer is a huge loser – if asset values have declined by £500 billion since the end of 2021, that is a tax loss of, at a 20% tax rate, of £100 billion.
The Pension Regulator was actively promoting LDI – and that is where the blame clearly lies.
While I would agree with Con Keating that the promotion of LDI is a result of the the Pension Regulators drive to make pension schemes derisk and may be a false strategy, the substantial market shock was a result of Liz Truss and Kamikasi Kwateng ignoring experts and economists and then throwing a hand grenade into the marketplace.