Thank the Lord for the Bank of England!

The Bank of England averted a run on the UK’s investment institutions yesterday. Chancellor Kwarteng is unlikely to thank them for their calm competency and credibility. The Bank’s intervention has triggered a global rally as the market now expects more central bank support.

Blain’s Morning Porridge, September 29th 2022: Thank the Lord for the Bank of England!

“Who needs asteroid busting satellites when you’ve got the Bank of England”

This morning The Bank of England averted a run on the UK’s investment institutions yesterday. Chancellor Kwarteng is unlikely to thank them for their calm competency and credibility. The Bank’s intervention has triggered a global rally as the market now expects more central bank support.

Relax. There is nothing to worry about. We are as safe as The Bank of England. (Which, incidentally, was founded by a Scotsman.) When the going gets tough, Central Banks will be there to resolve it, putting sticking plasters on our financial wounds. Yesterday The Bank acted swiftly and with demonstrable competency to avoid a technical issue in the UK Pensions Industry triggering a systemic financial failure. The market took note – Central Banks will act to avert meltdown. Hence yesterday’s Global rally.

The UK may be a small island at the unfashionable end of Europe, but we still set financial fashions and influence global markets – unfortunately for all the wrong reasons. Yesterday’s £65 bln re-opening of the QE programme to buy Long Dated Gilts (a time limited window which has a high likelihood of success) unravelled The Bank’s plans announced just last week to sell off its Gilts Book – but it demonstrated the wisdom, competency and experience of the Bank.

As the facts changed – the bank changed policy. Smart. Wise. Credible.

The Bank did its job, averting a potential systemic risk crisis swamping the Gilts Market and potentially crushing UK real money investment firms. Had it not been sorted, we could have had a repeat of the 2007 Northern Rock run on the investment industry.

The problem was essentially a simple one – pension funds meet their obligations to pay pensions using Liability Driven Investment (LDI) instruments. Nothing onerous in that, but when the Gilt market went chaotic after Friday’s not-a-budget it triggered margin calls on aspects of these trades. The industry is long-term stable, but this was a short-term shock. The pension funds were forced to sell assets to raise cash to meet these calls. In times of crisis you sell what you can – not what you want to. Which meant the largest holders of Gilts were forced to sell Gilts into an already crashing market. The Bank applied the break! Saved the day.

Financial professionals understand what happened, and the bulk of us respect the Bank for demonstrating wisdom and credibility in a time of crisis.

Not so Government Cabinet Ministers.

I am told Ministers and supportive MPs have been given a list of talking points from Kwasi Kwarteng’s lair. They are straight out the Lyons/Minford/Odey playbook. Number three on that list is: Blame the Bank of England. On media they have been told to tell listeners the reason for the current crisis is The Bank failed to anticipate inflation or prepare for it, and the reason Gilts collapsed last week was due to them announcing the Quantitative Tightening (QT) sale of its Gilts book. I watched the Rt Hon John Redwood, Minister for Business Dumbf*ckery, on Channel 4 tell the Camera with a straight face it was the Federal Reserve raising US rates and the Bank announcing its QT programme that triggered the Gilts collapse – nothing to do with the Not-a-budget.

Today I am confident I will hear a Govt Minister call for an immediate investigation into Pension funds using dangerous and volatile LDI linked swaps and derivatives, and that they and The Bank should be castigated for putting innocent pensioners at risk. Lie and deflect. Lie and deflect. Repeat till it sticks.

I don’t like being patronised or lied to…

Rather than me say again what I’ve been writing all week, Editorial Board of the Financial Times says it rather well:

“The ructions since Friday’s cavalier mini-Budget have shown that governments cannot flout due process, independent oversight and economic expertise. By severely undermining the UK’s economic and financial integrity, the new Conservative administration is gambling with British people’s money, pensions, and homes. The BoE can only prop up markets for now, but regaining UK credibility will be the task of the government. It must do so with haste.”

I have only been in the Fixed Income Bond markets for 37 years. I freely admit I have a massive amount still to learn. What I do know is: In Bonds there is Truth. Bonds are the bones and financial plumbing of the global markets. They set the base, the rate from which all investments are measured. When the bond market breaks – so does everything else.

As I’ve described so many times in recent days – the UK was a solid financially stable economy. There were periodic wobbles, but we broadly met the Virtuous Sovereign Trinity of a competent political economy, a stable currency, and a sustainable bond market. The institutions created to ensure financial stability – The Bank, The Treasury, The Office for Budget Responsibility, The Debt Management Office, and market participants understood the way the tripod of government competency, sterling and gilts combined and functioned.

Then along comes Kwasi Kwarteng, enabled by Liz Truss, who has been noticeable only by her absence these last few days.

Kwasi had some limited experience in banking and hedge funds before he became an MP, rose to become a minister, and was elevated by Truss to Chancellor – 24 days ago. He came in with a plan and launched it. He turned down advice and a costing from the OBR. It’s now clear he did not heed advice from the Bank or DMO, did not share his plans with them, and sacked his Treasury secretary. Kwasi, who was once on University Challenge, decided he knew best.

It was not about the tone-deaf policies on banker bonuses or the 45% tax cut that crushed his plans – they are frankly irrelevant. It’s about a Chancellor who thought he knew better than the great financial institutions of the land, their collective expertise and experience, rejecting their inputs to come up with a childish notion he could finance short-term spending and a series of income and stamp duty tax cuts with long-term borrowing. It was beyond naïve.

As has been said before: “Kwasi Kwarteng is a man so fond of his own voice, his ears have been made redundant.”

The problem is we now have tidal waves of consequences threatening to overlap the economy. Yesterday The Bank nipped a pensions crisis in the bud. Tomorrow it faces a massive mortgage crisis which will rock the UK Housing Market. When housing collapses the 15-20% real estate firms expect, it will deepen the recession about to overwhelm the UK. Then the Bank will face a wave of corporate defaults as recession bites.

Meanwhile it faces the ongoing inflation crisis – which is not just a record rise in food prices, the Energy Price-cap bailout, but is now morphing into wage-demand real inflation. Industrial strife this way comes.

The tools at the Bank’s command are limited. They can raise or cut interest rates. They can use monetary instruments like QE – but these have consequences. It does not help they had to effectively pump money into the pension system yesterday (inflationary) when they need to hike interest rates to address the currency collapse, and fight inflation.

It’s not easy being a central banker.

Especially when incompetent politicians are looking for someone to blame.

The Government of Kwasi Kwarteng and his sidekick Liz Truss is not going to admit blame. They will not admit they did not listen to advice, accept responsibility or be accountable for the utterly unnecessary “policy mistake” that’s crushed confidence in the UK. They will cling to their narrative – its Remainer “haters”, it’s the pinko media, it’s the Bank of England, its rising global interest rates, it’s the Fed, and they will detract and deflect by saying its worse in Europe.


Liz and Kwasi will not ‘fess up and admit they were wrong. Until Government accepts it screwed up and some heads roll, or is replaced by due electoral process, they will cling on by their fingernails – which is not good politics. Larry Summers will be right – the UK economy will become a third world crisis. When their biggest supporters are hedge fund managers profiting from shorting Gilts and Sterling – well, do I have to spell it out?

Truss and Kwarteng will not step back. They are 4 weeks into a new Government – but have the biggest credibility gap in recorded history.

That is excessively bad news for the UK. Nothing to do with their politics, but it will mean gridlock in parliament to address the ongoing economic crisis that could engulf the nation, the geopolitical issues with China, the ongoing war in Ukraine and the need to invest in defence, plus the long-term issues of the environment and global warming.

If we face the next two years of incessant political strife and yet another lame duck administration – things will only get worse. Can’t we just get it over and done with?

Lis Truss should let the country decide – we should press the Reset Button and have a General Election.

Five Things To Read This Morning

FT – The Jeopardy for banks in Kwarteng’s City chaos

BBerg – The UK Cannot Afford to Look This Ridiculous

Guardian – Tory MPs tell Truss: Sack Kwarteng or face mutiny

WSJ – Global Bonds Rally After 10-year T-Bond Yield Touches 4%

Times – Government undercutting Bank of England, says Mark Carney

Out of time, out of patience and back to the day job. Tomorrow I’m going to write about anything else….

Bill Blain

Shard Capital


  1. You’ve nailed it. It’s always the financial plumbing that is never understood by the policy wonks which causes the really big blow-ups. (I too spent enough time in Fixed Interest to learn that much.) I’m not sure the Chancellor – Odey’s sleeper?- has any first hand experience of blow-ups but, as you say, is too arrogant (KS at Eton and Trinity, after all) to ask people who do for advice, let alone take it. Perhaps KC III could do us all a favour by dissolving parliament!

  2. All good stuff as usual. Unbelievable naivety by this government. Despite BofE having voluntary split personality disorder yesterday, looking at long gilt this morning we are heading much deeper into the woods, not out. I was fortunately young enough to miss out on the fun and games with the IMF in the 70s but first mortgage at 14% was great!

  3. Surely the blame falls on those who accepted a mega promise campaign by Miss Trusst.
    And on those who didn’t push base rates up and allow guilt years to reach 10% before recent events.

    Near 10% inflation and the bulk of government borrowing is all pre-Truss. Inflation and that much putting off payment for current spending into the future requires extraordinary interest rates. Extraordinarily high that it, not low.

    Bizarrely the BOE adding QE to hoover up long dated gilts and keep interest rates down is a clear sell signal for Long term Gilts. How many trading days before the market works that out?

  4. Excoriating and spot on. Best journalism currently out there.
    If you’re not going to write about this tomorrow ( for reasons I can fully understand ) a challenge for you. Can you find similar examples of major klusterf*ckz in history from which we might learn?

    • I am sure there are similar examples, but I will go with the Union General telling his troops ats Fredricksburg the damn Rebels “could not hit a barn door” and dropped dead with a bullet through his head.

      • The rebel artillery commander famously declared “a chicken could not live on that field when we open on it”. Switching gears, when will Bill sprinkle a few UK investment ideas into our porridge? I’m guessing there may be some keen opportunities hidden within the current carnage. Seems to me there’s quite a sale going on, but then again I’ve caught my share of falling knives. At any rate, Bill’s clever, incisive analysis beats any other UK marker coverage we get here in the States….by a country mile. Keep at it!

  5. Almost exactly a century ago William Butler Yeats wrote this poem. It is as applicable today as it was then:

    The Second Coming

    Turning and turning in the widening gyre   
    The falcon cannot hear the falconer;
    Things fall apart; the centre cannot hold;
    Mere anarchy is loosed upon the world,
    The blood-dimmed tide is loosed, and everywhere   
    The ceremony of innocence is drowned;
    The best lack all conviction, while the worst   
    Are full of passionate intensity.

    Surely some revelation is at hand;
    Surely the Second Coming is at hand.   
    The Second Coming! Hardly are those words out   
    When a vast image out of Spiritus Mundi
    Troubles my sight: somewhere in sands of the desert   

    A shape with lion body and the head of a man,   
    A gaze blank and pitiless as the sun,   
    Is moving its slow thighs, while all about it   
    Reel shadows of the indignant desert birds.   
    The darkness drops again; but now I know   
    That twenty centuries of stony sleep
    Were vexed to nightmare by a rocking cradle,   
    And what rough beast, its hour come round at last,   
    Slouches towards Bethlehem to be born?

  6. And here we go:
    Next chief Simon Wolfson says he flagged LDI concerns to Bank of England
    Liability-driven investment schemes a ‘time bomb’, says fashion retailer head

    Simon Wolfson is a Tory Peer.
    Next stock has fallen since he said it! Market suddenly realises the Head of Next is a deranged denier of reality and has the economic grasp of a five-year old.. which is, admittedly better than Truss or Kwasi.

    I think I shall tell him, not having been near his shops for neigh on 40 years, that his socks are a retail catastrophe…

  7. Bill, as I watch from afar I am amused that everyone seems so confused as to the actual “problem”. It ALL boils down to one simple thing…MASSIVE, UNSUSTAINABLE AND SUFFOCATING DEBT (of all kinds).

    We’ve hit the apex.

    For 30 years we’ve sold our future for today’s (yesterdays) pleasures.

    We are now simply paying the price of a wonderful 30 years of excess, parties, holidays, bigger waistlines, nicer cars, bigger homes, new boats / yachts, massive pensions, subsidies, and every electronic gizmo you can think of.

    Getting out of this will require a LOT of pain IF we truly want things to get better. Do we? Do THEY?

    KamiKwasi, Truss and most MP’s are in the short term self preservation business…and will put off what needs to be done until gravity takes over and does it for them.

    That is when things REALLY break. 😉

    Tim at AscendTMS ( By InMotion Global, Inc.

    • I’m stuffed then… new boat is my objective… And yes… my pension could be.. well lets say the new boat will be the 7th, so that means the pension pot is new boat z x 7 smaller than it could be. And I like fast boats – and winning races…
      Bugger.. as they say…

  8. I was involved in helping build some of the early LDI programs and it is worth keeping in mind how well they have protected DB beneficiaries when interest rates went down and stayed down. Covid has now helped by disproportionately killing DB beneficiaries while keeping most DB contributors alive so they can keep contributing

    • LDI makes sense. It meets the needs of the schemes and pensioners – in stable markets. Chaotic markets – as we had in gilts – changed the equation to kick in margin calls – which was a risk built into the system. I don’t think there was ever a real risk of a major pension real money account collapsing on back of LDI schemes, but the fact is in crisis you sell the assets you can.. meaning the high grade, liquid ones – Gilts. And that’s the root of the issue – gilts sales into a tumbling market making the crisis worse.
      Exactly as I predicted we are now seeing calls by Tory appologists to scale back dangerous LDI trades – and how the bank has failed yet again.. Its bollocks.
      The fact is the Bank bailed out Truss.

      Please.. make this political clusterf*ck problem go away.

  9. The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore.

    These markets are also dangerous but they offer the opportunity to generate the gains to acquire the Lucky 7 boat.

    Sail on…

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