NEW YORK SHARES

By Ruth Sunderland

PUBLISHED: 13:17 EST, 6 July 2012 | UPDATED: 06:39 EST, 9 July 2012

Throwing good money after bad? Mervyn King, the Governor of the Bank of England, announced more QE

An increasingly desperate Bank of England is showering the economy with another 50bn of fivers and tenners, the ink, metaphorically speaking, still warm.

It takes the total under the Quantitative Easing scheme to 375bn, a huge amount of money by any measure. Mervyn King is not actually strewing sacks of new notes into cash machines; the money is created by electronic transfer as the Bank buys up gilts from banks and pension funds.

But to put the size of the operation into perspective, it amounts to more than a third of all the gilts – government IOUs – that are  in issue. And no-one has the least clue what, if any, good it is doing.

Certainly, QE3 has been greeted with a marked lack of enthusiasm in the City, which fears the law of diminishing returns.

Even if earlier bouts were effective at boosting the economy – and that is incapable of being known - the Bank is getting less bang for its buck (or pound) this time, simply because the ‘shock and awe’ factor has worn off. The City had already factored more QE into its thinking; in other words, markets are becoming addicted to their fix.

At the same time, pensioners and savers are furious that the policy is eroding their hard-earned savings.

The arrival of CBI economist Ian McCafferty on the Monetary Policy Committee that decides on interest rates and QE might, one hopes, have a good effect on that body, which at the moment is stuffed with Bank insiders, academics and professors of the dismal science of economics.

McCafferty at least has been working at close quarters with real businesses and might help focus the minds of the committee on their needs: namely, for credit so they can invest, export and grow.

QE has not succeeded in opening the sluice-gates of credit to small firms – hence the latest wheeze, an 80bn ‘funding for lending’ scheme.

Cash: The Bank of England is showering the economy with another 50bn taking the total amount under the Quantitative Easing scheme to 375bn

The initiative involves the Bank of England taking low quality loans off the commercial banks’ books. That, in turn, will free the lenders to make cheaper loans to small and medium firms, or so the theory goes (the fact it will saddle the Old Lady with a pile of dubious assets is glossed over.)

It was announced with great fanfare at the Mansion House speech. But it has all been very quiet since then.

Hardly surprising: everyone has other things on their minds.

Paul Tucker, widely seen as favourite to be the next Governor, has been dragged into the scandal surrounding   Bob Gissa Job Diamond. (I have always thought a man of 60, with such a luxuriant head of hair, in such an unconvincing shade of nut brown, must be up to no good).

The Bank’s latest action on QE came as the European Central Bank cut interest rates to 0.75pc and the People’s Bank of China slashed its lending rates  in a surprise move.

The latest jobs figures from the US suggest that hopes of a recovery in the world’s largest economy may have been premature. There are fears of a slowdown in China and other emerging markets, that supposedly were insulated from the malaise in the West.

Borrowing costs in Italy and Spain soared yesterday as Christine Lagarde, the head of the International  Monetary Fund issued yet another dire warning that more needs to be done to shore up the single currency.

Banks need billions of pounds of fresh capital to withstand the Eurozone crisis – another Mansion House measure was the ECTR, designed to pump 5bn a month into the banks to keep them afloat.

In this terrifying battlefield, QE has been the main weapon in the Bank’s armoury. The problem is, QE  does not solve anything. There is no exit strategy, and there can be no guarantees it can be unwound in an orderly fashion. It runs counter to the cultural changes in our attitudes to borrowing and sound money that are needed for a sustainable future.

At best, it is a palliative – at worst it is a monstrous gamble that risks debasing  the currency.