QE stakes are so much higher after Barclays scandal

This month the Bank of England is expected to extend quantitative easing, but ordinary voters might feel QE rewards banks for their misadventures with extra funding

Opinion is building outside the Bank of England against pumping more money into the economy, just as the momentum inside the central bank makes a £50bn boost almost inevitable this Thursday.

Several economists and business groups have spoken of their belief that banks are undermining the effectiveness of quantitative easing by hoarding the extra funds rather than lending them to small businesses and first time homebuyers.

What is the point if the money fails to make its way into the real economy, they ask? Previously pro-QE lobbyists, the British Chambers of Commerce and economics consultancy Capital Economics, have argued against more. A committee of economists attached to the free market thinktank the Institute of Economic Affairs have joined them.

Last month the bank’s monetary policy committee voted to keep QE at £325bn. This month the continued weakness of the UK economy is expected to bring a change of policy.

However, sanctioning more QE could prove more controversial than just antagonising a few economists.

In the midst of the Barclays Libor interest-rate fixing scandal and the City regulator’s damning verdict on the mis-selling of structured insurance products to small businesses – some of which went bust as a result – ordinary voters might feel QE rewards banks for their misadventures with extra funding.

An extra £50bn spread across the financial services industry will make Barclays’ reserves look better and improve its share price.

Chief executive Bob Diamond, given more funds, will have the perfect excuse to divert some of the cash to paying himself and his traders bigger bonuses.

Arguably, all the banks have been doing it for the last four years.

One mantra Diamond has merrily chanted since 2007 is that his bank never went bust – unlike Northern Rock, Royal Bank of Scotland and Lloyds/Halifax. How else could he justify taking almost £100m out of the bank since then?

However, Diamond can only make this claim because the European Central Bank and its US counterpart, the Federal Reserve, put at risk hundreds of billions of taxpayers money to prop up the financial system. Without prompt action in 2007 by central bankers, Barclays and most other banks would be out of business. They had all lent too much to customers who would never be able to pay it back in a ferocious recession that involved stock markets collapsing and house prices halving – that didn’t happen thanks to taxpayer support.

And ever since 2007 he and all the other bank bosses have underplayed the fragility of their balance sheets, especially as the euro crisis developed and the full horror of a Europe-wide bank run began to threaten the whole industry.

In the minutes of the MPC’s June meeting, the committee confessed for the first time that banks were hoarding QE rather than lending it. Several committee members said it was a key reason why they voted against a rise.

So in addition to asking why furnish banks with extra money when they refuse to lend, is the question why give them cash they are almost certain to siphon off, at least in part, for themselves?

Bank of England governor Sir Mervyn King believes the parlous state of the economy, the weakening US economy and the ongoing euro crisis means the UK needs all the monetary stimulus it can get.

The picture painted by surveys of the economy says he is right. But he must wish his colleagues voted with him last month. Because the politics of banking have deteriorated much more quickly than the economy in the last two weeks and offering banks support now looks like a very generous act.

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