Bank of England governor Mervyn King recently declared in the 2012 BBC Today Programme lecture that ‘our banking and financial system overextended itself’. This included allowing financial institutions to leverage their balance sheets by over 50 times, and making use of esoteric, complex derivative instruments which few understand even today.

This created a profound and unwelcome disconnect from the real economy, or ‘Main Street’, and the lives of citizens both in this country and across the globe. Central banks have facilitated a climate where there is effectively an implicit taxpayer guarantee because the unthinkable scenario of ‘too big to fail banks’ falling would cause a massive global systemic collapse.

The IMF recently released its ‘Global Financial Stability’ report in which it warned of a crunch where EU banks would, by continuing existing policies, shrink their balance sheets by $2.6tn (a contraction of seven per cent) by the end of 2013. Only an ‘improved policy response’ would help mitigate the consequences of this scenario, by which they mean further quantitative easing (or QE).

While some will argue the cause of our current predicament can be traced back to the ‘irrational exuberance’ of the Greenspan era, others will cite the defining epochal event which was Nixon closing the dollar window in 1971, severing the dollar backing to gold. This is a discussion for another day.

This week we had a woefully anaemic Tory-Lib Dem Queen’s Speech which did not address the kernel of the problem, namely generating sustainable economic growth and jobs, and yet overlooked an area where it could have reviewed the rules of the game.

While the need to strengthen the financial sector was acknowledged, specifically by introducing legislation to enact the Vickers Commission recommendations, the government did not consider how the Bank of England’s quantitative easing policy could more directly act as a catalyst for the ailing economy.

Briefly, over the last three years the bank created ‘new money’, an additional £275bn, which has been used to purchase existing government debt held by commercial banks and pension funds, which in turn have free cash, as well as profits from their gilt sales.

The public debt purchased from the banks and pension funds is now held by a wholly owned subsidiary of the Government, the Asset Purchase Facility, which will receive interest from the Debt Management Office, also an arm of government, creating a circular arrangement.

In the Prospect magazine (October 2010) Bank of England Governor Mervyn King admitted that he could not tell ‘exactly…the scale of purchases [needed] in order to reach our objective.’ And he added that ‘our objective is clear: to see an increase in the supply of money in the economy, so we can see a level of spending return and a beginning to economic recovery.’

So when George Osborne suggested the Tories were ‘fiscal conservatives and monetary activists’ he did so without regard to the inherent injustice resulting from the effect of the monetary component of this twofold strategy.

The reality of quantitative easing as it is being pursued by the Bank of England, with the chancellor’s effusive endorsement, means the value of the currency is being steadily debased and so there is a transfer of wealth from the many to the few.

When the commercial banks are relieved of their government stock, as described above, they have not supported initiatives on the scale required in the real economy to reignite growth and restore confidence.

So take for example Joe the small businessman who has just registered his fantastic groundbreaking patent for a new formulation of graphene with a rare earth metal, which has tremendous applications and promises to create many skilled jobs in the future. He really needs to secure capital from investors with foresight but the traditional banks (who make up over 90 per cent of lending to SMEs) are not interested.

It seems, however, these banks would rather take a punt on the latest anticipated bull market in a sector of the commodities market using some exotic instruments, the type which contributed to the unstable global financial we now face.

Why doesn’t the Asset Purchase Facility for example use the billions created by QE and invest it in special bonds issued by a putative National Investment Bank for Innovation.  This way the real, innovative, job creating economy would get a sustainable boost and the Bank of England would also meet its own objective as Mervyn King states above.

This monetary activism as currently practiced, with its implied negative real interest rates, also hits Mr and Mrs Smith who recently retired after working hard for years, looking forward to a happy retirement. On top of their pensions, they have some national savings and building society investments. But the QE policy is destroying the purchasing power of their pound over time and will lead to pensioner poverty, a point forcefully raised by Ros Altmann, the pensions expert and director general of Saga.

So whether it is the entrepreneur, inventor or light engineering firm looking to expand, the student wanting to boost their transferable skills or those needing to live off their capital, this policy is a pernicious attack on their capacity to achieve their respective aims. Not only does this form of QE lacks accountability and transparency, it will not compliment a proper fiscal strategy and worst of all it represents a transfer of wealth today and tomorrow from those with little to those with more than enough.

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David Phillips is a former research scientist, parliamentary candidate and member of Progress.