The UK’s economic system was shown to be under immense strain on Friday, as the flaws in the decade-old quantitative easing (QE) program were exposed, triggering market turmoil that cost the banking sector £6.4 billion. The episode revealed how a policy designed to create stability is now, paradoxically, a source of significant instability.
The key flaw, highlighted by the IPPR thinktank, is that the QE mechanism becomes a massive drain on public finances when interest rates are high. The revelation that this is costing the taxpayer £22 billion a year has created a political crisis around the policy, with banks caught in the middle.
The market turmoil was a direct consequence of this flaw being exposed. The proposal of a windfall tax to fix the problem immediately created winners and losers, pitting the government against the banking sector and causing a chaotic sell-off in bank shares.
This demonstrates that the current monetary framework is not sustainable in its current form. The strain is showing, and it is forcing a difficult conversation about how to reform QE or mitigate its costs. Friday’s market reaction was the first painful symptom of a system that is no longer functioning as intended.