Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Even central banks run out of money eventually.

And if they're being managed by mini-me Greenspan clones, it shouldn't be taken for granted that they want to avoid a melt-down.

I think you're right about the bank failures, however. If a few banks vomit and die it will steady the rest, because they'll be left feeling that a few sacrificial victims are enough atonement - and they can get back to raping and pillaging with a clear conscience.

Which is why I think I think the fraud angle is the most interesting response, politically. It would enforce accountability, of sorts, and shock the banks and financial houses into the realisation that they're not above the law.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Dec 12th, 2007 at 01:50:45 PM EST
[ Parent ]
Central banks cannot run out of money, but they can trigger hyperinflation.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Dec 12th, 2007 at 04:17:53 PM EST
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True, if this money is paid out as wages etc (Zimbabwe), or used to pump up asset prices.

But not if - as with Northern Rock - the Central Bank is printing money which is being used to pay off existing bank loans.

The monetary effect in that case is neutral, and the "tax-payer" makes a small fortune from the "seignorage" arising from the privilege of money creation. In this case receiving 5.5% plus penalties for something that costs nothing to create.

So the truth of it is that the longer that the Northern Rock saga goes on, and the more the Bank not the "tax payer" pumps in - the better off the tax-payer will be....

Although it was interesting to see Tim Congdon letting the cat out of the bag, we are also seeing FSA's Hector Sants beginning to think the unthinkable.

These thoughts are essentially financial pornography.  No decent newspaper has for generations printed anything that exposes the reality - and redundancy - of the banking system.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Dec 12th, 2007 at 04:48:29 PM EST
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The BoE creates money to lend to NR for paying off debt owed to bank A this doesn't really change the money supply but it shifts the loan from A's assets to the BoE's assets.

Now, why is it not a problem for the BoE if NR then defaults on that debt to the BoE?

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Dec 12th, 2007 at 05:02:12 PM EST
[ Parent ]
There has been some interesting stuff on the Gang8 Yahoo list of late and this little snippet came a week or so ago in response to my questions re Northern Rock.

The author is Geoffrey Gardiner - one of the "founders" of Gang 8 - who has probably forgotten more about banking than most people, including me, will ever know.

If the loans to the Rock go sour (for instance because the penal rate of interest has made the Rock unprofitable and it has to be liquidated), the Bank of England will still have a liability to the other banks, but reduced assets as counterparty.

If it merrily invents the money there will be no great harm to the taxpayer. The situation is reminiscent to what happened in 1914. The start of the Great War bankrupted all British Banks because the German and Austrian bills of exchange they had  bought became worthless.

The Bank of England bought all the bills at face value, inventing the money to do it. The war went merrily on, unfortunately. The bills may still be in the Bank of England's archives perhaps.

My point in relation to Northern Rock is that in a default the Bank of England would lose no more from the destruction of this freshly minted money than they would if they burnt a few more skiploads of time-expired bank-notes.

What they would lose - as they do with the retirement of bank-notes in circulation - is the Seignorage on this virtual Money.

Difficult to get your head around, maybe, but the reality of Central Bank credit creation is that there can be no "loss" when there never was any value in the first place.

Central Bank money is a Chimera.

So you will understand that I find it difficult to characterise as "tax-payers' money" something that has been created ex nihilo and has never been anywhere near a tax-payer.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Dec 12th, 2007 at 07:42:09 PM EST
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