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