Or to be more accurate, the Bank of England will accept mortgage backed securities in return for government bonds. Nice trade if you cant get it. The amounts mentioned are 50 to 200bln pounds (where the hell is my pound key?) but basically it’s a free for all.

Now we can expect to see banks reaching for the refinancing button in order to take advantage of this. RBS has already put its hand up for 10 to 12bln of fresh capital plus a 6bln write down.

Ok so its just more mess. The markets may rally on this hoping it can help clear the looming crisis in the mortgage market but the numbers are really starting to mount up and this is just very bad news indeed.

The key issue here is the capital adequacy of the banking system. It’s proven to be the achilles heel which is why the authorities have had no option but to underwrite the system.

Given this exposure of the fragility of the banking system it is time to ask questions about capital adequacy and the way banks are regulated and allowed to operate.

Watch it here

But with the $ swift decline into obscurity the fans of something more solid than the US Treasurer’s signature on a piece of paper are clamoring fro the return of the Gold Standard as a way of preserving the value of paper and controlling the impulse of bankers to keep printing the stuff.

Well yes that does seem to be a problem. I’ve touched on this before when looking at how the Bank of England experienced several runs just after it was formed. Why? Because they printed way more paper than they had in reserves of gold. So gold or no gold, there is nothing to stop authorities or private banks printing paper or more accurately filling up spreadsheets with lots of numbers.

I’m ambivalent on this gold business. Storage issues, never mind the horrendous process of digging the stuff out of the ground, present problems as do the ability to carry it safely but really its a confidence thing.

Readers of this blog should hopefully know by now that money is an artificial construct. We can make it anyway we like. It’s created into existence in some form in order that we can exchange goods, services and labour in an efficient manner.

It is subject to the laws of supply and demand like any other product or service.

William Rees-Mogg makes some interesting points about it here but the reality is still the same gold or no gold. We must control the supply of money. 1:1 exchange for gold is a way to do that but its so last century. Surely we can come up with a smarter way of doing it.

My favoured approach is for a central monetary authority to issue interest free new money into the system directly. that supply of money (the only supply) could be controlled on an annual basis responding to set limits, constraints and changes in demand, population etc.

Goodbye interest, goodbye inflation and goodbye financial markets as we know them.

Gold bugs or not, we have to do something about the current system before it blows up and makes the 1930s depression look like an afternoon tea party.

But this simply hastens the decline of the banking system as we know it. In 10-20 years time we will look back on this and see how important this moment was. What the banking system or indeed money looks like remains to be seen but our trust in current arrangements must be questioned.

More importantly for football fans is the Northern Rock’s sponsorship of Newcastle. Surely the taxpayer won’t be happy about this. Supposedly the sponsorship is safe but they said that about Northern Rock.

Did i mention that mortgage means “deathgrip”?

Anyway this just shows that for all the hi’ fallutin’ nonsense about free markets we actually live in a system that is far from free. Bush doesn’t really want to hand the next election to the Democrats though he’s done his best to do so in recent years.

But what we are seeing now, as we saw post 1930, is that the financial system can be changed if required and that the fundamental right to create money resides with the people via their representatives. If i owned shares in a bank i would be worried.

Come to think of it if i had money in a bank i’d be worred but humping around gold coins is so 13th century.

I can’t quite work out if this is the beginning of the end or the end of the beginning. I fear its the latter.

This week concerns have arisen that the taxpayer could actually be seriously under water from this guarantee. Cracks are appearing in the government establishment with the Bank of England under fire from the Treasury and the knives are being sharpened as the blame game starts.

The UK financial system is clearly still in trouble.

When the Bank of England was formed in 1694 it was not as a government agency but a joint stockholder company who then lent money to the government to wage war. Money and war go hand in hand really….sound familiar?

But the deal was interesting. Coin, in the form of gold and silver, had to be deposited and then was lent at a rate of interest which at the time was 8%. This is where the term “gilt edged” comes from.

So far so good. But at the same time new money in the form of paper bills was issued against the same deposit of coin. Therefore at a stroke the amount of money as measured by coin and paper was doubled. The paper money was exchangeable for coin so in fact there was only enough coin for half the supply of money.

I’ve seen more complicated magic tricks at a children’s birthday party!

Needless to say some bright spark decided to up the ante somewhat and the first run took place. Over time this settled down so that 4 to 6 times the gold on reserve could be lent out as paper money. This paper money became known as “good as gold”. Quite clearly it wasn’t but it became accepted.

This was taken to extreme by the Farmers Exchange Bank from Rhode Island which was found to have issued banknotes to the tune of $580m backed up by metal reserves of just $3m (note to Les Hunter for that information).

It never hurts to check the balance sheet of your bank to see exactly how much it does have in the way of equity but as we saw in the UK recently it doesn’t really matter since its all guaranteed by the authorities anyway!

Bernanke is not known for his pandering to the markets and inflation is still mentioned as a concern. So this move is part of the restoration of confidence in the US economy and global monetary system. The G7 central bankers and finance ministers will have been wired into each other this past month and since the Northern Rock meltdown probably on 24 hour call.

They all depend on each other now.

How the Asian central banks must be laughing given the dressing down they received during the 1998 crisis and how the G7 bankers and IMF threw the financial risk playbook at them.

So where does all this leave us. Well pretty much in the same place except we know that G7 will underwrite the financial system. This is good for big guys and bad for small ones (or foreigners!). Small guys can fail and be picked up for a song by the big fellas……nice bit of wealth transfer (anyone remember Long Term Capital or Barings?).

But fundamentally there is still pain to come. The fact that asset prices have been inflated way beyond realistic levels means at some point they must retreat and money must be destroyed as the money supply contracts.

No amount of paper shuffling can change that. Pumping out more money will help in the short term to keep institutions from falling over and the system functioning but it cannot prevent the inevitable.

The best we can hope for is a gentle downturn in asset prices. And of course lessons will be learnt….just like in 1794 and every 18 years since

Of course readers of this blog will already know that money is merely a ficition, one with a deep and dark history. As Trevor commented in the previous post, the general public relies on he integrity of the system and the honesty of those who operate it.

Can we have confidence in those people? I think not. Not because they are dishonest  but because they refuse to acknowledge a system that is unstabl, inequitable and ultimately inefficient.

Please read and ask questions, comment, spread the word and ponder.  What does your money mean? Do you really have any savings, wealth or assets? Don’t rely on the system to support you. It has failed regularly since the Bank of England was first formed and wil l continue to do so until some serious surgery has been performed.

Wow! In a stroke they have just removed any risk from the banking system. They have in effect nationalised Northern Rock without actually doing so.

Actually this is a good thing since it further exposes the myth behind our banking system. Mind you they didn’t rush to bail out the depositors of BCCI  when that failed.

So where to from here? Well that’s anyones guess but this wont finish here even with the  blank cheque provided the the Old Lady.

Max Hastings writes a lovely piece here. Finally as the party comes to an end and the hangover kicks in, will there be some reason?

I hope so. It is a great opportunity to look closely at the money system we currently have. Do not look to our central bankers to provide the lead or even our politicians. We the people will have to provide ideas, answers and solutions on how to proceed. The monetary reform movement has been growing by the day and now it is time to stand up and be heard.