A financial institution is solvent if it has positive net equity. The risk-weighted value of its loans (and hence, the value of its net equity) is determined according to the rules of the Basel Accord; as is its ability to lend.

A financial institution is liquid, if it doesn’t have a cash-flow problem.

As far as I know, Northern Rock is solvent but has a cash-flow problem. The BoE is simply replacing the fleeing depositors (including other banks) in providing cash-flow. You appear to be describing this a taking over the risks associated with a ‘failing bank’, without distinguishing between solvency and liquidity. The whole purpose of the Basel Accord, and regulation by the BoE/FSA, is that the risk of failure should be covered by equity. If the risk of failure is not covered by equity, then the BoE/FSA has failed in their role as regulators, and should bail out depositors on that account. If the risk of failure is covered by equity, the BoE ought to act as the lender of FIRST recourse at market rates, not LAST recourse at penal rates. In effect, all deposits should be on-lent to the BoE (and hence to a world bank), and all lending should be on-borrowed from the BoE (and hence a world bank).

You appear to be proposing that the BoE/FSA (with all their expertise, insights and regulatory influence) should allow financial institutions to borrow from ordinary citizens (without any realistic means to judge the solvency of a financial institution), whilst holding back themselves from lending. That appears to be the reverse of the normal arragements.

If I may return to that issue, I wish to raise two issues. I will raise the second issue in a separate posting.

The first issue relates to your description of the loan itself. I hesitate to quible with a professional accountant, but I will anyway.

You wrote:

‘Well, Congdon has a point, and he rightly asserts that this £23 billion did come out of thin air. Before Northern Rock asked for this £23 billion it simply did not exist elsewhere, and was being used for no other purpose.

You also point to your own explanation as to how that works. It seems to me that that explanation, and your further comments, are based on a paradigm and terminology associated with the use of precious coins as ‘money’ (with a meaningful quantity in circulation). Of course, no-one uses precious coins as ‘money’ any moore. However, it seems to me that you have used that paradigm and terminology erroneously to describe the current use of debt as ‘money’.

As an example of debt administration, if a citizen withdraws assets from Northern Rock and deposits those assets with (say) Barclays, then that single integral transaction is recorded in four (or more) sets of ‘books’:

1. The citizen (if he actually bothers to maintain ‘books’) credits Northern Rock and debits Barclays.

2. Barclays credits the citizen and debits the BoE.

3. The BoE credits Barclays and debits Northern Rock.

4. Northern Rock credits the BoE and debits the citizen.

This single integral transaction is a zero-sum closed-circle of zero-sum double-entry postings. Either the whole closed circle is posted, or the whole closed circle is cancelled. No net assets or liabilities are ever ‘created out of thin air’. No party is any richer or poorer. Debt administration is not like tracking physical precious coins (where there needs to be an ‘it’). With debt administration, there is never any actual ‘it’ to exist either before or after the transaction.

The global zero-sum network of owed-wealth (money or non-money without distinction) is simply a zero-sum book-keeping exercise which ‘keeps the score’ on where we are in our non-barter trading and employment activity. Those who have sold more than they have bought accumulate a net positive balance, and those who have bought more than they have sold accumulate a net negative balance. The grand total (of course) is zero. The distinction between money-wealth and non-money-wealth is (or ought to be) a purely-administrative factor; of interest only to students of the history of routine financial administration. Thus, macro-economists, central bankers and politicians (and this discussion) should ignore all concepts, expressions and aggregates associated with the expressions ‘money’ and ‘monetary policy’.

The loan to Northern Rock di not in any way divert resources from any other use, and any other propositions requiring and justifying a loan could proceed independently.

Now you’re accusing me of absuing the naturalistic fallacy.

I don’t think I am - but that’s because we have different starting points. Our assumptions are so fundamentally different that I can derive my argument from those I use - and you cannot because you do not share them.

Richard

In a normative world a problem relates to a need.

A very interesting point. At the risk of sounding like Alan Partridge, I looked up “normative” and “positive” after I read your comment and you have captured our difference perfectly.

However, I still believe there is a problem: you are incorrectly merging two quite different domains.

There is a problem/need domain and a solution domain in discussions of state vs market approaches.

In the problem domain, as you quite rightly suggest, one can discuss problems in terms of what *is* or in terms of what *should be*. That is fine.

However, in the solution domain, it doesn’t work. One may have used value judgements or morality to determine that something must be done. But when determing what that something should be, you can only evaluate options correctly if you think in terms of outcomes: “which of the available options is the best way of achieving the outcome we have decided we want?”

Ignoring this crucial subtlety means that good solutions can be dismissed out of hand, sometimes with tragic consequences.

You are seeking to use normative language to promote your positive agenda.

I am normative through and through.

And that’s the way life is. Only economists and those on the right who buy the conventional economic model pretend otherwise.

In a normative world a problem relates to a need.

Richard

I assume you’re talking about language that has been used in other comments here? You clearly must understand the difference between “intent” and “outcome” - and realise that there is a very real difference between a “problem” (something that can be defined and reasoned about in terms of costs, benefits, outcomes, tradeoffs, etc) and a “need” (something far more emotive, where appeals to justice or morality can be used as alternatives to reason).

They both have their place but when talking about the very interesting subject of when any given approach is superior or inferior to another, surely it’s better to frame the underlying issue in objective terms so that the area of disagreement can be focussed on?

Can you have debate if you don’t move forward?

I’m confused too - but simply because you, like the majority of right wingers who like to read this site don’t speak a language I recognise. I sometimes presume it is based on braille - because it seems to be a language of the blind - or at least, of those not willing to see.

You can say this is abusive Iif you don’t, someone else will) - but actually it is about communicaton. If you comment here you’ll have to assume that it is my blog - and the engagement is with a person and (I think) a community of readers who simply don’t share your views. In which case the communication problem is your, not mine - because it’s you who is not using the language that I or most readers do not understand - and indeed often find incomprehensible.

So I make clear this is your problem, not mine. It’s entirely up to you if you ant to engage - but please don’t ask me to use your language and its inherent philosophy - it’s one I do not wish to embrace.

Richard