September 18, 2007 (LPAC)--The Bank of England took emergency measures Sept. 17, injecting into the British banking system a total of 4.4 billion pounds in short-term inter-bank funds, and 2.85 billion pounds in slightly longer term funds, for a total of 7.25 billion pounds ($14.5 billion); the BOE indicated it would make available another 4.4 billion pounds on Sept. 24, if required.

But the bids (requests by banks) made for the 4.4 billion pounds that the BOE injected Sept. 17, were six times larger than the actual amount that the BOE injected. This underlines the severe liquidity shortgage of the British banking system, as banks have been scrambling to acquire funds for several weeks. The interest rate on borrowing on Britain's overnight market was still at 6.5% on Sept. 17, three-quarters of a percentage point above the BOE's official lending rate, as banks tried to borrow funds, but could not get them except at a higher rate.

The problem at Northern Rock, Britain's fifth largest mortgage lender, is still very much alive. Thus far, over the past four business days, frightened depositors have withdrawn approximately 3 billion pounds—or 12.5%-- of Northern Rock's deposit base of 24 billion pounds. Last week, the BOE gave Northern Rock a special unlimited emergency credit line; on Monday Sept. 17, as part of its broad emergency package, the BOE stated that it would insure all deposits at Northern Rock.

But the liquidity problems in Britain, as the above indicates, are severe and go far beyond Northern Rock. Other U.K. mortgage lenders—Alliance & Leicester and Bradford & Bingley— have had their stocks fall significantly. Beyond that, London is the world's center for derivatives trading, the center for Europe's leveraged buy-out operations, and the headquarters for world speculation. It is this center that is shaking.

On Sept. 17, U.S. Treasury Henry Paulson made an emergency stop-over in London to meet Bank of England Governor Mervyn King, and British Chancellor of the Exchequer Alistair Darling, in which it appears that Paulson told King that due to the liquidity shortage in London, which would affect the whole world's banking system, King must start openly injecting liquidity rather than the more backroom injections that King had made heretofore. Shortly after the meeting, King announced his liquidity injections package. On the same Sept. 17, as what appears to be a coordinated action, the U.S. Federal Reserve injected $16.75 billion into the U.S. banking system, some of which funds could be made available to British bank branches operating in New York.

This BOE and Federal Reserve heavy dose of liquidity pumping solves nothing, but instead stokes a hyperinflationary process far more ravaging than that of 1923 Weimar Germany.