Should tens of billions of pounds of public money be diverted from health, education, defence and other social services to underwrite the profits of hedge funds, protect the jobs of international bankers and subsidise stockbrokers' bonuses?

This is effectively what “government sources” suggested two months ago when they criticised the Bank of England for failing to offer a line of credit to support a takeover of Northern Rock by Lloyds TSB. At the time, the suggestion that bankers were more deserving of public subsidies than coalminers or car workers seemed so preposterous, especially from a Labour Government, that nobody paid much attention to the whispering campaign about the Northern Rock bail-out. It was assumed that government spin-doctors were trying to deflect blame to any available scapegoat.

Pointing to the Bank of England's refusal to finance a Northern Rock takeover was temporarily more convenient than publicly admitting that the management of the Rock had destroyed what was once a good business and the company would have to be wound up.

Yesterday morning it appeared, however, that Alistair Darling and Gordon Brown might actually be contemplating a plan to spend billions of pounds on subsidies to the managers and investors in this dying bank. Is it possible that ministers are now so worried about the few thousand job losses in Newcastle that would follow from the orderly liquidation of Northern Rock that they would seriously consider supporting a “private sector” takeover with tens of billions of pounds of public money?

This seems the only logical explanation for the reports of dismay at the Treasury about Mervyn King's “naive” BBC interview, in which the Bank of England Governor confirmed the grim calculations about Northern Rock's financial requirements. The Governor explained that the Treasury and the Bank of England had jointly rejected offers to “buy” Northern Rock, thereby averting the embarrassing bank-run, because all such “white knight” rescues would have demanded up to £30 billion in public funding to make the figures add up.

Why should the Government have offered such an immense sum to subsidise a bid from one bank for another? Why, in fact, should the Government have even considered such funding?

“Banks have to take the consequences of the risks that they undertake,” said the Governor. “That is what happens in any other industry. It is not the role of the central bank to bail out people who takes unnecessary risks, in just the same way as the Government doesn't bail out manufacturing companies that take risks and their product fails. I was asked whether if a certain retail high street bank were to make an offer or a bid for Northern Rock whether we would be prepared to lend that bank £30 billion, at the bank rate, for about two years. So I said this is a matter for government.”

One would have imagined gratitude at the Treasury for these comments. The Governor had confirmed and endorsed the Chancellor's wisdom in refusing to spend a staggering sum of public money to subsidise a private bank. But instead of thanking the Governor, “Treasury sources” busied themselves on Tuesday rubbishing his comments and implying that the failure of a private “rescue” for Northern Rock reflected the Bank's unworldly delicacy about the “moral hazard” of subsidising imprudent private banks.

This is an astonishing reversal. The Bank of England, traditionally regarded as the representative of City interests in the British governmental Establishment, is calling for consistency of treatment between industrial workers and bankers. Meanwhile, a Labour Chancellor is apparently embarrassed to admit that he has rejected a demand for ransom to the tune of £30 billion from City bankers, a payment that would probably have constituted the biggest government support package offered to a private company in any market economy.

What, then, is going on? The answer is fairly clear. Around the world, banks, insurance companies and hedge funds have landed themselves in trouble because of a series of miscalculations, involving not just the US sub-prime market but also the way that mortgage banks, hedge funds and private equity houses have been financed. These miscalculations were ignored for many years because they were so profitable. But now part of the excess profits earned by the global financial industries has to be written off. As a result, investors are seeing the share prices of financial companies tumble, hedge-fund managers are seeing their bonuses jeopardised and some senior bankers are being forcibly ejected, albeit with golden parachutes of up to $150 million.

The financiers are responding to this shake-out by putting enormous pressure on governments and central bankers on both sides of the Atlantic to reverse, or at least arrest, these costly and embarrassing trends — first and foremost, by cutting interest rates aggressively, even at a time when global economic growth is booming and inflation is still looming; secondly, by supporting financial institutions with public intervention, as in the case of Northern Rock or Germany's Sachsen Landesbank or the US Treasury's proposal for Wall Street to mount a bailout for the mortgage vehicles created by Citibank.

The wonder of financial markets is that they can exert such political pressures without any conscious conspiracy on the part of the bankers. They do this by creating an atmosphere of crisis based on exaggerated interpretations of relatively minor movements in shares and currencies. While the US and British economies grow strongly, and most industries, apart from finance and housebuilding, continue to do well, economists prophesy darkly about the chances of a catastrophic global impact from the credit crunch. While global stock market averages have fallen by less than 5 per cent from the summer's record highs, City and Wall Street analysts call for emergency interest rate cuts to shore up the tumbling share prices of leading international banks.

It is of paramount importance that the Bank of England and the US Federal Reserve Board ignore such calls. An article of faith of modern economic policy is that central banks must be independent of politicians. It is infinitely more important that they should be independent of bankers and financiers. As Mr King said in his interview: “The role of the Bank of England is not to do what banks ask us to do; it is to do what is in the interest of the country as a whole.”

The job of the central banks is to manage demand and stabilise inflation and unemployment. If central banks start to follow the markets instead of leading them, then all the gains achieved by the flexible monetary policy of the past two decades will be jeopardised.

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