Last week I asked, perhaps a little hyperbolically, whether tens of billions of pounds of taxpayers' money should be diverted from health, education and social services to subsidise the bonuses of stockbrokers and salaries of bankers - and added that the employees and shareholders of Northern Rock seemed to assume a divine right to public support of a kind that nobody would dream of offering these days to car workers or miners. In response, I was upbraided by several bankers and politicians for confusing a temporary commercial loan, backed up with 100 per cent security for repayment, with old-fashioned government featherbedding.

Maybe my critics were right. I certainly hope they were, since I have a compelling interest, as a citizen, in the health of the British economy and the proper function of the Government. But if the £20 billion advanced to Northern Rock by the Bank of England in the past two months was really a commercial loan and not a state handout, then somebody needs to explain this to the company's directors, shareholders and financial advisers. And this explanation had better be delivered urgently by the Chancellor himself, with no buts, ifs or maybes. For in the leaked sales memorandum that Northern Rock tried to suppress yesterday through a court injunction the company's directors have prepared one of the biggest tax demands in British history.

And to judge by the leaked papers, this conspiracy to raid the Exchequer may have extorted the Chancellor's acquiescence, if not his active support.

If these statements sound as exaggerated as my comments last week, I'm sorry. But they seem to me quite a moderate response to the audacious proposals circulated by Northern Rock to potential investors this week. These proposals, published in yesterday's Financial Times under the terms of the limited injunction, include three astonishing “assumptions” - a better word would be “presumptions” - about government support.

The first is that the Bank of England's £20 billion line of credit, instead of being repaid in February, would continue until 2010 - at least to the tune of £6 billion. The second is that the interest on this line of credit would be reduced despite Mervyn King's insistence that Northern Rock must pay a “penal” rate for its support. The third is that, in the event of a break-up, the Government would keep a lien only on Northern Rock's riskier assets, allowing all the most secure mortgages to be sold off to private bidders, while taxpayers took their place at the end of the creditors' queue.

Do these proposals still sound too technical and arcane to justify my accusations of attempted larceny and extortion? Then consider the more politically explicit version published in The Guardian under the headline “Taxpayer may lose £2 billion in bank rescue”. According to this story, potential private sector “rescuers” are not just demanding a lower rate from the Bank of England but pressing the Government to waive completely the interest bill on its £20 billion loan.

They are highlighting “the benefits of a bid for the job prospects of the bank's 5,500 workers in Newcastle and Sunderland... Alistair Darling is well aware that Labour has a majority of seats in the North East and needs to protect them ahead of the general election”. Mr Darling is also being told that if he has the temerity to demand payment of the interest due to the Bank of England for the Northern Rock bailout, the Government could face “accusations of profiteering which are unlikely to play well with MPs in the affected constituencies”.

Suddenly it becomes clear why several of the self-styled “bidders” for Northern Rock have been high-profile public figures who have publicised their rescue plans on newspaper front pages, instead of trying to buy the company on the cheap through the usual means of quiet behind-the-scenes negotiations. They know that the easiest way to make a fortune from a Northern Rock “rescue” is to squeeze billions of pounds of subsidies out of the Government. And the easiest way to do that is to spin the story so that the Government and the Bank of England, instead of the company's own directors, bear the blame for the job losses at Northern Rock.

This is exactly the kind of City blackmail that I described hypothetically on this page last week. Now that this has come to fruition, the question is how the Government and the Bank of England should react. The answer is obvious.

The Chancellor should make a public announcement that there can be no question of extending any state funding beyond February, whether Northern Rock is under new ownership or remains in its present form. If, by that time, the company has not managed to secure private funding, the Bank of England will call in its loans and put the company into administration. To prepare for this contingency the Government will immediately present a short emergency Bill to Parliament, allowing the Treasury to honour its guarantees to depositors and creditors by offering £1 for all Northern Rock's assets and liabilities in the event of the company going into administration. Since the company would face a demand from the Bank of England for immediate repayment of more than £20 billion, there would be no question of either the administrator or the shareholders refusing this £1 offer.

Once this Bill was passed, the Government would be in a position to repay Northern Rock depositors within 24 hours of it being placed in administration. Meanwhile, Northern Rock's mortgages and other assets would be handed over to a newly created public sector company similar to Railtrack, which would sell them off, either directly to the credit markets or to other mortgage lenders, over a period of time.

If the Bank of England, the Financial Services Authority and the Treasury were right in their assessment two months ago that there was nothing fundamentally wrong with Northern Rock's book of assets, then the Government would be able to sell them off over a period at a good price. In that case the Treasury would recoup all the money paid out on deposit guarantees and might even make a modest profit.

If Northern Rock's assets turned out to be less valuable than expected, the Government would suffer a moderate loss. But, given that the Government would not be a forced seller, the Treasury's loss in gradually disposing of Northern Rock's assets would be much smaller than the subsidies or soft loans that almost any private sector “bidder” is now almost certain to demand.

If Northern Rock's directors can organise a genuine financial rescue, they should be allowed to do so. But any such “private sector” offer must repay every penny of public money with full interest by February, as originally required. Anything short of that would not be a financial rescue offer. It would be a political blackmail demand.

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