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Treasury plan to rescue mortgage lenders

The Treasury is preparing a radical rescue plan for the housing market which may involve pumping billions of pounds into the stricken mortgage markets. Alistair Darling, the Chancellor, has asked his leading advisers to investigate a plan to provide government support for lenders until the financial crisis has abated.

The proposal is being investigated ahead of the completion of Sir James Crosby’s report into the funding struggles faced by UK banks. Crosby is expected to warn that banks are facing a massive “funding gap” caused by the collapse of the securitisation markets which previously provided around 40 per cent of backing for home loans. Experts think the gap to be filled by the Treasury could amount to £40bn-£50bn a year… Although he will not provide cast-iron recommendations until his final report in October, he is expected to warn the Government that some form of intervention is necessary to lessen the eventual economic pain. In advance of his recommendations,

Treasury officials have been working hard to formulate a rescue plan; the Government would offer to swap new mortgage debt with banks for gilt-edged government securities. The scheme is very similar to the Bank of England’s Special Liquidity Scheme in which the Bank swaps treasury bills for old mortgage debt, except in this case the scheme would cover new mortgages issued this year In reality, the scheme would be designed to support the wider housing market and economy…

In the view of Peter Spencer, economic adviser to the Ernst & Young Item Club, the sooner the Government spends the money the less it will have to spend eventually Once these markets collapse and confidence disappears, there are all sorts of consequences in terms of job losses, which will be even more costly for the wider economy.”

In 2006 total net mortgage lending amounted to just over £100bn, with around £60bn of that funded by banks’ deposits and the remaining £40bn by securitisation. The demise of the securitisation markets, in which banks package and sell on the mortgages to investors, left lenders with a £40bn hole if they intend to lend as much as previously. They are also having to pay back investors of the existing mortgage backed securities around £20bn a year, so the hole is as large as £60bn. Experts warned that although the nationalisation of Northern Rock and subsequently the special liquidity scheme helped support the market temporarily, this effect is now wearing off.

Many analysts have warned that the number of new mortgages being issued could drop to almost zero by the end of the year.. they point to actions being taken by the US administration to shore up its own housing market. As well as taking radical action to support Fannie Mae and Freddie Mac, which support its domestic mortgage market, Congress yesterday passed a major package of housing legislation including tax relief for homeowners, a new regulator for Fannie Mae and Freddie Mac, and a $300bn anti-foreclosure programme. Another plan being considered by the Treasury is to multiply the amount of cash it is providing to local authorities to buy up homes from developers.

Sunday Telegraph article about Treasury plan to rescue mortgage lenders

From this it can be taken that the goverment, and the experts it listens to, are in favour of doing anything to prop up Britain’s inflated land market in order to try to stave off recession. Would they be in favour of the same action if the price of other essentials such as bread had gone sky high? The underlying problem is that the UK economy is pathologically dependent on the state of its land market. The right action would be do what is necessary to break this cycle of dependency once and for all. LVT is part of the cure.

The proposed “rescue plan” will not prevent recession. It will simply ensure that a slighly deferred but still severe recession will be accompanied by 1970s style inflation. The lessons of 30 years ago have been forgotten by this new generation of experts. Even without LVT, the least bad option would be to let the crash happen.