I think we agree about the effects of letting or not letting failing banks fail - the question is whether politicians have the cojones to accept short term recession for longer term growth (when they may be out of office). Practice over Northern Rock suggests not.

Isn’t that the big danger, though. With house prices at their present levels isn’t it inevitable that a correction will come sooner or later? The banks have been very free with their lending in recent years, but they can’t continue indefinitely to extend the maximum salary multiple that they are prepared to lend to borrowers. In my day it was 2 or 2.5 times salary. I understand that a multiple of 8 is not unusual these days.

Before their economy hit the doldrums, the Japanese house price boom resulted in the concept of an inter-generational mortgage that would take more than an entire working lifetime to pay off, but you could pass the remaining debt onto your children. Is that where the UK housing market is going?

The UK housing market is in for bad times, I fear, but what of the wider economy? The common negative factor is enormous, unprecedented debt, both personal and public. I can’t see the wider economy escaping the effects of this debt burden, especially if the personal equity in housing that has supported years of excessive spending vanishes.

Reply: There may be house price falls, but this need n t trigger a general recession. That depends on what the government and the Bank do next. If they take early enough action they can prevent recession.

I do not think there is a real contraction in demand for homes, there is merely a contraction in the feling that owning a home is, forever, going to guarantee an increase in your assets. The real demad for homes greatly exceeds the supply which is not lomoted by the market but by the planning system.

Reply: yes, the Japanese case is a worrying one. It may have speeded up adjustment if some banks had been allowed to go under there, but that in the short term would have created a worse recession and accelerated the downwards lurch in property values. The case of Northern Rock is different - all the experts say the mortgage book is fine, the problem was the inability to raise money in the normal way in the short term markets. There has not been a sharp downwards move in UK houe prices to expose the mortgage security, nor has there been a big increase in unemployment to raise the default rate.

I’m delighted that David Cameron has committed a future Conservative government to supporting the supply side of the economy. Labour’s policy of only supporting demand has created problems which are starting to surface and would have surfaced sooner had it not been for the strength of sterling. When Gordon Brown was chancellor he put the concept of credit ahead of productivity. Now however Brown is hpefully starting to realise that an economy can’t be run on tick forever, as those in the 1920s Weimar republic found out to their cost.

It is the Federal reserve policy under Greenspan and successor that has caused the problem in the first place. Their policy of squirting money at every problem has itself distorted the market and resulted in the excessive behaviour we are seeing the results of today. Your solution of squirting more money ( “pump liquidity” ) is rather like pouring petrol on a raging fire. It won’t put the fire out but it will keep the fire burning a bit longer.

The behaviour of the corporate sector is an entirely rational response to the economic climate set by the US fed - massive inflation in the US economy. It has resulted in the dot com bubble and most recently the housing bubble. We saw the DCom crash now we will see the credit crunch.

JR: “The Bank of England still thinks its problem is fighting inflation (0.2% below target currently) rather than stabilising the banking and property sectors.”

As I understand it, the bank of England is legally obliged to follow this policy.
Although it is rather amusing that one organ of the state (The BOE) is obliged to counter what the other, the treasuary is doing. It is rather like two people in a life boat, one is hacking at the planks while the other is bailing the water with a teaspoon.

If it wasn’t so tragic.