Average mortgage loans down 19 percent

For me, it is the contradictions that I find really irritating.

For example, we know that today's crisis is due to bankers handing out huge risky loans to overstretched borrowers. In extreme cases, loan to value ratios exceeded 100 percent.

We also know that this huge surge in credit bid up house prices, and encouraged speculation, with the buy to let scam being the pinnacle of this financial idiocy.

Last week, we heard from a chastened Financial Services Authority, who told banks that there was going to be no more Mr. Nice Guy. From now on, the FSA are going to get serious about bank regulation.

Then, we have the chart above. It suggests that the banks might have actually learnt something in the last six months. The average size of a mortgage loan is down 19 percent in the last six months. This decline is far quicker and deeper than the decline in house prices. This implies that loan to value ratios are becoming more prudent.

Yesterday, we learnt that the UK is in recession, a fact that was accompanied by the usual demands to cut interest rates. Moreover, the cause of the GDP decline was the housing crash. In particular, the sudden contraction home equity loans has cut back consumption, coupled with a growing awareness among homeowners that they weren't quite as rich as they thought.

Here we come to the contradiction. In order for a rate increase to work, the house prices would have to start to rise again. However, this implies rising debt levels, higher loan to value ratios and higher banking sector risk.

This doesn't sit easily with the FSA's promise to tighten up regulation. If banks are to improve the quality of their balance sheets, risky lending has to stop. Cutting rates while banks are cleaning up the mess strongly suggests that rates won't actually do much to boost output.

I don't wish to trivialize the pain of a recession, but the UK economy has entered a painful adjustment. To their credit, banks are beginning to understand this, and they have taken the first tentative steps towards recovery. Households are also starting to understand that personal debt levels need to fall, and consumption is falling back to more sustainable levels. This has inevitably led to a fall in output.

Even if rate cuts did work, with credit increasing, the housing bubble reigniting and output recovering, inflation would pick up. Somewhere down the road, the BoE would have to choose between a renewed round in rate hikes, which could re-ignite banking sector difficulties, or it would have tolerate permanently higher inflation rates.

What we need now is patience. We need to let the economy recover. It will take time for households to cut back their debt levels, and for banks to reduce their leverage ratios and clean up their balance sheets. What we don't need right now is some desperate short term measures that will interrupt this recuperation.

The only people who haven't "got the memo" are journalists and politicians.