Mortgage approvals up

Mortgage approvals are unquestionably up. In February, 38,000 home buyers persuaded their banks to hand out a loan. Approvals are now at their highest level since last May.

However, does this number represent the bottom? As the months roll forward, will we see mortgage approvals continue to recover? Possibly yes. Lending could pick up quickly. Suddenly, I am feeling slightly nauseous. This might be the beginning of something really nasty.

Over the last six months, the government dispensed unparalleled levels of state aid to the banking system. While the recapitalizations were essential, the guarantees could set off a sudden gushing torrent of lending. It is, after all, precisely what Brown and Darling would like to see.

At the same time, the Bank of England slashed interest rates to zero. I said at the time, it was an unnecessary over-reaction. Now I think it might be worse than that. For all practical purposes, the bank rate has now become totally detached from the rest of the economy. If lending does accelerate, the Bank of England has no effective means of controlling credit growth.

Mervyn King might also be waking up to the danger. Already he is back tracking on the quantitative easing. Other members of the MPC are warning that should inflation take off, rates might have to rise awfully quickly. Still, I am not sure if they really mean it. After all, inflation would eat into those oppressive household and public sector debt ratios.

The serious point here is that the Bank of England and the Treasury may have enormous difficulty in unwinding the policy errors of the last six months. It will be hard to withdraw those generous guarantees, eliminate all that excess liquidity and hike interest rates high enough to re-establish monetary control.

In the meantime, the UK economy continues to spin around in the chaotic and incoherent policy framework established by Brown, Darling and King.