The national sickness

The UK obsession with housing is never far from the surface. On the day that the government had to nationalize a huge chunk of our banks on account of an overblown property bubble, the Prime Minister is again ramping up the market.

According to the BBC, Gordon Brown believes that UK has "pent-up demand" for housing. He added "UK problem was not shortage of demand for homes at the right prices but a shortage of mortgages at the right prices for people to buy. So the problem appears to be a lack of credit, not a huge overvalued market where prices are at unsustainable multiples of income.

These comments were ominous given today's announcement about the treasury recapitalisation plan. As a condition of accessing funds, Banks must maintain their credit growth levels consistent with 2007 for at least three years. So it would appear that Brown wants a return to the crazy days of the housing bubble.

This would be madness. In the best case scenario, the UK has just dodged a systemic banking crisis that threatened to obliterate every high street bank. This catastrophe was avoided only through the government pumping in massive amounts of taxpayers money into failing banks.

The crisis also forced the Bank of England to reduce policy rates and effectively make them negative in real terms. The BoE also pumped in huge amounts of liquidity to prop up banks that were in danger of total collapse. In the long run, negative real interest rates will only serve to distort savings and investment decisions and if they persist long enough, we should see inflation take off.

It is just possible that in these circumstances that a wave of hysteria and optimism could grip both the banks and the UK public. Another surge of credit could quickly lead to renewed house price inflation, despite the unprecedented lack of housing affordability.

However, it won't take long for the banks to quickly find themselves in trouble again. However, we won't be so lucky a second time. A government funded rescue is unlikely to save us from a devastating and inevitable banking collapse.