If we don't get our house in order, the bailout will backfire

If your car is running out of fuel because the petrol tank is leaking, you don't pump in more gas.

Whether it is the $700bn Bernanke/Paulson plan or the much-vaunted £500bn Darling/Brown project, both will fail because both address the symptoms rather than the cause.

Despite numerous commentators saying the crisis stems from an under-capitalisation of banks, leading to a freezing of liquidity and a collapse in inter-bank lending, they can't see the wood for the trees. It is the precipitate and intensifying fall in the asset base on which all loans are ultimately written that is the cause of the present global meltdown. And the principal secured asset on which all outstanding global loans are written is housing.

Both the UK and US governments keep saying they are buying assets that will ultimately recover the public money expended. This assumes their own policy will work and the asset value underlying the price that authorities are now paying for this bad debt will not decline further.

But nothing we're doing in the US or the UK is stopping, or is designed to stop, the vertiginous collapse in house prices. Last month the Halifax reported a fall in UK prices of 13.4 per cent, the highest yearly drop ever recorded and the eighth month of consecutive decline. These falls are led by inner-city buy-to-let blackspots where the BBC identified yearly falls of over 17 per cent in, for example, the canal quarter in Birmingham.

Repossessions are set to rocket: more than 300,000 UK households are now over three months in arrears and Shelter reports a 160 per cent increase in enquiries over court action.

What will happen if present trends continue? Quite simply, double the amounts needed to finance the US and UK bailouts. Present policy is madness and is destined to fail. Indeed, after both bailouts, the Dow Jones suffered its biggest ever one-day fall and Libor remained at its dangerously high level.

We need to secure the real rather than the speculative economy. This requires a two-stage reversal of current strategy.

First, we need to create the conditions for a hugely indebted nation to repay its debts. Rates have to go as low as possible as soon as possible. Due to the patently unwise independence of the Bank of England, where fiscal and monetary policies are divided, the Government's recent attempts at fiscal expansion are yet another wildly ineffective use of public money, as they run counter to the Bank's deflationary fixation. And in addition to enabling people to pay their mortgages, we must ensure the deeply in-debted stay in their homes.

Second, we must drive down long-term interest rates. At the moment the Government is piling on debt that increases the risk for investors, so the Treasury must offer higher yields on its long-term bonds. But interest rates on the high street are tied to bond yields – the higher the one, the higher the other.

Unless we change policy and create the conditions for repayment of debt (now £1.5 trillion) and economic recovery, we'll spend our way into the biggest depression since 1932.

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