Jeremy Warner's Outlook: Crosby: not what Government wanted to hear

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The Independent Online

Sir James Crosby's interim report on the mortgage crisis is long on analysis of the problem but almost wholly devoid of meaningful solutions, or at least ones he thinks might do any good.

For a Government that faces re-election within the next two years, it makes for particularly depressing reading. Broadly summarised, Sir James' conclusion is that the situation is bad, unlikely to get any better for at least three years, and there's virtually nothing that can be done about it, other than stand on the sidelines and watch it unfold. To Alistair Darling, our already beleaguered Chancellor, it must read like a counsel of despair.

To be fair on Sir James, his brief was to find "market-based" solutions, and it is perhaps the case that there are none. The problem is born not of public policy, but out of market failure. If the markets knew of a solution, they would already be applying it. Unfortunately for the Government, markets will always want to deal with an unsustainable boom by having a matching bust. It's not what the Chancellor wants to hear, but Sir James' central view is that we are going through a "necessary" adjustment that must be allowed to run its course.

Had Mr Darling asked the famously hair-shirted Mervyn King, Governor of the Bank of England, to conduct the review, he could scarcely have got a more unpalatable result. We already know Mr King's views: for reasons of moral hazard, the markets must be allowed to take their punishment, however uncom-fortable it might feel to ordinary householders. Sir James seems to be of much the same opinion.

In Sir James' view, the current shortage of mortgage finance will persist through 2008, 2009 and 2010, and he suspects that already depressed forecasts for net new mortgage lending during this period will prove optimistic, perhaps significantly so. Ergo, house prices and consumption will remain depressed for years to come.

Sir James explores the various options for government intervention, only largely to reject them. Creation of a US-style agency which carries an implicit or explicit government guarantee? In Sir James' view, it would not be right to apply last century's solutions to this century's problems, and in any case, it would take far too long to set up. Other forms of government support for the mortgage securitisation market which would transfer credit risk from investors to taxpayer are similarly rejected as likely to distort incentives and create moral hazard. Nor is Sir James too keen on the halfway house approach of extending the Bank of England's Special Liquidity Scheme so that it might apply to new mortgages as well as old ones. Again, Sir James reckons it would carry significant legal and fiscal risks while perhaps also prolonging the transition to better functioning markets in the long term.

So what can be done? Ominously for the Government, Sir James says he reserves the right to recommend that ministers do nothing at all, on the grounds that any such intervention would do more harm than good. On this prognosis, he may well be right. There's no mess quite so bad that government intervention isn't capable of making even worse. Regrettably, the priority of the ballot box dooms the Government to at least trying. But whatever it ends up doing, nothing will happen before the autumn. In the meantime, the housing market continues to wither on the vine.

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