DEPRESSION

Now the banks are forcing everyone to remortgage at a higher rate and demanding large deposits.Im thinking this is going to be far, far worse than the housing recession of 1990-92. Fuelled by irresponsible bank lending, UK house prices nearly tripled in the decade to 2007 - a more lunatic rise even than in America. British prices have been running at nearly eight times average earnings against a historic average of 3.5. This was never going to be sustainable.

But right at the moment the bubble burst, in August 2007, a combination of related events conspired to turn this boom into an epic bust that is likely to consume the British economy and lead to a depression. You may think the credit crisis is over, but the real crisis is just beginning.

What can the government do? Well, Gordon Brown thought he could revive the market by in effect handing £50bn of public money to the banks through the Special Liquidity Scheme and by leaning on the Bank of England to cut interest rates. Not so. The banks took the £50bn in Treasury swaps in April and promptly put mortgage rates up even further.

Then in May, Mervyn King, the governor of the Bank of England, announced that there were likely to be no more cuts in interest rates this year because of rising inflation.

Tommorow we will see? but Im not optimistic.

This caused apoplexy in No 10. Brown wanted King to emulate Ben Bernanke of the US Federal Reserve, who slashed rates from more than 5.25 to just 2 per cent in eight months. But King stood his ground, and is right to do so. As anyone who goes to the shops knows only too well, the cost of living is rising faster than at any time in the past two decades. Cutting interest rates now could start 1970s-style hyperinflation.

There has been much debate about the causes of the recent global inflation in commodities, but in the end, in the circular world of economics, it all comes back to housing. It was the attempt by the Federal Reserve to revive the US housing market that ignited the current commodities boom. Its that simple.

It hoped that slashing interest rates below inflation would encourage people to put their money back into houses. It didn't.

Instead, the big investment houses, the pension funds and thousands of in dividuals ploughed their cash into oil, food - anything that looked as if it might become scarce. Roughly 60 per cent of the recent increase in the cost of oil is down to speculation. Yes speculation! Oil Futures etc !

In the US, cutting interest rates has actually made house prices fall faster. Pyramid of credit
The recent house-price boom in Britain has also been fuelled by immigration, much of it from Poland. With the British economy weakening and the pound falling in value, however, many eastern European migrants are returning home. There is still a shortage of houses in Britain, but we are about to find that the shortage is not as great as we thought.
Are falling house prices a bad thing? All things being equal, a return to sanity in the housing market is good for everyone, even estate agents. But we are facing a serious economic dis location here, not just a correction.

It was brought about by the astonishing short-sightedness of central bankers and politicians in Britain and the US who kept interest rates artificially low for more than a decade. A huge inverted pyramid of credit was built on top of the expectation of yields from British and US mortgages. Believing that house prices would rise for ever, and that even if they faltered the Bank of England would cut interest rates to reinflate the bubble, the banks began to lose any sense of financial risk, and started to relax credit standards and lend irresponsibly.

Private-equity firms were allowed to borrow huge multiples of their real assets. Banks started to hide their lending in off-balance-sheet devices such as structured investment vehicles.

In Britain, homeowners are seeing the value of their properties fall at about £2,000 a month at the same time as the cost of living is rising and their wages and salaries are stagnant. Deluded by house prices, British consumers borrowed and spent like there was no tomorrow.

Unfortunately, tomorrow has arrived and consumers are sitting on £1.4trn of debt, the highest for any country in the world. People can no longer defer their loans by remortgaging their properties, and the banks are demanding cash upfront.

In the past two months, many consumers have taken out huge one-off credit-card loans, which explains the paradox of recent unsecured lending going up as spending goes down.

Shelter has reported that at least a million people are putting mortgage payments on their credit cards - the height of economic madness.

The government is already overdrawn apparently and unable to spend its way out of impending recession.