Iain Macwhirter on housing crisis

They still don't get it. A year into the credit crunch and with house prices crashing, the government is still trying to "help first-time buyers onto the housing ladder" in order to "help revive the housing market". The last thing the government should be doing right now is encouraging young families to take on big mortgages.

UK house prices are down 11% this year already and with the International Monetary Fund forecasting further steep falls, the government is simply luring people into negative equity. It should be advising first-time buyers to wait until the market stabilises before they even think of buying a house.

Using young families to prop up falling prices is morally objectionable and economically illiterate. House values have to fall to restore some balance to the financial system.

The contradictions in government policy are glaring. Ministers promise "affordable housing", yet the minute house prices begin the long slide to affordability, they look for ways to make them unaffordable again. They don't really want to help first-time buyers, of course; they want to help the banks, the mortgage lenders and the construction industry which are paying the penalty for their greed and irresponsibility during the boom years. They are the people who are calling for stamp duty holidays and interest-free mortgage accounts to get people buying again, to make prices go up, and bolster the value of their worthless mortgage bonds.

We have already paid a huge price for taking their advice. In April, the chancellor, Alistair Darling, handed £50 billion of our money to the UK banks in exchange for their dodgy mortgages. The banks had been complaining that they couldn't lend to first-time buyers because they lacked liquidity. Well, they got it - oceans of it - and of course it didn't make the slightest difference. This was an irresponsible use of public funds, as were the billions pumped into the bankrupt Northern Rock.

Last week the government had to pour £3.4bn into the nationalised Northern Rock because the bank is now losing hundreds of millions on its supposedly rock-solid mortgage book. They should have seen this a mile off. As this column pointed out last September, Northern Rock had been handing out tens of thousands of 125% loans to "help first-time buyers onto the housing ladder". Many of these borrowers are now in acute difficulty, facing default on homes they can't sell without a huge loss. Hardly surprising, since these "suicide loans" put first-time buyers into negative equity even before they got the keys.

Why did the government, the Bank of England and the Financial Services Authority not do something about this predatory lending? Northern Rock was still giving out 125% loans in February, six months after the credit crunch destroyed the bank's business model. Surely this was beyond irresponsibility and amounted to criminal negligence, and a failure of its duty of care to borrowers. Like many of the practices of the boom years, it should have been illegal.

The "mortgage famine" the government talks about is simply the market trying to correct the excesses of the decade of debt. We all became ensnared in the web of credit spun by the mortgage industry and the banks. The credit crunch is a direct result of the collapse of the house price bubble which was created by irresponsible lending. The financial wizards of the City and Wall Street bet that house prices would rise forever. They didn't.

Now the British banks are in very deep trouble. They have leveraged huge loans on mortgage assets which are falling in value. Now they are trying to find ways of shoring up their capital base so they don't go the way of Freddie Mac and Fannie Mae in America. Asking shareholders for more cash, seeking injections from sovereign wealth funds abroad. It will hurt, but so it should.

However, that is the banks' problem, not ours. We have so far given them up to £100bn to help them stave off a solvency crisis that was their own fault. It is not the government's job to subsidise bank lending. This cash should have been used, not to prop up an ailing and irresponsible financial system, but to try to help the British economy evolve into a new productive economy - one not based on ever-rising debt.

That £50bn in banking liquidity could have been lent instead to local authorities to build new council housing. This would have protected jobs, saved the building industry from collapse, created valuable public assets and helped the millions of people languishing on council waiting lists. They have little prospect of ever being able to buy a home, and anyway they should have the choice. Why should people have to take on massive mortgage debts just to put a roof over their heads?

The £27bn used to nationalise Northern Rock could have been used to finance fast rail links to bring Britain closer together and promote economic efficiency. That would have helped revive the engineering industry. Financial commentators all say the public finances are in no fit state to pay for innovative public projects. But if billions can be found to underwrite the losses of private banks, this argument is simply unsustainable. We cannot go on having socialism for the banks, and capitalism for the public sector.

As for the housing market, instead of stamp duty holidays the government should be helping homeowners facing huge losses as house prices fall, as they must. Now, in the US, most mortgages are "non-recourse" loans, which means they are secured solely against the property, with no further liability for the borrower. This means if you can't keep up payments you just hand the keys back to the bank and the debt is finished, even if the house is worth less than you borrowed. In Britain, you are still liable even if you hand the keys back, and you can be pursued for 12 years for any loss incurred by the bank when it sells the house.

Non-recourse would be a powerful disincentive to predatory lending, because the risk would lie with the lender, not the borrower. Why does the government not introduce these mortgages here? If the banks thought they would be the ones losing out if homes were repossessed they would think twice about 125% loans. The only people who would be hurt are the bonus-driven managers of companies like Northern Rock and all the other banks who pushed their loans like crack cocaine. It's time for a new thinking on the economy, instead of trying to resurrect a system that was morally indefensible, economically disastrous and politically ruinous.