Bailing out is not the best option

Government intervention in the financial market seems to be based more on political damage limitation than it does on the workings of a free market.

Take mortgages. It is obvious to most that there is turbulence in the market, caused mainly by the collapse of the US sub-prime sector, but equally by the off-balance sheet activities of some UK lenders, most notorious of all Northern Rock, and the subsequent retrenchment of lenders.

However, there is very little evidence of a collapse of public confidence in the mortgage market or indeed their willingness to borrow money.

Despite hysteria about negative equity, and the more-than-necessary publicity given to the fraudsters, all the evidence points to a buy-to-let market that is still sustainable and first-time buyers who are kept out of the market by prohibitive lending rates, not a willingness to buy.

The other fear raised quite often by the tabloid press is that of massive hikes face by those borrowers coming off two-year fixed rates.

Of course, that is a real concern. But housing has a special place in the psyche of the average Briton far beyond the basic explanations of behavioural finance.

The average borrowers will be quite willing to cut-back on much of their leisure spending in order to meet their mortgage repayments.

The threat by Alistair Darling to pump more of the tax-payer's money in to the mortgage market, over and above what the Treasury has al ready put behind Northern Rock, is highly questionable.

The market has a long record of sorting itself out, even thought there are those who will point to isolated cases of government intervention which might have changed events for the better.

The reality is that there are others, apart from Banco Santander, prepared to take advantage of the numerous opportunities current market conditions are throwing up.

So, if Sir James Crosby is suggesting that government should further underwrite any shortfalls in the sector, over and above what it already has, may be barking up the wrong tree.

A better suggestion is reforms of stamp duty legislation, a re-introduction of Miras and further fiscal incentives to kick start the housing market may be better in the long run.