Even UK guarantee can’t stop housing crash

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: out of favour,” Bank of England governor Mervyn King told parliament this week.

And even if we all agree to forget recent experience with securitisation, there is the issue of who exactly is going to buy these guaranteed bonds, and who will buy all the houses these loans will fund.

The idea that there are real money or central bank investors out there who will pay a great price for these bonds is not supported by the evidence. Look at the United States, where the government has been slapping government guarantees, or wink, wink “implicit” guarantees on all sorts of financial paper. Goldman Sachs, which used to borrow on its own name, this week sold $5 billion of bonds under a Federal Deposit Insurance Corp guarantee. The bonds paid about 200 basis points over equivalent government bonds.

That’s crazy, I hear you say. To paraphrase Keynes, the markets can stay crazy longer than you can stay solvent.

Or look at paper issued by Fannie Mae and Freddie Mac, which are under government conservatorship and enjoy an “implicit” guarantee.

Their bonds have done so stunningly badly in recent weeks, as foreign central banks deserted them in droves, that the US government was forced to go in and buy them up themselves.

My best guess is that, even with a fat premium, the world will have all it can handle of sterling denominated British government risk in the coming years.On the other side of the equation, you have to wonder which buy-to-let investor or potential house buyer is out there who is a) a good risk, b) possessed of a 20% down payment and, c) willing to buy an asset that is losing 2% of its value a month.

So, it’s looking like the fall in British house prices will be deeper than expected, and probably deeper than deserved. If you look at the US experience where a higher percentage of loans were securitised and thus tended to end up not on bank balance sheets, that is bad news for the banks.

Ask yourself what would happen to Britain’s banks under similar circumstances. It might only be as bad as the 1990s, but it could be worse.

Bank liabilities in the United States are about 20% of the size of the economy. In Britain, the figure is 285%.

Ask yourself then what might happen to Britain itself.