Later this week, Mervyn King, governor of the Bank of England, is due to publish his consultation paper on plans to enable the banking sector to access extra liquidity once the Special Liquidity Scheme ends on October 21. This is expected to impact on subsequent Government policy.
The aim of the Bank of England report is to advise on short-term liquidity insurance that will “smooth the adjustment of financial institutions hit by unexpected shocks”. The Special Liquidity Scheme has helped banks and mortgage firms to keep lending through the crunch.
However, Barnett said: “Action by the US Treasury to shore up the US housing market by effectively underwriting the struggling mortgage giants, Fannie Mae and Freddie Mac, will help to release much-needed funds back into US mortgages. However, it is vital that our own Government takes steps to assist in freeing up the UK capital markets.
“There is still a strong demand from people wanting to buy and sell property in the UK and the danger is that demand will just build up until mortgage lending becomes more readily available.
“As the months go by, assuming there is no decisive action from the Government, a potential time-bomb situation will emerge. When funds are eventually released, perhaps a year's worth in one swoop, the property markets will witness a considerable escalation of property prices within an unacceptably short space of time.
“In light of this, I believe it is incumbent on the Government to follow the example set by the US - to take firm control of the situation and put in place effective measures that will manage and protect our mortgage markets for the benefit of the whole economy.”
