There is no magic wand to solve the housing crisis, warns Bank of England chief Mervyn King

Mervyn King yesterday warned there was no ‘magic solution’ to Britain’s housing crisis as he cautioned ministers against US-style bailouts.

The Bank of England governor acknowledged the City was in its worst state since the 1930s, but that pouring public money into the mortgage market was fraught with risks.

Gordon Brown is known to be considering extending government guarantees for mortgages in an effort to increase availability on the high street.

Mr King’s comments came as fellow interest-rate setter David Blanchflower predicted thousands of workers could be laid off every week between now and Christmas as the nation’s economic output dives.

He warned there could be a ‘horrible surprise’ lurking around the corner, declaring he had a ‘doom laden’ view of Britain’s outlook.

In equally bleak testimony to Parliament’s Treasury Select Committee, Mr King said Britain faced ‘testing times’ as incomes are squeezed and the economy flirts with recession.

He said: ‘The prospects for growth in the short run have deteriorated, and inflation has risen.

'Financial conditions are worsening and the banking system as a whole remains short of capital. As a result, credit conditions have tightened and lending is being restricted.’

The Treasury has been considering kick- starting the mortgage market by backing loans with public guarantees.

Labour is under massive pressure to act as house prices register their steepest falls for decades.

The number of mortgages approved in July tumbled to a record low of 33,000 as banks hoard cash rather than lending it out.

But Mr King said the notion that there was a ‘magic solution’ to this credit collapse was ‘an illusion’.

Heavy government intervention is a risky path to take, he warned.

‘What that would do is totally undercut the incentive of private sector banks to get their own balance sheets back in order.’

Mr King’s comments come only days after the U.S. government announced the effective nationalisation of stricken home loan providers Fannie Mae and Freddie Mac.

The White House’s move has prompted demands for similarly decisive state intervention by the UK Treasury.

Former Halifax Bank of Scotland chief Sir James Crosby is currently conducting a review for the Treasury considering ways of shoring up the mortgage market.

Mr King will unveil a new facility to help cash-strapped lenders next week, but he said the Bank can only offer a term salve to the industry.

The governor welcomed the fall in oil prices, saying they may curb inflation, but signalled there were still considerable barriers to near-term rate cuts.

Fellow Monetary Policy Committee member Mr Blanchflower meanwhile reiterated calls for aggressive cuts in interest rates, warning the UK economy was in a critical state.

Gains in unemployment could exceed 60,000 a month before Christmas, he warned.

• John Lewis yesterday revealed a 27 per cent slump in pre-tax profits to £108million in the first six months of the financial year.

The retailer warned of further pain ahead but said it would still be opening new outlets in the downturn.

The non-savers

Half of all workers will be forced to work into their late sixties or even their seventies because they are failing to save enough money, research reveals today.

Investment firm Scottish Widows found millions are not putting a penny aside towards their retirement, while others are saving money but not nearly enough to pay for a decent pension.

An ‘adequate’ amount is classified as putting aside 12 per cent of gross salary, including employer pension contributions, from the age of 30, yet the average being saved is 9 per cent.

Ian Naismith, head of pensions at Scottish Widows, said: ‘It is vital that people who are still working realise the difference between wanting a good retirement and actually planning for one.’

Brown: Blame me

Gordon Brown took personal responsibility for Labour’s woes yesterday, as fresh evidence emerged that he is heading for a General Election wipeout.

At his first press conference after the summer break he accepted that he was answerable for the economic downturn and the Government’s unpopularity.

‘I am the person who is in charge and I have got to take responsibility for what happens,’ he said, adding: ‘I do take responsibility for the economy.’

But in a message of defiance to his critics, he said: ‘We can take people through these difficult circumstances and that’s what we are going to do.’

A poll for Channel Four News suggested the Tories could hope for a Commons majority of 120 at the next election.