Gordon Brown ... you have to admire his front

Poor old Gordon Brown, caught in an impossible situation of trying to fix the UK economy without actually admitting it was all his fault in the first place. Gordon of course is not the only culprit, but he is certainly guilty of encouraging the credit bubble, based on residential property, that is now so painfully deflating, with grim consequences for the UK economy. But one thing you can't fault Brown for is his barefaced nerve in attempting to exculpate himself. Clear away much of the wreckage and we have a dual problem, with one root.

Problem 1? Much of the fuel of our banking system over the last decade has been funds generated by securitised loans, the sliced, diced, repackaged and sub-prime mortgages on overpriced properties 'owned' by under-capitalised punters who from 2006 on have increasingly been defaulting on their mortgages. Result? Confidence in the products disappears, swiftly followed by confidence in the banks, meaning a drying up of trading. Result? Liquidity disappears.

Straight on to Problem 2. As liquidity disappears, so Joe Punter can't refund his mortgage as his fixed rate deal comes to an end. Or new buyers find that the super multiples of 5x earnings and 100% loans aren't there to haul them up to the elusive first rung of the ladder. So the market disappears and so prices tumble, exacerbating the problems with negative equity, and making it harder to hit the new, tighter loan-to-value requirements of the banks. You may have bought a flat at £200,000 on a £150,000 mortgage, but as the market price plunges to £175,000 you find you miraculously have an 85% mortgage rather than a 75% one.

And so the market and the wider economy deleverages and thus deflates. Now Brown has to work the impossible balancing act of trying to encourage people to spend their way out of the recession (for we truly have no option, whether it's you and I buying new cars or banks and companies buying financial products from each other, which is what our shift to quantitative easing is all about), while simultaneously urging prudence and frugality. Brown this weekend told banks they shouldn't be offering 100% mortgages anymore. That is, firstly, comical - has he looked in the marketplace for a 100% mortgage recently? If he can find one he's doing well, they've disappeared by default. Secondly, he is instructing the banks to remove the fuel that he needs to get the economy motoring again. And if he can resolve that conundrum, he's a smarter chap than the last 12 years of economic mismanagement would suggest.

But it goes deeper. Brown's lecture is staggeringly hypocritical when you realise that his 'economic miracle', the NICE decade that came in with Labour, was driven by a determined creation of the property credit bubble, masking the fact that apart from financial services and personal debt, Britain was increasingly not generating products, sustainable wealth or anything very much at all. For a superb and readable critique of the Brown timebomb, read Graham Turner's The Credit Crunch.