The economic crisis that has enveloped the ‘developed’ world has it origins in the US mortgage market – or to be more accurate the ‘boom’ in the housing market and the inevitable ‘bust’ that followed it. Symptoms of the ‘boom’ included consumers drunk on irresponsible lending by the banks, on properties that they could ill afford, and borrowing well beyond their means. America has been a scapegoat, as many lenders in the UK behaved erroneously on the FSA watch. Self declaration of income only encouraged unaffordable loans. Plenty were warned but no one listened.

Over the past few days, Harvard economist Robert Shiller has been in the UK. Shiller is a Harvard economist who predicted the dot com bubble burst and the current mortgage crisis. He has been meeting with, amongst others, Gordon Brown and Mervin King to offer his perspective on the lending crisis and how it can be resolved.

There have been similarities between the reactions of the UK and the US to date. For example, the recent cut in interest rates to 2% by the Bank of England comes at a time when the Federal Reserve is set to slash borrowing rates to zero. Our transatlantic cousins are generally seen as being further through the ‘bust’ period than us, and many economists predict it will only be a matter of time before the UK interest rates are at an unprecedented 0%.

Remortgages and mortgages should track the same borrowing formula. I.E. if a bank borrow at libor they lend at libor plus. If they borrow at base, they lend at base plus. Mortgages with rate spikes are not needed, and long term fixed rate mortgages as per America should be encouraged. All lending should be regulated by one regulator.

‘Flash Gordon’ Brown was hailed as a superhero and saviour of the economy on both sides of the Atlantic when he came up with the bank bailout plan, but this has had intangible effects for the average homeowner and consumer to date.

There have been signs in recent days that the Bank of England is turning to increasingly drastic measures (a la USA), in a bid to get banks lending again. Alistair Darling recently announced that he was looking to implement the recommendation in the Crosby report to guarantee securities backed by new mortgages. This follows the Federal Reserve’s announcement that it will purchase half a trillion dollars in mortgage backed securities in the States. This is a great idea. It moves the problem cases to a new body who have to have the ability to resolve unaffordability, reduce balances, extend term etc, otherwise it is still a repossession ,but by a different institution. Any regulated lender should have access to the scheme.

At the end of the day, the US and UK economies are different animals. The UK economy is reliant on property and the banking system. The US has industries such as manufacturing to fall back on. If channels of lending are to open up again, we need to take a ‘back to basics approach.’ This means that lenders, brokers and borrowers all take their fair share of responsibility, and accurate and proper criteria is applied when gauging the affordability of loans. Whether secured, unsecured or mortgage based, all lending must be centrally regulated, rules based, and with a zero tolerance (not ineffectual fines) for offenders.