The government’s largesse with taxpayers’ money knows no bounds. Its latest wheeze is a sketchy plan to allow homeowners struggling with mortgages worth up to £400,000 to defer interest payments for two years. The idea is that a government guarantee of the deferred interest will deter banks from repossessing the homes of delinquent debtors, of whom there may be about 75,000 next year. That, in turn, will reduce demand for scarce social housing. But, aside from the fact that this scheme increases moral hazard by substantially reducing borrowing and lending risk in the mortgage market, it is misguided on a number of levels.

First, government intervention on this scale is unnecessary. Repossessions are a disaster for banks, who find themselves lumbered with often unsaleable property and high transaction costs. Lenders already have a strong incentive to reschedule payment terms for borrowers likely to set their finances in order within a reasonable period and generally do so. Second, the government guarantee of the deferred interest payment will be no free lunch for the banks: the more lending risks that the taxpayer underwrites now, the more tightly banks will be regulated in future. If government backstopping is extended to small business lending, the next logical step, the government may as well run all the banks itself.