It appears the Bank of England is close to rushing in and saving the day.

According to the FT, a plan to allow the Bank of E to swap government loans for mortgage debt is set to be announced.

It works like this: mortgage debt is supposedly low risk, but banks can’t borrow against it. They can, however, borrow against government bonds. So the Bank of England will take on their mortgage debt, and offer government bonds in return. The deal will last for one to three years.

The central bank will only be taking on mortgages from before December last year. So it is trying to avoid the criticism that it is subsidising lending.

Gordon Brown is reported to be in favour of the idea.

It is of course quite similar to plans hatched in the US recently, the big difference is that the US is further into the economic downturn than the UK. So, by effectively getting ahead of the curve, is possible that such a plan could stop the UK from mirroring the US downturn too closely.

This action does however raise important issues.

The Bank of England really does need to take action like this to stop recession, but, at the same time it will in effect be taking actions to deliberately stop a house-price crash.

This in turn raises the question, why didn’t the government deliberately take action to try and slow down the housing market boom in the first place?