So far we have escaped a US-style sub-prime meltdown. We may never see anything so bad, but it's going to be a close call. House prices are falling at a faster rate than the late 1980s-early 1990s slump. House prices generally relate to highly-geared assets (mortgages on homes). As prices fall at rates not seen since the 1930s, equity is vanishing with a rising tide of negative equity the result.

As long as people stay employed and can carry on servicing their debt, they can sit tight and wait for prices to recover to restore their equity. But with more people losing their jobs and the cost of servicing the huge debt pile already taken out, such as credit cards and other unsecured credit, mortgage arrears and repossessions will rise.

Optimists point out that although repossessions have started to rise, they're still way below the levels endured at the height of the last recession. But that's because we're still only at the beginning of this recession.

Over the next 18 months banks are going to face a rising tide of bad debts, arrears and repossessions. The worst hit will be those lenders who have focused on high loan-to-value lending, the buy-to-let market and the self-certification mortgage market where borrowers became their own credit controllers. Another source of worse-than-usual bad debts will come from the large loan books that some high street lenders bought from specialist rivals in a bid to bulk up in the boom.

All of this brings me back to Bradford & Bingley. Assuming it succeeds in raising its £400m capital injection from shareholders it will be, in the happy words of its executive chairman Rod Kent, one of the best capitalised banks in Britain. Phew, because it's going to need to be. Given the profile of its lending (buy-to-let, specialist loan books and so on) it could be one of the worst hit for arrears and further losses and write downs on bad debts. It's going to need the capital it's raising now, not to give it a chance of weathering the onslaught to come, but to give it breathing space until a takeover can be agreed or a run off of its business arranged.

The only engineers you need in the house building trade these days are financial ones. Barratt Developments has sold 43pc less houses in the past six months than the corresponding period in 2007 but is still geared up with debt and a workforce designed for the boom.

Mark Clare, Barratt's chief executive who was finance director of Centrica, has been busy with his financial tool box trying to reinforce the company's financial foundations in the hope that it will be left standing come any recovery. The subsidence showing up on Barratt's balance sheet has been spreading alarmingly and, without yesterday's urgent action, the company's future would have been questionable. It's managed to survive without raising fresh capital but shareholders should put the champagne on hold.

On the debt, it has agreed a refinancing package which gives it breathing space. But this comes at the cost of its interest burden soaring by a third. Paying down this debt now becomes a priority so it must convert shareholders' assets for cash and then pass the cash to the banks. For the foreseeable future, Barratt is working for its banks, not shareholders.

The company's Wilson Bowden Developments will be sold and more cash will be freed up by sacking 1,200 staff. It's also going to stop buying land (which for a house builder isn't great) to conserve cash. But more radical action will be needed.

Its portfolio of starter homes could probably be sold off in bulk to a large buy-to-let specialist because first time buyers can't get mortgages any more so this part of Barratt's market is dead anyway. But this is not a seller's market and shareholders are witnessing a fire sale of their assets to keep the banks happy.

However, all this comes at the start of a possibly prolonged downturn. The shares' 15pc rally yesterday seems a rather premature form of house party.
Bankers want more help from Bank of England
It didn't take the banking sector long to return to the Bank of England asking for an even more special Liquidity Scheme. With the ink barely dry on the initial scheme designed to inject £50bn into the credit market, banks now want the rules loosened so it's easier to borrow from the Bank's scheme.

Some banks that have been downgraded by the rating agencies, or who are at risk of a downgrade, may be finding it particularly hard to parcel up loans into the sort of triple-A rated bonds that the Bank wants in exchange for providing cash. Some want to be able to use new mortgages written this year as security, rather than just last year's vintage or before.

The Bank's scheme cannot yet be counted a success because inter-bank rates remain high, although this is for a number of reasons. But neither can it be counted a failure. The mortgage market is under pressure but that should not be an excuse to help banks back towards the profligacy that's got the economy in such trouble. Those who have over-lent must learn their lessons, just as those who have over-borrowed.



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