The bare-faced cheek of begging bankers at Gordon Brown’s breakfast

Gordon Brown's breakfast this week with Britain's top bankers to discuss the mortgage crisis was, by all accounts, a dispiriting affair. Almost everyone round the table had played their part in creating the most serious financial crisis since the Great Depression.

Almost every bank and building society had done its bit to inflate house prices, offering crazy loans to people whose incomes they didn't verify to buy homes that commentators had warned for years were overvalued. Now here they were demanding a bail-out.

Of course, they didn't call it a bail-out. They wrapped it up in fancy financial jargon. What they wanted was the Treasury to order the Bank of England to widen the range of collateral it would accept at its repo auctions and extend the terms to up to three years.

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In plain words, they wanted to dump their dodgy mortgage assets on the government in return for generous amounts of taxpayer's cash. Help us out here, Gordon, they said, and we will get the mortgage market moving again, which will prop up house prices and stop everyone writing beastly things about you.

This is bare-faced cheek. No one denies that conditions in the housing market are ugly. But the current hysteria is over the top. The fact is that on even the gloomiest survey by the Halifax, the average house price is still only a little below where it was a year ago. Does anybody really believe that is such a bad thing? No one expected prices to rise for ever. Meanwhile, unemploy­ment is at its lowest level since 1975, average earnings are rising 3.7%, even the uber-bearish IMF predicts the UK economy will grow 1.6% this year.

The real danger in this market is not that a dithering Brown does too little, but that a desperate Brown does too much. Talking to people who were at the prime minister's breakfast, it's clear that more than one thought the bankers were bluffing. I'm told that HSBC boss Michael Geoghegan told the PM it would be wrong to bail out the banks. Hats off to him. It's not the government's job to prop up house prices or any other market. The mortgage market will only start functioning properly again if house prices fall and lending standards improve to a point where investors feel comfortable coming back to the market. Bailing out bad banks not only prolongs the crisis, but penalises banks like HSBC that did not get caught up in the mortgage frenzy.

At the very least, Brown could have refused to help unless he got something in return. For all their bluster, not one had seen fit to scrap bonuses or dividends this year, or raise new capital. And since none of the bank bosses had paid for this mess with their jobs, how could he have any confidence they wouldn't take his money and go and relieve themselves of it against the nearest wall? "I might let your banks have some money," he could have said, "but not while you are running them, and not unless you make yourselves more creditworthy in return." Instead, Brown struck a different bargain. His condition was that the banks do more to help first-time buyers.

I find this extraordinary. One well-known City figure told me this week that, by his calculation, house prices in parts of the southeast last year reached the same multiple of earnings as Tokyo property at the height of the boom. He then told how a friend of his had bought a Tokyo penthouse at the top of the boom, which even now, nearly 20 years later, is only worth 20% of what he paid for it.

At this stage in the cycle, first-time buyers should be counting their lucky stars and praying for further house price falls, not being used as cannon-fodder by a desperate prime minister who thinks he can single-handedly keep house prices up.

The most depressing aspect of all this is that Brown has been handed a free pass by the Tories, who have spent the last week urging him into precisely such a "collateral swap facility". Shadow chancellor George Osborne has clearly had his ear bent by the same bankers, so that we now have the depressing spectacle of the supposed party of sound money urging a socialist prime minister to undertake a major bail-out.

That's bad news for Mervyn King at the Bank of England, who now finds himself isolated as he weighs up the interests of taxpayers against the demands of a desperate government, opportunistic opposition and rapacious bankers. Last month, he set out two clear conditions for any bail-out. He said any collateral swaps had to take place on the basis of a transparent price and should expose the taxpayer to no credit risk. It is hard to see how those conditions can be squared with the kind of demands the bankers are making. After all, many of the assets they want to swap don't even have a price right now. And who knows what will happen to house prices in three years?

Not surprisingly, King is now reported to have come up with a scheme, although the details are still to be agreed. No doubt a furious debate is going on behind closed doors. But the share price reaction of the banks tells you who the markets reckon will be winners. All of them soared on news that a deal was in the offing. And if the banks are the winners, it is a fair bet the rest of us will ultimately be the losers.

Simon Nixon is executive editor of Breakingviews.com