April 24 (Bloomberg) -- Here's the plan. Hokey-Cokey Bank bundles together its tainted 2007 mortgages and bakes an asset- backed bond. It hands that bond to the Bank of England in return for a bag of freshly minted U.K. government gilts. It then uses those shiny new gilts as collateral to borrow much-needed money.

What would you, as the treasurer of Hokey-Cokey Bank, do with that cash? Would you:

(A) lend it to eager first-time buyers Bob and Sue to purchase that apartment they want, even though every bone in your body tells you property prices are headed down, down, down?

(B) hand it to Tom, who also wants the apartment, except that he plans to rent it to Bob and Sue for less than he'll have to pay every month on the mortgage?

(C) scurry to the Hokey-Cokey vault as fast as your little legs will carry you, toss in the cash, lock the door, and tell your chief executive the liquidity problem is resolved and he won't have to beg the shareholders for fresh capital after all.

Hello? Am I missing something here?

There's more than a hint of disagreement between the U.K. government and its central bank about the motivation for allowing banks to unload their tainted mortgage debt. Chancellor of the Exchequer Alistair Darling freely admits that he wants to stimulate mortgage lending.

Housing Heresy

Bank of England Governor Mervyn King is trying to be more nuanced, claiming that his aim is to stabilize financial markets and prevent the banking crisis from damaging the economy. That's mostly because it would be heresy to confess that the housing market is dictating central banks' policy-making.

The plan probably won't work. Lenders are more likely to use the new source of central-bank cash to repair their balance sheets than to revive the mortgage market.

Housing costs have continued to climb even as the central bank has been cutting its key policy rate. The charge on an average new mortgage climbed to an eight-year high last month, while the Bank of England rate has dropped to 5 percent from 5.75 percent in December.

The U.K. move comes about a month after the Federal Reserve started accepting mortgage-backed debt in its Term Securities Lending Facility. Paul Volcker, who was Fed chairman from 1979 to 1987, gave his view earlier this month on the demerits of central banks buying mortgage bonds.

``A direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in times of crisis: lend freely at high rates against good collateral,'' Volcker told the Economic Club of New York on April 8. ``It tests it to the point of no return.''

Public Interest

King said this week he wants to ``take the liquidity issue off the table in a decisive way.'' He's trying to prevent any more institutions following Northern Rock Plc and Bear Stearns Cos. over the cliff edge, though he insists there isn't a bailout. ``The objective is not to protect the banks but to protect the public from the banks,'' he said.

The problem is, King has performed a U-turn by agreeing to buy mortgage debt.

``The provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behavior,'' King told the U.K. Parliament's Treasury Committee in September. ``That encourages excessive risk-taking, and sows the seeds of a future financial crisis.''

Risky and Reckless

The U.K. central-bank chief also said then that helping commercial banks salvage their ``risky or reckless lending'' is especially dangerous because it ``encourages the view that as long as a bank takes the same sort of risks that other banks are taking then it is more likely that their liquidity problems will be insured ex post by the central bank.''

There's nothing wrong with taking the Keynesian approach of changing one's mind when the facts change, and financial markets have clearly deteriorated in the past seven months. At every stage in this credit crisis, however, the U.K. authorities have flip-flopped, backtracked and reversed, leaving the distinct impression that they haven't got a clue.

Moreover, the Bank of England, which has been banging on about how transparency is key to thawing the credit markets, won't tell us for six months -- SIX MONTHS -- how much U.K. lenders borrow through the new Special Liquidity Scheme it announced this week. So much for sunlight being the best antiseptic.

By all means, be discreet about the identities of the individual borrowers to avoid scaremongering about their financial stability. Refusing to say how much new government debt has been created to grease the financial wheels, however, smacks of secrecy for secrecy's sake, especially when the central bank says the final bill could easily exceed the initial 50 billion- pound ($100 billion) amount.

It also suggests that HSBC Holdings Plc, Barclays Plc, Royal Bank of Scotland Group Plc and their peers don't trust the central bank to stop their names from leaking if it reports the borrowing totals. What a sorry state of affairs.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the reporter on this story: Mark Gilbert in London at magilbert@bloomberg.net

Last Updated: April 23, 2008 19:01 EDT