May 2 (Bloomberg) -- Former Bank of England policy maker Charles Goodhart said central bank actions have helped the global financial system defend itself against the ``great shock'' caused by the seizure of credit markets.

``Now central banks have averted the worst,'' Goodhart, who sat on the bank's rate-setting committee from 1997 until 2000, said in an interview on Bloomberg Television yesterday in London. The Bank of England's ``special liquidity scheme is a great advantage and will be an enormous help.''

The U.K. central bank said yesterday that its plan to swap government bonds for mortgage securities will help restore confidence in Britain's banking system. The U.S. Federal Reserve today expanded its cash-loan auctions for banks by 50 percent and increased its currency swaps with the European Central Bank and Swiss National Bank to help ease money-market strains.

``This is not the biggest crisis since the Great Depression,'' said Goodhart, a professor at the London School of Economics. ``Nevertheless, we have all had a great shock.''

The Federal Reserve will auction $75 billion at each of its bi-weekly auctions of 28-day loans, starting at its May 5 sale, it said in a statement today. The Fed's currency-swap arrangement with the ECB will rise by two-thirds to $50 billion, and it will double with the SNB to $12 billion. The Fed also widened the collateral it will accept for Treasury loans.

Risk Appetite

The ``most likely'' outcome for financial markets in coming months is that confidence and risk appetite will return ``gradually,'' Bank of England Deputy Governor John Gieve said yesterday. The central bank pledged last week to meet demand for its bond swap even if it exceeds an estimate of 50 billion pounds ($99 billion).

Goodhart said a good point of comparison for the current turmoil is the period of 1972 to 1975, when stock markets fell by two-thirds. He said that was still worse than now.

``There are large parts of the financial system that are just nowhere near in as much difficulty as that,'' he said.

The period of 1990 to 1992, when the U.K. was in a recession, is the ``closest analogy'' to the current predicament faced by the British economy, Goodhart said. ``That wasn't too bad of a crisis,'' he said.

Goodhart's prognosis is more sanguine than that of David Blanchflower, a Bank of England policy maker who this week called for ``aggressive'' action by his colleagues to avert a recession and said that house prices may fall by a third. Home values posted their first annual drop in April since 1996, HBOS Plc, the U.K.'s biggest mortgage lender, said today.

Rate Decision

The central bank, which has cut the benchmark interest rate three times since December, will keep it unchanged at its decision on May 8, Bloomberg's survey of economists shows.

Goodhart is a member of the LSE's Financial Markets Group, a research institute founded by Bank of England Governor Mervyn King. He devised ``Goodhart's Law,'' which holds that targeting monetary aggregates as a surrogate for inflation is futile.

Goodhart predicted that a repeat of the current crisis is unlikely.

``Regulators always rush around trying to deal with fighting the last battle,'' he said. The crisis of ``2007 to 2008 won't recur. We don't need to fight that battle because the banks are so scared they are actually pulling in their horns.''

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; Hamish Risk in London hrisk@bloomberg.net.

Last Updated: May 2, 2008 09:27 EDT