Sept. 23 (Bloomberg) -- Prime Minister Gordon Brown should weigh whether to follow the U.S.'s lead and pursue a government- backed rescue of the U.K. mortgage market, Goldman Sachs Group Inc. chief economist Jim O'Neill said.

The British government should consider ``doing something to take over the activities of all those institutions that are just not in a position to lend here any more, because it's going to end up causing significant economic weakness in the U.K.,'' O'Neill said in an interview on Bloomberg Television.

U.S. Treasury Secretary Henry Paulson has proposed a $700 billion plan to stabilize the banking system by buying devalued securities from financial institutions, after seizing mortgage lenders Fannie Mae and Freddie Mac on Sept. 7. While the Bank of England last week extended emergency measures to help banks repair balance sheets, it stopped short of backing new lending.

``The U.K. government needs to consider carefully,'' O'Neill said. ``It can't do exactly the same but we need to even consider setting up something like a Fannie and Freddie Mac.''

Fannie was formed after the Great Depression and spun off in 1968, and Freddie was created in 1970. Paulson engineered their takeover after the biggest surge in mortgage defaults in at least three decades threatened to topple the government-sponsored lenders, which owned or guaranteed almost half of the $12 trillion in U.S. home loans.

Mortgage Lending

U.K. mortgage approvals fell to the lowest level in at least a decade in August as the slump in property values deterred buyers, a report by the British Bankers' Association showed today. Banks granted 21,086 loans for house purchase, down 64 percent from a year earlier.

The property market is ``on its knees'' as the global credit crisis intensifies, Rightmove Plc, the U.K.'s most-used real- estate Web site, said yesterday. The average asking price for a home fell 1 percent in September from a month earlier and 3.3 percent on the year, the report showed.

Bank of England Governor Mervyn King told lawmakers on Sept. 11 he opposes using the central bank to provide long-term assistance to banks to unfreeze lending and said the government would take on credit risk if it chose to do so on its own balance sheet. His stance on the central bank's role amounts to a resignation threat, the Sunday Herald reported on Sept. 14, citing an unidentified person at the central bank.

O'Neill said today that the U.K. is in a recession, and policy makers must cut borrowing costs to support the economy. The Bank of England kept the benchmark interest rate at 5 percent this month after the inflation rate climbed to 4.7 percent, the highest in more than a decade.

``If they don't do something more aggressive soon its going to be a big one,'' he said.

The risk of the world economy falling into stagflation -- a combination of slow growth and faster inflation -- has fallen to 5 percent from 10 percent, O'Neill said. He said the chance of a global recession is down to 10 percent from 15 percent.

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; John Dawson in London at hepburn@bloomberg.net.

Last Updated: September 23, 2008 06:40 EDT