Leslie says: "The current economic downturn is not a ‘classic’ recession: it is heightened by the collapse of trust in the private banking sector that places otherwise viable businesses and homeowners in a credit squeeze not of their making. Mortgage borrowers are not being passed on Bank of England base rate reductions and many homeowners approach the end of fixed mortgage facing punitive rates.

Such mortgage dire straits are undermining the wider housing market and the private banks are stifling its recovery because of their unwillingness to lend on reasonable terms again.

It is for this reason that we need to revive concepts of public sector banking once more. Not only is it right to have taken a stake in RBS, Northern Rock and Bradford & Bingley, but the Government should consider using these and other agencies in its ownership far more actively than is currently the case. The Post Office already offers savings and loan facilities, which could be extended to partial or full mortgage offers.

But the real opportunities for active public banking agency comes from those bodies closest to the customers, located in neighbourhoods and cities with which they are most familiar – local authorities.

Local councils were once in the business of mortgage lending on a considerable scale – 600,000 mortgages were in operation as recently as 1980. During the 80s the competitiveness of banks and building societies overtook the ability of councils to lend, who were simultaneously squeezed by a Conservative government crackdown which ideologically disliked public intervention in what it felt should be a reserved private market, together with a tightening on capital borrowing facilities.

While councils technically are still free to offer home loan mortgages, there are several obstacles. First, the 1985 Housing Act forces all councils to offer any mortgages it enters at a ‘standard national interest rate’, to be determined by the Secretary of State. This rigid anachronism assumes an inability on the part of councils to think through for themselves competitive terms of benefit to their residents – and it should be abolished. Second, councils should be actively encouraged by the Treasury to revive their mortgage role. Orthodoxy has accrued a reluctance to innovate in some local authorities and a Government green-light would give cover to the more conservative town hall treasurers.

The council tax payer could benefit in the long run if these loans – secured against the collateral of the property – saw the interest payments reverting to the council budget rather than the profit margins of the big banks. And critically, local homeowners and prospective purchasers could see mortgages available and on competitive terms from agencies who would take care to invest wisely in areas which they have a clear interest in seeing thrive.

This initiative will diversify a mortgage market in desperate need of new energy and confidence. If we can get prime lending moving again, the downturn will be far less severe."

The Fabian Review is out on January 5th.