Mervyn King yesterday set his face against two of the more radical potential solutions to the mortgage crisis, making it far harder for the government to put either forward in the autumn.

Last month's Crosby Report raised the prospect of extending the Bank’s Special Liquidity Scheme under which illiquid legacy mortgage backed securities can be swapped for government gilts.

Sir James also touched on the idea of covering mortgage lending with permanent government guarantees. But speaking at the inflation report press conference, the Bank governor seized upon a question on the Bank’s existing support for mortgage lenders to say: 'I think there is a very big confusion in much of the discussion over mortgages.'

He went on to spell out the dangers of failing to make what he saw as a necessary adjustment to the housing market. Referring to the state of the mortgage market in early 2007, he said that 'much of the lending did not merit the description prudent'.

He was equally adamant on what the future should hold. 'The sooner we can make that adjustment [to the housing market] the better... pretending there is a magic solution is not the answer,' he said.

He was categorical that he favoured neither of the two solutions floated in the Crosby report.

Financial Times, Independent