Two months ago Hank Paulson said that Congress had given him a bazooka by granting him power to intervene to support Fannie Mae and Freddie Mac, the US mortgage finance giants. The mere sight of the bazooka would so impress the markets that he would not actually have to use it, the US Treasury Secretary said. It is a measure of how fragile those markets have become that Mr Paulson was forced to pull the trigger yesterday.

Although the US Government had made clear that it would stand behind Fannie and Freddie, the markets were so spooked by the companies’ mounting losses that the cost of their borrowing was rising. That in turn was pushing up the cost of US mortgages, more than three quarters of which are being financed by Fannie and Freddie. The US Government’s support for the companies should have an immediate impact on those mortgage rates, which may lessen the risk that US house prices “overshoot” on the way down as they did on the way up. The US Treasury is also proposing to buy securities based on bundles of mortgages.

This market is vital to the financial system, not only because it affects the rates charged on new US mortgages but also because banks around the world, including in Britain, have large holdings of the securities. The falling value of these investments have prompted some banks to rein back on their own lending, exacerbating the economic slowdown.

Helping to stabilise the US housing market should bring some benefit to British counterparts. It will also increase pressure on the British to take bolder action. The US will inject up to £110 billion into Fannie and Freddie, arguably the biggest such intervention by any western government since the Second World War. That makes last week’s £1 billion housing package from Gordon Brown look less of a bazooka and more of a peashooter.

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