Mervyn King seems to have avoided ‘bailing out’ the banking sector.

His conditions for swapping quality government debt for mortgage-backed debt seem sufficiently onerous enough that it’s tough to describe them as a ‘get out of jail free’ card for the banks.

JP Morgan credit strategist Ben Ashby summed it up well in The Telegraph, when he said: “Banks will give their best assets at unattractive rates and keep all the risk. It’s not exactly a compelling trade unless your fairly desperate.”

But banks are fairly desperate, it seems. The general consensus is that the facility will be used enthusiastically – in fact, some believe up to £100bn will end up being drawn down.

So there’s now an outlet for banks with genuine liquidity issues, making another Northern Rock-style situation unlikely. But the underlying problem – that too much money was loaned against overpriced houses, which are now heading lower – hasn’t gone away.

And that’s why it doesn’t matter how much money the government tries to force through the financial system. Banks realise they’ve messed up. They now think that housing has a way to fall. And that’s why, even if they were up to their eyeballs in cash, we wouldn’t see anyone keen to return to the loose lending standards of a year ago.

As Michael Coogan of the Council of Mortgage Lenders said: “The improved liquidity is unlikely to reverse the trend to higher mortgage costs we have seen in recent weeks… there are other considerations such as the cooling housing market.”

In other words, even if Libor comes down (the inter-bank lending rate which has been much blamed for rising mortgage costs), lenders might not follow suit. What most people still don’t fully understand is that banks are under no obligation to track the base rate, or Libor, or any other rate.

If you own a factory, you want to get your raw materials as cheaply as possible, and then charge as much as the market will bear for the end product. That’s how you make a profit. How much you can charge the end user depends very much on how much demand there is for your product, and how competitive the market is.

Banks are exactly the same. All that Libor represents is the cost of money to the bank in the wholesale markets (savings rates are the cost to attract money from depositors). So that’s the price of raw materials, if you like.

So what the banks want to do, is to sell the end product – their mortgages – at a price as high as the market will bear. Now when banks were competing for mortgage business – any mortgage business at all - there was good reason for lending rates to pretty much track the base rate. If bank A wouldn’t give you a 100% interest-only mortgage at 5%, then bank B definitely would.

But now, banks don’t really want the business. House prices look set to fall, and lending money against a depreciating asset is of course much riskier than lending on an appreciating one. After all, negative equity is bad for banks too. You don’t want to repossess a house only to find out that it’s worth far less than you loaned out against it.

That’s why banks are now demanding 25% deposits if you want to be in with a hope of getting a good rate. That’s a huge amount of money given current house prices. So, of course, for most people the availability of decent mortgage loans has dropped like a stone. Suddenly neither bank A nor bank B want your business. And that means that bank C can charge as much as it wants.

Banks are in business to make a profit. That’s it. They’re not there to help people get onto the housing ladder, and they’re not there to help the Government cling on to power. And those that can will milk the current situation for all it’s worth, while their weaker counterparts retreat to lick their wounds.