In the unlikely event that I am ever on a sinking ship with Gordon Brown, I will remember not to rely on him to throw me a life jacket. The Prime Minister's much-heralded “rescue package” for the housing market announced this week was the equivalent of sending a canoe to save the Titanic.

Yet much of the debate focused not on the inadequacy of the plans, but whether the Government should do anything at all. There are people who believe that Mr Brown should simply allow house prices to fall to a more affordable level. While this is superficially appealing, it ignores the relationship between the housing market and the wider economy and the awful spectre of negative equity.

If property transactions continue to stagnate and house prices fall by a further 25 per cent, it is likely to have a devastating impact on the economy. Apart from job losses in the building industry, thousands of estate agents, surveyors and solicitors will also find themselves out of work. A slump in prices will also hurt retailers, and not only those selling DIY products or home furnishing. With homeowners feeling less well off, most are likely to rein in general spending. A significant downturn will also hit the banks, which might have to recapitalise further as the value of the housing stock that secures their loan books dwindles. The likely result: fewer and more expensive mortgages.

The Government, which ultimately means taxpayers, will also suffer. Apart from the falling revenue from property taxes, a slump in house prices will increase the chance of big losses from Northern Rock. The taxpayer will also have to find extra money to support the tens of thousands of people who become unemployed or lose their homes. The likely result: higher taxes.

Then there is the problem of negative equity. About 70,000 borrowers already owe more to their lender than their property is worth. Another two million could fall victim if house prices tumble by a further 20 per cent. That's two million people unable to move and at the risk of repossession and bankruptcy if they lose their jobs.

So who would benefit from a house-price slump? Well, first-time buyers will, but only if - and it is a big if - they can secure a mortgage. Existing homeowners with plenty of equity also gain if they decide to trade up. Good news, but worth the pain and misery of a full-scale recession? Surely not.

Perversely, a property crash now may also contribute to another house-price bubble later. If property prices keep falling, the construction of new homes will come to a virtual standstill. When the economy eventually recovers and the mortgage market returns to normality, the demand for housing will inevitably outstrip supply.

Though it would be far from easy to achieve, the Government's objective should be years of stable prices. Ultimately, this would help first-time buyers by allowing incomes to catch up and would end the menace of the boom-bust cycle. But to achieve this, Mr Brown has to do more than fiddle with stamp duty and offer help to a small proportion of homeowners.

The best solution, albeit an unpopular one, appears to be an extension of the existing Bank of England liquidity scheme. Allowing new investors in mortgage-backed securities the ability to swap these bonds for Treasury gilts may be viewed by some as a subsidy to the banks, but it will at least encourage new money into the system.

In theory, this should not cost the taxpayer a penny in the long run because it will bolster the housing market and economy sufficiently to cut the chance of these securities defaulting. The greater risk to the taxpayer is surely a large recession if nothing is done. The challenge is to strike the right balance - reviving the mortgage market enough to avoid a house-price slump without encouraging reckless lending or triggering another property bubble.

Of course, it may already be too late. To return to the maritime analogy with which I began, house prices are like an oil tanker - once they have changed direction, it takes a very long time and much effort to turn them back again.