More Aussic Mac in the AFR

A couple of mentions of Aussie Mac in today’s Australian Financial Review. First of all, in a letter John Sutton, the National secretary of the Construction Forestry Mining and Energy Union, wrote that the Aussie Mac proposal “merits strong consideration … The Rudd government’s commitment to tackling the housing affordability crisis must not be blindsided by recent developments in financial markets.”

Also in the paper was a longer piece by Andrew Cornell which talked about the proposal. He wrote:

They put a strong case, but the critical issue is whether what is happening is indeed more significant than a cyclical unwinding of an abnormal situation of excess liquidity.

There is no doubt the non-banks were a vital source of competition, a brilliant idea that exploited the times, garnering 13 percent of the home loan market and shaving around 2 percentage points from every mortgage out there.

Yet should non-banks by protected? Dire as it is, the crisis will pass, securisation markets will reopen, non-bank competition in some form will re-emerge.

Ultimately it is competition which benefits the consumer and the economy and that should be what the government and regulators concentrate on. Any proposal like Aussie-Mac should withstand the test of improving efficiency across cycles, not simply providing a mechanism to support one segment in a crisis.

I agree that we should not be supporting particular firms nor reacting just to the crisis.  But that is not what our proposal is about. First, it is about supporting the securitised segment of the supply of liquidity for lending in Australia. That support helps the majors as much as the smaller non-banks; both of whom rely upon it. But what it means for consumers is (a) there is more liquidity and that will keep interest rates lower and (b) the non-banks main supply (as they don’t have a large deposit base) stays intact and so competition is preserved. I do not believe what we saw over the last decade was some sort of ‘blip of entrepreneurship.’ In the US and Canada, it is a lasting model.

Second, the evidence we present in our report demonstrates that an institution like Aussie Mac will improve the efficiency of the lending markets for the long-term and not just in a crisis. Although, it would be good to have there. Already the US are using the privatised Fannie and Freddie to inject liquidity while we rely on the comparatively non-transparent activities of the RBA. Do we really have enough faith that Australia can have high competition in lending without institutions to smooth the bumps where in so many other places with more competitive banking structures they don’t. That seems to place a faith in the market-place beyond what is warranted in these or any other times.

3 thoughts on “More Aussic Mac in the AFR”

  1. I don’t know the market that well, but it seems to me that by guaranteeing to purchase “complying” mortgages Fannie and Freddie made the securitization of complying mortgages unprofitable. As a result, the only way to make money in mortgage securitization was to focus on non-complying mortgages, i.e. subprime and jumbo, which is what caused the current crisis.

    Am I missing something? And how do we stop Aussie Mac from causing a similar problem?

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  2. It would be quite easy to place regulatory constraints on AussieMac’s day-to-day activities to ensure that it did not disintermediate any meaningful private sector activity.

    For example, except during periods of demonstrable market stress, you could limit AussieMac to supplying no more than, say, 5%-10% of the market liquidity (and note that this would be liquidity only for the purposes of acquiring prime RMBS that conformed with AussieMac’ strict credit criteria).

    This should ameliorate any artificial distortions brought about by AussieMac’s participation in the RMBS market during the ordinary function of that market. It would also minimise day-to-day operating costs, notwithstanding that AussieMac should be a cash-flow positive concern with no direct government subsidies (eg, like CMHC in Canada).

    AussieMac’s chief mandate would be to serve as a liquidity provider of last resort to a key component of the financial system (ie, the securitised RMBS market) in the event of these once-every-ten-years external shocks–which appear to be occurring with increasing regularity given the ever-more integrated nature of financial markets–that result in the closure of critical economic markets for extended periods of time to the potentially irreversible detriment of Australian financial institutions and the households they service.

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