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.