AussieMac in the Oz

In today’s Australian, a long article by Alan Wood about policy reform towards the mortgage securisation industry. He does a good job of describing what an AussieMac might do but questions the need for a government-sponsored enterprise. (By the way, the latest version of that report is here).

So what’s wrong with this idea? There is nothing wrong with the analysis by Joye and Gans, but the creation of such an institution in Australia is completely unnecessary.

The creation of a government – that is, taxpayer – subsidised institution, largely for the benefit of non-bank mortgage lenders, would need to be justified either by the existence of a long-term structural problem in the provision of housing finance in Australia, or evidence of a short-term collapse in the availability of home loans.

Neither problem is evident, and in any case it would take too long to set up such a body for it to be of any use in the current credit crisis. Nor is it warranted as a hedge against future crises.

The problem here is that Wood is mis-characterising and simplifying what AussieMac would be needed for. First, while it may assist in supporting competition in home lending in Australia, its goal would be to expand the capacity to lend for the entire industry (including banks). The problem right now is that banks are the only game in town and their activities have also been curtailed (impacting on business lending first). Home lending is not a distinct market. The securitisation option that has supported it, supports the entire financial system. That is one reason the RBA has stepped in to intervene in this market. If there is no problem, why are they doing that?

Second, I agree that it won’t fix our current crisis. Nor did those institutions coming from the Great Depression fix that one. But it will make it far less likely that we will face the adverse impacts of a crisis like this again. That insurance will both help us then and also in the immediate future as it helps restore confidence.

In any case, we have a simple way of seeing whether Wood is right or not: if mortgage rates are matching the cost of funds and so rising with tighter monetary policy then, when the RBA turns that around, then if Wood is right, we should see mortgage rates fall. If not, as I wrote many weeks ago, Canberra, we have a problem.

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