Last night I met a regular reader of this blog who said, “I like reading your blog but disagree with everything you say.” Fair enough. But he also suggested that I hadn’t made the case for a government-sponsored enterprise (GSE) like AussieMac or something related.
This surprised me because I had figured I was talking about this ad nausium. Anyhow, just in case the message isn’t clear, let me put it here in baby steps:
- Home lending is funded from two sources: deposits and securities.
- Thanks to the US subprime crisis, securities have dried up in Australia.
- The result is a contraction in supply, a rise in interest rates on mortgages, credit rationing of SME business lending and the major banks now having 90%+ of the home lending market (reversing a decade or more of competitive gains).
- Non-deposit taking institutions (and smaller banks) have been left out in the cold. Compared with the US and Canada that have GSEs where they are still operating competitively.
- An Australian GSE would bring back the securitisation channel. By using the government’s AAA-rating it would restore confidence to that market and so long as the GSE was not backing non-conforming (high risk or subprime) loans then there would be no cost to the government.
- The only risk would be a major housing meltdown (of the kind seen in the US recently) but in that situation the government is already carrying that risk by an implicit guarantee to the banks.
- There would be no moral hazard as loans backed by the GSE would have to be conforming.
- There would be no crowding out because supply is currently tight and the GSE could have a mandate to only ramp up activities in liquidity constrained times. (see also Paul Krugman today on this).
- At present, there is no other solution that offers to do all of this and back sustainable competition in home lending. (The spectre of re-regulation looms as a lack of a securitisation pathway removes the Wallis justification for de-regulation).
- And that is why we need a GSE.