Intervention is here

Just yesterday I noted that intervention by the government to restore confidence in mortgage-backed securities was on the cards. Today, it is on the table and out the door. From the Treasurer:

Today I announce that the Australian Office of Financial Management (AOFM) will purchase Australian residential mortgage backed securities (RMBS) as part of the Government’s commitment to strong and effective competition in Australia’s mortgage markets.

The Rudd Government is committed to ensuring that Australia’s financial markets continue to perform strongly and provide Australian households with a wide range of financial products at competitive prices.

Since the deregulation of the financial system in the 1980s and 1990s, the RMBS market has provided an important source of funding for new and smaller mortgage lenders to compete with the major banks.

Australian RMBS are of high quality, and continue to experience low rates of arrears. However, due to recent extraordinary developments in international capital markets, liquidity in the primary Australian RMBS market has been reduced. Quarterly issuance has fallen to around $2½ billion since mid-2007, compared with $18 billion over the previous year. This has weakened the capacity of mortgage lenders reliant on the primary RMBS market as a source of funding to compete.

To reinvigorate the Australian RMBS market and support competition in mortgage lending, I will direct the AOFM to invest in AAA rated RMBS in two initial tranches of $2 billion each.

This is not an Aussie Mac as a long-term institution but is along the lines we had been suggesting earlier as a short-term or transitional measure and, more recently, as critical piece of insurance, as the crisis grew deeper. Aussie Mac was designed for the future. This use of the AOFM is for right now. It is an appropriate move and my expectation is that it will have an effect on those markets right way. Hopefully, we will see the non-banks and smaller banks get right back into this market and we will be able to turn the ticker on off.

6 thoughts on “Intervention is here”

  1. Any idea what the provenence/timeline of preparation/implementation of the strategy actually is?
    An artifact of Mr Turnbull prescribing it last night on primetime television, and apparently earlier in the week, is that more crassly political elements been able to seize on said timing artifact as an opportunity to go “Nyah, nyah, malcolm thought of it first, and Wayne’s a stupid-head”.
    Which is hardly encouraging for the prospect of genuine non-partisan co-operation.


  2. Buying the loans creates more money and is unnecessary. Just give the banks and the other providers as much zero interest money as needed as described yesterday and the system will adjust itself quickly without any inflationary pressure. There is no reason to purchase the non performing loans and reward those who lent irresponsibly.

    Governments need to stop thinking like cost accountants who think balance sheets and starting thinking like entrepreneurs who think investment and creation of value.


  3. Danny, Swan kind of blew the idea of bi-partisanship on this out of the water when he called the proposal: “either a monumental gaffe or intentionally irresponsible”. That is after Turnbull explicitly said: “…I’d like to talk to the Prime Minister about to see if we can agree on some bipartisan measures.”, by the way.

    And timing artifact my foot. For this to have been a timing artifact, you’d have to (a) accept that Swan was happily calling his own policy irresponsible for a week (which is to say, Swan is deranged, or a ‘stupid-head’ if you prefer) or (b) he didn’t actually understand what Turnbull was talking about and therefore didn’t make the (fairly obvious) connection between Turnbull’s comments and his then-secret policy (which is to say that Swan really is a ‘stupid-head’). Either way, Swan looks a little, err, stupid.



  4. Should the government take money from the prudent to pay the enormous losses of gamblers so that their ongoing gambling can be called economic growth?

    Why does Swan want homes to remain unaffordable? Why doe he want me to take on the losses of incompetent fools who lent to the greatest fools of the bubble?

    This welfare for high rolling house price gamblers should be resisted at all costs.


  5. For the record, on the 23rd of June we proposed in our postscript paper that was part of our Parliamentary submission:

    “If there is a pressing need to immediately implement AussieMac, it could be operationalised in the interim through the Treasury’s Australian Office of Financial Management (AOFM), which is purpose-built for this type of activity.”


  6. Thank you for clearing that up Chris, and BBB.
    I guess we’ll never know, until it’s memoirs time, what Chris Bowen really had in in his mind when he introduced the Commonwealth Securities and Investment Legislation Amendment Bill 2008, in early June.
    How come he introduced it, not Wayne?


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