Credit on credit

With the government’s highly sensible move towards providing liquidity in the residential mortgage-backed securities market, it is with some bemusement that I note that much of the discussion this morning was about credit (here and here). That is, not credit as in credit crisis but credit as in who gets it.

My view is that the contribution towards getting this policy up was dispersed. To be sure, Chris Joye first proposed the idea to me back in March and convinced me of its importance. That led to our joint paper released very soon afterwards and much media discussion about it (see here for more details). In that paper, we identified the problem (just before the RBA came out saying much the same thing) and also proposed various solutions which we dubbed ‘Aussie Mac.’ But we have always considered that how this came about was very open. Certainly, initially it would be all government run but eventually we speculated that it could be privatised. And we were agnostic about the need for a new GSE in the short-term. For instance, in our House of Representatives submission in June we said:

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.

Of course, that is precisely what happened yesterday and was the route for which we were most quizzed about by the government (in private communications) and also something we raised when questioned by Malcolm Turnbull (among others) at the House of Representatives inquiry.

Around the same time, the Australian Securitisation Forum was gathering a coalition from the industry to support a very similar but ultimately more specific proposal. Given their need to convince their constituency, they were likely working on this for much of the year. But bringing that set of interests to the table was very important in getting government attention on the issue.

Indeed, in April, ASF chief, Greg Medcraft successfully brought the whole idea to the 2020 Summit and it was mentioned in the initial report. The government’s move yesterday can be seen as it implementing on the first state of a 2020 idea.

Given the troubles faced by Fannie and Freddie, the discussion of these options cooled somewhat as everyone tried to work out what it meant. That did not stop more right wing elements from continuing to critique the whole idea of intervention and in this regard they had some support from Treasury and RBA officials who told the House of Representatives that intervention in the RMBS market was not warranted. The August drop in bank interest rates gave them some comfort here.

And then we arrived at September. The problem had not gone away and there was another RBA rate cut on the cards with a real risk that banks would pocket the difference rather than pass them on. This state of affairs was not lost on Malcolm Turnbull who raised the idea of AOFM intervention again last week; explicitly tying it to issues of competition. That led to some politics as his statement was clarified.

I must admit that, in my experience, these types of policies are hard and they are difficult to communicate in sound bytes. We should expect some clarification as Chris and I have had to do over the last six months. But when it comes down to it, my reading of the past few days is that for the core idea there is bipartisan support. This is something that should be welcomed and compared with the lack of the very same thing in the US, should give us confidence that should things worsen for Australia, that we have leadership on both sides that could come together and do what is right.

Ultimately, the issue of policy credit is very unimportant. I see that we have overcome substantial uncertainty to put us on a path to supporting markets and laying down rules for their appropriate design as critically important and very welcome. Many have imagined and worked towards this and it is great to see it happening. I think we have lots more to do on financial reform but yesterday will be remembered as the real beginning of movement on that front. Today there is real reason to be optimistic.

3 thoughts on “Credit on credit”

  1. No. This action by the government does not provide support for the concept of Aussie Mac, and does not vindicate your position.

    While I am not in favour of government taking on risk by purchasing potentially risky securities such as RMBS, not matter the rating, I recognise the need to consider extraordinary measures for these extraordinary times. I will defer detailed criticism until more facts are known.

    But the key point is that this in no way justifies establishing an institution such as Aussie Mac. The government has indicated that this is a temporary measure, and should return these securities to private hands when circumstances permit.


  2. You are quite mad and have now contradicted everything you have ever said about what we have proposed (given you seem to support what the government has done). The government explicitly asked for our advice on what they should do and they have followed it almost exactly to the word. This is exactly what we recommended (we can prove that as our advice is in writing) and entirely consistent with the AussieMac proposal. In fact, as Joshua noted above, we have gone on the record many times to say that the AOFM would be “purpose built” for this type of activity. The government has explicitly stated that these securities that it has *bought* (note not temporarily lent against, like the RBA) will be “held until redeemed or sold into secondary markets”. For the avoidance of doubt, held until redeemeed means held until maturity. Sold or held until maturity is irrelevant: our policy objective was the temporary provision of liquidity when the securitisation market collapses, as everyone now agrees it has. AussieMac has always been about the government providing temporary liquidity to the RMBS market in precisely this fashion. We have been consistently agnostic as to how it was implemented, which is why we also recommended the AOFM. In fact, we were happy for the RBA to assume this role–but when I spoke to them about that they responded that they would prefer an independent entity carried the responsibility. Stephen Grenville made the same point in an op-ed that appeared in the AFR. You seem to be trying to deliberately mislead the readers of this blog and your stunning reversal now in support of what the government has done indicates that you must be compromised by some sort of agenda. It is really quite pathetic.


  3. The AussieMac is a step towards alleviating the problem caused by excessive debt. In other words it allows new debt to be created because everyone else is worried about lending because it may not be repaid.

    The underlying problem is that lots of loans and with it new money has been created and not turned into productive assets. People who have this money are now worried about loaning it out because it may not get repaid.

    Banks get new money from the Reserve Bank, create a heap more themselves and are meant to invest wisely so that the money creates productive assets.

    Clearly they have not done so because they have allowed lending against inflated house values. So they cannot be trusted to loan new money wisely.

    It would not matter if the new money did not attract interest until it turned into a productive asset but it does. Where does the money come from to pay the interest? If you do not create productive assets with the money it has to come by creating more money. If we think of the Australian Total Economy as a business and if we think of new money as being shareholders putting in new investment money in the hope of getting more productive assets then we want to make sure that it really is turned into productive assets and is not spent on things that do not produce a return on investment. We certainly do not want to pay interest on the money until it returns value as that is the heart of all Ponzi schemes which appears to have happened in the USA and Australia with the house price bubble. So a long term solution to the problem is for new money to be created that does not attract interest until it is turned into a productive asset.

    Hence the government could give all lenders of home finance some zero interest money that they can lend out at a low interest rate BUT the money is not usable elsewhere until it has been turned into a new dwelling.

    This would be an Aussiemac on steroids. The government could do the same with loans for renewable energy sources, home insulation, etc.

    The credit crisis is caused because people do not want to lend even if it is a “good cause”. The idea of the $4billion is a good one but it would be better if the money the loans create was turned into new dwellings and did not get soaked up by loans on loans and the interest paid on those loans.


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