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.