In the wake of Joshua Gans and Christopher Joye’s AussieMac proposal for a government-backed corporation to provide access to low-cost capital for home loans, it’s interesting to see what’s happening in the UK. According to The Guardian:
The plan is expected to allow lenders to swap mortgages for government bonds or similar instruments, which they could then use to provide collateral for raising cash in money markets.
“We are working very closely with the banks and very collaboratively at options for providing more liquidity to markets,” said a government source. “Things are not quite finished but we are not far off.”
The scheme would only cover mortgages issued up to the end of December last year. This would help thaw frozen money markets but not support new lending or create risks for taxpayers.
The details of this scheme are quite different to the Australian proposal – for one thing, it’s not ongoing – and the economic and housing situation is also different. The British economy has apparently slowed down quite a lot; their housing market is in free-fall around the country. But in its broad outlines – government stepping in to make capital available for the housing market – the concept seems similar.
My bet is, that if new government bonds were issued by The Reserve Bank, guaranteed by the Australian Government and easily available to all, you would see such a move from the private sector that a government could sit back and decide whichever way they wanted to spend it.
And at a much lower interest rate than that prevailing.
Two quick thoughts about this:
1) It effectively expands the money supply, doesn’t it? That isn’t what Australia wants to be doing in a still inflationary environment.
2) If the government is left holding mortgages, what happens when people default? I have this image of Joe and Joanne Working-Family, with their 5 beautiful little children and labrador, pleading on Today Tonight for Kevin Rudd to save them from being thrown out of their home …
Spend what? The scenario you describe would cause the government to bleed revenue.
Any such bonds would be guaranteed on the basis of Australian taxes so aside from the privileged few who would benefit from such tax backed loans you’d have three much larger disadvantaged groups, those who couldn’t get the loans (always the poor because they won’t have the collateral), those on whom the government would have spent the money if it wasn’t tied up in repaying the bondholders (think schools, hospitals, aged care, pensions, the unemployed etc.) and the taxpayers whose taxes would go up to cover the cost of those who default on the loans.
But it’s nice to see that you believe in middle-class welfare at the expense of the poor, joe2.
Alan Kohler showed figures that demonstrated that personal loans and business loans carried identical interest rates in 2005 but that today business loans are 2% below personal loans.
This suggests two things:
1. Private persons are incapable of negotiating a competitive loan.
and/or
2. Private persons represent a growing risk to banks.
While I’m not denying 1, I think it is probable that 2 is the more important factor. We have reached the bell-hop end of the credit cycle. Additional debt is evermore risky debt.
In that context if the Aust Gov were to take on risk for private mortgages, then the public purse would be buying additional risk and selling subsidised interest rates at the expense of taxpayers.
Katz: have you had a look at the AussieMac proposal?
What a rant, GregM, @3.
Commonwealth Government bonds are already available and have been for years. What i suggested was that they could be made more accessible ,as a safe haven, for small investors and that the demand would be huge, despite likely lower interest return.
It would be up to the government if it thought a social good would come from providing housing loans or prefer to spend the money on other priorities like public transport or small loans for solar hot water systems, for instance. The market does fail sometimes and we are moving into a new phase where government needs to come back and govern again for the overall social good.
Joe2, because there is currently no Commonwealth debt there are no Commonwealth bonds. This is the consequence of years of budget surpluses being applied to retire debt, a deliberate policy which freed up a lot of money to go into the capital market, to among other things, fund the current housing boom. Given Australia’s current booming economy projections are that budget surpluses will continue well into the future. So why should the Government incur debt just to provide a safe haven to small investors? That’s just a way to transfer wealth to them from taxpayers.
If the Government used bonds as a vehicle to fund borrowing by people who wanted to buy houses it would just be throwing money into an already overheated market thus increasing house prices and reducing affordability. When the market cools, as it will, a whole lot of people would find themselves servicing debts higher than they would otherwise have had to and the taxpayer would carry the can for the borrowers against government bonds who defaulted on their loans.
It would be better for the Government to reduce taxes which would provide relief to all people paying off loans or to spend the money on its many other priorities.
“Joe2, because there is currently no Commonwealth debt there are no Commonwealth bonds.”
http://www.rba.gov.au/FinancialServices/CGBondFacility/buying_bonds_from_rba.html#who_can_buy_bonds
Or they could use government bonds in conjunction with subsidies to be provided in the National Rental Affordability Scheme This wouldn’t help home owners, but would provide a real boost to the affordable rental.
The idea of using bonds for this purpose is not new in Australia, but never got traction with the previous government unfortunately.
As a matter of fact, Robert, I hadn’t. My comments were actuallty referring to the British example.
However, let us refer to “AussieMac”
From its proposers:
Two problems.
1. If in a situation when credit is difficult to access, why would banks continue to lend at concessional rates simply because they have invested in AAA bonds?
2. Why would banks sell the very safest mortgages when they might palm off some dodgy ones?