Working Papers

No Benefit for Borrowers in RMBS Support

I have an op-ed in today’s Age arguing that the government’s expanded support for the mortgage securitisation industry is of no benefit to retail borrowers. Henry Ergas makes related points in The Australian:

where is the evidence that the benefits from the subsidy outweigh its costs? Indeed, where are the estimates of just how large that subsidy is likely to be, and to whom it will accrue? And where is the analysis showing that what Australia needs is yet more lending on houses, this time funded by taxpayers?

Don’t waste your time looking, for the answers are nowhere to be found.

As Michael Stutchbury notes, the whole banking package was premised on Joe Hockey’s lies about the big banks. But what does it say about the government that it allows public policy to be driven by the cynicism and opportunism of a populist federal opposition?

posted on 14 December 2010 by skirchner in Economics, Financial Markets

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Chris Joye has long supported government investment in RMBS, but says that this should be in exchange for regulation/licensing of the securitisation market, which has not occurred to date. Joye and others such as Ian Harper have also supported government guarantees of AAA-rated RMBS, for a fee. The idea seems to be that because the big banks benefit from their implicit status as ‘too big to fail’ as well as the now-explicit government guarantee of their deposits, a paid-for government guarantee of AAA-rated RMBS puts non-banks and smaller banks on a more even footing with the large banks.
If the solution is not for the taxpayer to take on more risk, surely there needs to be some way to ensure taxpayers don’t underwrite the large banks either? Or would you say that prudential regulation is the necessary and sufficient quid pro quo for government guarantees of the major banks?

Posted by .(JavaScript must be enabled to view this email address)  on  12/14  at  01:20 PM

Chris supported the RMBS intervention before there was a wholesale funding guarantee for the banks. Ian, I think, has an open mind and would want to see it addressed in a larger context. It is true that bank guarantees makes life harder for RMBS, but this is a case where one intervention blows-up another. Moving away from bank guarantees to a well-defined Bagehot-style lender of last resort model and a return to depositor preference would be my approach.

Posted by skirchner  on  12/15  at  08:27 AM

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