Saturday, September 27, 2008

The week good policy won!

I say that because George W Bush - the man who believes in minimal government - came to accept that at times government has a very big role, and because of our own Wayne Swan.

First Bush:

The words of his speech say it all:

"I'm a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly...

The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal."

Thank God!

And then there's Wayne Swan...

When the Opposition leader Malcolm Turnbull suggested on Sunday that the Treasury's Office of Asset Management should buy mortgages from second-tier banks, Swan rubbished the idea.

Here's what his media advisor emailed to me Sunday afternoon:

Gday - as discussed - from Wayne:

"It is very worrying that despite all his claims to financial literacy, Mr Turnbull is out there today asserting the Government should be following the US in taking on bad debt, when the fact is Australia simply does not have the type of bad debts prevailing in the US banking system.

"It is either a monumental gaffe or intentionally irresponsible for Mr Turnbull to be out there again asserting that our banking system faces the same problems facing the US banking system.

"As Governor Stevens pointed out, the reality is that the health of our banks is light years away from that of US banks, and it is plain reckless for Mr Turnbull to be out asserting otherwise and talking down our banking sector.

"In the national economic interest, it's important Mr Turnbull stop shooting from the hip in an attempt to promote himself, and in the process talking down our banking system at a time of global uncertainty."

(For the record - Mr Turnbull never suggested buying bad debt. )

On Friday came the backflip - in order to implement good policy.

One of the architects of the idea, Christopher Joye, has been assiduous in talking to the Prime Minister's office and his co-architect Joshua Gans in talking to the Treasurer's office, even though the Treasury was pooh poohing the idea and even though Joye was close to Turnbull.

It was such a good idea (I described it as a nobrainer) that it won out.

Swan and Rudd are to be congratulated for putting politics last.

Joshua Gans outlines what happened here.

As he told me, it doesn't really matter now who talked to who - good policy won.

There is hope for us, and the United States, after all.

I am very, very happy!


GoodToBeWithYou said...

What does that mean, " The market is not functioning properly"? The regulatory regimes haven't functioned properly, sure, or the moral compass of certain players didn't function at all, but Teh Market just is.
I'm sure players such as the guy from LendLease who was on one of the shows during the week, rubbing his hands with gleeful anticipation, pointing out that they are pickimg up assets for 25% of what they would have cost a year ago, reckon the market is functioning just nicely thank you very much.
Isn't capitalism all about the rich getting very much richer, and the poor being grateful for the crumbs? Seems to be working perfectly well and according to design specs from what I can see.

Darren Lewin-Hill said...

Hi Peter,
I'm a pronounced non-economist, so I don't really get how this mechanism isn't going to cost taxpayers if the AOFM issues bonds and uses the proceeds to buy mortgages from banks and other lenders.

I understand that our mortgages are 'better quality' (i.e. less risky because of low defaults in Australia) than those involved in the US sub-prime scandal, and that by buying them from a range of lenders, not all of whom can get funds because of the credit crunch, competition will be improved and that will help those on mortgages (provided stringent lending practices are observed).

What I don't get is how the money is eventually recouped. I take it the idea is selling the mortgages back to financial institutions at a profit when times are better, but the idea of selling a mortgage (I guess a capacity to pay more than was borrowed) as a commodity does funny things to my non-economist's mind. If you can shed any further light on how this works (or offer a link), I'd be grateful.

Pete said...

(FYI i am not Peter Martin...)

Hi Darren,

Bailouts are disasters. Recessions are the free-markets way of shedding skin - much like a snake does, in order to grow and survive. Fighting recessions ensures that the problem areas (financial sector) don't learn their lesson (bankruptcy) and continue with bad practices.

Click on my name to see a very good blog that covers these kind of things.

Personally I have been a fan of Peter Martin's work until late, which he seems to be reporting what people want to hear, rather than what is lies beneath the surface. I still come here though, the political commentry is entertaining.

- Pete

Michael S said...

Sorry Peter, but this is a terrible idea. I don't know how you could support it. All that will result is even higher house prices, and people requiring even more complicated financing arrangements (such as Rismark's equity finance mortgages - hmm ... who is associated with Rismark?) to buy places for living.

Anyone who supports this actively wants affordability to decrease.

Anonymous said...

I think that Pete (in comments above) has a very good point there. Whilst some assistance is obviously neccessary, it's important to find a balance so that bad and risky practices do not continue and are not rewarded and propped up by the taxpayers.

As such I'd love to hear more details about the planned $4 billion investment by the Australian Government into the RMBS sector. Would this be a one-off payment or would they need ongoing or periodic support?


alan said...

Deliberately Engineered Debt Mess: US Bailout = $700B.

US Govt has worked hand in glove with business to engineer and protect a culture of speculation amongst investors, institutional and amateur. Asset protection is now the name of the game, no one wants a riot.

In Aus, the latest effort by govt to prop up the housing bubble is a $4B RMBond offer. Following figures from Westpac Banking Corp (Jul08):

In first 6 months 2007: A$45B RM Bonds issued.
In first 6 months 2008: A$1.9B RM Bonds issued.

That is about 96% collapse. A ringing endorsement for the RE industry, not.

The banks know what they are doing: Clearing the decks of the Titanic and launching the life rafts of debt avoidance, bankers and financiers first.

Gold Medal Bailout, Aus versus US:

If Aus govt was to try and get lending up to 2007 levels for the next 12 months, then, using figures above, it would issue say A$86B of RM Bonds [(A$45B less A$1.96B) x 2 lots of 6 months].

But US population is about 220M, Aus 21M.

Therefore, in US population terms, our potential bailout is equivalent to A$821B.

Looks like Aus can win the gold medal for bailouts, at least in our local currency. Not sure if beating them at their own game is that smart though.

Cassie ST said...

While I kind of see the logic, my gut instinct says no.

The public purse almost always bails out the bad apples (when you owe the bank a million dollars you have a problem, when you owe the bank $1B the bank has a problem).

Like the angry man protesting in New York said, "Pull yourselves up by your own damn boot straps!"

I'd be happier seeing $4B going directly into environmentally sustainable public and affordable housing.

And I think this might work just as well. By then the private sector (newly taunt and trim) could whinge about "unfair taxpayer funded" competition, and get it privatised, just like the good old days. ;-)

Marek said...

I'm a bit confussed about the upsides vs the downsides of this plan, is the general idea to incearse competition in the loans market up inceasing availible liquidity?

in the mean time - you know how much i love graphs!

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