Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

AussieMac won’t work

By Stephen Kirchner - posted Wednesday, 10 September 2008

The commencement of a new easing cycle by the Reserve Bank of Australia has put the spotlight on mortgage interest rates and their relationship with the official cash rate.

Since the credit crisis began in August 2007, the Reserve Bank has allowed market-led increases in retail lending rates to partially substitute for increases in the official cash rate in achieving its desired level of credit restrictiveness.

However, this relationship between RBA policy actions and market-based retail lending rates is a symmetrical one. As recently as August 2006, the RBA rationalised an increase in the official cash rate on the basis that retail lending margins over the official cash rate had contracted, reflecting competition from non-bank lenders benefiting from what was then a healthy market for residential mortgage-backed securities (RMBS).


In the wake of the credit crisis, the RMBS market has suffered a temporary closure. This has led to the proposal to establish a US-style government-sponsored enterprise (GSE), dubbed “AussieMac” after is US counterpart, Freddie Mac. AussieMac would seek to exploit the government’s funding advantage in capital markets to support the market for RMBS, with a view to lowering retail mortgage interest rates.

But any benefits from the creation of AussieMac could be fully offset by the RBA as it sought to maintain its desired level of credit restrictiveness. The RBA has always calibrated monetary policy to prevailing financial market conditions. These two arms of government would be operating at cross-purposes, with no benefit in promoting cheaper housing finance.

The AussieMac proposal mischaracterises the domestic implications of the global credit crisis as a failure of competition. The problems in credit markets and the market for mortgage-backed securities are better characterised as a temporary negative shock to available financial technology and market liquidity.

The issue is whether government can supply a superior substitute technology on either a temporary or permanent basis that will result in long-term improvements in financial intermediation, with benefits for home borrowers and without significant risks to taxpayers.

US experience finds that most of the funding advantage enjoyed by their housing GSEs was not passed on to home-buyers, but was instead captured by the GSEs in the form of higher profits.

But even if lower wholesale funding costs were passed on to consumers in the form of lower retail rates and not offset by RBA policy actions, this would simply be capitalised into house prices, with no benefit to home-buyers.


Housing affordability needs to be tackled from the supply-side, not the demand-side. This means building more houses, not giving consumers more money to spend on the existing housing stock, which is currently in short supply.

The US experience also highlights the dangers to taxpayers associated with GSEs that exploit implicit or explicit government guarantees to secure funding advantages in capital markets. These guarantees are ultimately underpinned by the government’s power to tax.

For decades, US politicians have deluded themselves that Freddie and Fannie were helping US home-buyers, at no direct cost to taxpayers. At the same time, the US GSEs used their implicit government guarantee to become the dominant players in the US mortgage market, earning huge profits from their government-supplied funding advantage that should have been passed on to consumers.

  1. Pages:
  2. Page 1
  3. 2
  4. All

First published in the Australian Financial Review on September 8, 2008. Dr Stephen Kirchner’s paper Government Intervention in Mortgage Finance: The Case Against AussieMac was released by CIS this week.

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

11 posts so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Dr Stephen Kirchner is a research fellow at the Centre for Independent Studies. He blogs Institutional Economics.

Other articles by this Author

All articles by Stephen Kirchner

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Stephen Kirchner
Article Tools
Comment 11 comments
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy