AussieMac won’t work

Their implicit government guarantee allowed Freddie and Fannie to operate from a very low capital base and encouraged excessive risk-taking, leaving them dangerously exposed to even small changes in the value of their assets. In the wake of the downturn in the US housing market, Freddie and Fannie now find themselves undercapitalised and the US government has been forced to make its implicit guarantee explicit.

The final cost to US taxpayers of this guarantee is as yet unknown. But the US experience demonstrates that there is no free lunch in exploiting the government’s power to tax to secure funding advantages in capital markets. Taxpayers should not be surprised when faced with the clean-up bill for the financial risks they underwrite through government-sponsored enterprises, such as the proposed “AussieMac”.

According to the RBA’s August Statement on Monetary Policy, the average interest rate on household lending was 100 basis points above its post-1993 average. The average interest rate on business loans was also 100 basis points above its post-1993 average.

The increase in the cost of borrowing experienced by both business and households does not reflect the absence of a US-style housing GSE in Australia. It reflects the basic fact that Australia is integrated with global capital markets and must compete with the rest of the world for access to capital.