Four days after the Treasurer announced a further $8 billion of government purchases of residential mortgage-backed securities through the Australian Office of Financial Management (AOFM), the Wall Street Journal decided to weigh in, calling the scheme an “Aussie Mac in the making”.

And it means this as a derisive term. The WSJ states that most borrowers have “naturally migrated” to the Big Four banks. I guess it is natural when there has been a drying up through acquisition and scaling back of other options. It seems hardly an exercise in consumer choice as opposed to consumer compulsion. Nonetheless, the WSJ sees Australia’s lack of securitised mortgages these days as a good thing.

But its criticisms are weak. For starters, it argues that these moves are not creating a market as much as filling a cap. “Every deal done so far has relied on the government backstop.” That may be the case but it does  not point out that the US government (and many others, including Canada) are doing exactly the same thing and have done so for decades. Most US mortgages remained securitised with government backing.

Second, it alludes to the notion that Australia is somehow repeating US mistakes.

“Nowhere in this discussion is risk that this venture poses to the taxpayer. Fannie Mae also boasted about its exposure to ‘AAA-rated’ securities. Most investors know the denouement of that story. Canberra may be taking smaller risks because the country’s subprime market is smaller. But it’s still a risk that wasn’t there before, and needn’t be there now.”

It goes on.

“Washington meddled in private-market mortgages and brought the world the financial crisis. It would be a shame if Australia didn’t learn from that experience.”

You mean, learn from the experience of taking a solid government-owned institution and privatising it without complementary regulations and then being surprised that it has the same incentives as private firms to write extraordinary sub-prime loans and disguise it in securities? Seems like the government has learned that lesson well and is proceeding cautiously.

The issue here is the quality of financial reporting and commentary regarding what happens in Australia. The WSJ’s argument is that this looks “Mac”-like and that is bad so the government should just stop. A real analysis would have pointed out that the main issue facing Australian financial regulation is that the government extols the rhetoric and belief that financial markets do not work efficiently and yet has failed to consider that what that implies is that Australia needs to carefully review its financial regulations and work out if it will be robust to future GFCs.

Ian Harper, who was a member of the 1990s Wallis Committee, has explicitly acknowledged that their recommendations were based on an assumption of efficiently working markets in this area. An assumption proved false in the past couple of years. What is more, our current system — seemingly endorsed by the government through continual support — remains based on those outdated assumptions.

The current RMBS intervention, while welcome in the circumstances, remains crisis-driven and reactionary. It is not a long-term based for financial stability and, indeed, competition in banking. The risk we are taking is not that we lose money on those interventions but that we are failing to do the hard analysis to ensure a robust financial system.

Joshua Gans is an economics professor at Melbourne Business School. For more of his writings in this area visit

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