The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, June 16, 2011

The impact of Joshua Gans' and my $20 billion policy idea (charts)

As is comprehensively explained here, during the financial crisis Professor Joshua Gans and I came up with a very controversial idea for the Commonwealth to level the liquidity playing field in the credit-creation space via supplying a little support to smaller banks and non-bank lenders that relied very heavily on selling packages of residential mortgage-backed securities to outside investors (where this relatively new funding medium did not fall into the traditional RBA/APRA regulatory net).

Our idea was supported by Rudd/Swan, who directly sought out our advice, and by Malcolm Turnbull, the then leader of the Opposition with whom we also consulted, but violently opposed by the RBA, Treasury and the AOFM. The latter is a little ironic given that the Treasury now promotes the merits of the AOFM interventions in senior staff speeches (eg, see Ken Henry here), as does the RBA (cf. Guy Debelle's regular references to the subject).

The Government has thus far committed $20 billion to the initiative, and mostly followed our prescriptions (eg, harnessing the Treasury's AOFM to implement it). You can clearly see the impact of this policy via the orange-shaded AOFM activities in the next three charts.

Since the AOFM has acquired most of its RMBS at well over 100 basis points above the swap rate, and spreads seem to be gradually compressing, they look to be making a decent amount of money on their investment in a mark-to-market sense over and above the fact that they (ie, taxpayers) are earning a running yield (or return) of about 6% pa on these assets, which is substantially higher than the current 3 year government bond rate at which taxpayers borrow, which is less than 5%.