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September 01, 2008


Luis Enrique

You are right that, on grounds of efficiency, the state is better placed than the private sector for certain activities (health insurance being one) - this is mainstream economics, I think, despite the apparent perception that mainstream economics endorses privatising everything.

The govt may have an edge in education too - see a paper called "Incentives in Markets, Firms, and Governments" by Acemoglu

Mr Art

The government would have an incentive to underprice its loans for political reasons - putting up interest rates would be unpopular.

Thus, as usual, taxpayers would end up subsidizing landowners.

James Schneider

I echo Mr Art's concerns. I appreciate your logic, Chris, there may be greater short term efficiency but the downsides are too great. We have better ways to pool risk. Banks may be badly run, but let knew banks, co-ops (how well is the co-op bank run), managements (sorry) improve this.
How would the state get out of the market once in it?

William McIlhagga

Further to Mr Art, the state would also be under pressure to approve loans to people who might not be able to repay them, thus turning them from a lending institution (as banks were) into unwitting homeowners (as banks currently are, since they own the property when the lender defaults) most likely at a time when the property market is collapsing. The end result is what we have now, but with added government involvement.


I’m not sure if this isn’t a benefit, rather than cost. All creditors want low inflation - because rising prices erode the real value of debt - so the government’s desire to stick to a low inflation target would increase.

I'm not sure of this. Chris, do you have theory to back this up. Higher inflation means higher nominal interest rates means higher returns in turns of cash flow. After all a mortgage lender isn't in a "real" business, it is in a cash business. And higher inflation rates probably means lower rates of default. Administration costs are low relative to turnover.

Think about this - a mortgage bank can make money EVEN with negative real interest rates (provided it receives money at even lower negative real interest rates).

And another thing - STOP talking about government as though it is monolithic. It is a lot of different institutions with their own particular cultures and incentive structures, and while government has agency problems and suffers from being a monopoly, so often do private businesses.


I did it myself
... while government businesses suffer from agency problems...


William, Mr Art, James: I'm not sure there would be political pressure to under-price loans. The majority of voters don't have mortgages, so there'd be majority opposition to under-pricing.
Reason - higher inflation would mean higher borrowing costs for the government too. And our experience of the high inflation of the late 80s, relative to the lower inflation of the 90s, suggests this squeezes lenders' margins. And I'm not at all sure inflation would reduce default rates; the key thing here is the rate of job loss, whilst is uncorrelated on average with inflation.

chris strange

Government debt is priced differently from company debt because it can force people to buy it through regulation and if needed it can extort money to pay it back through taxation. Neither are good things to encourage.

Given the experience with every other government run industry it would be heavily loss making and even more bureaucratic than the private sector. Given the huge way bureaucracy damages efficiency where ever it is found it is therefore very unlikely that it would actually be more efficient as a mortgage provider than a private company. If it were possible to remove the effect of the very special powers (which are in themselves bad) that state has to distort the market (which is also in itself bad) I doubt that its bonds would look quite so good.

Where it to enter the mortgage market it would end up as a monopoly, as Fanny Mae did, and a monopoly isn't a good thing either.

Plus as Mr Art has pointed out the state is in a pretty uniquely bad position when it comes to trying to fend off the attentions of rent seekers.

So no, I would not have the state become a major player in the mortgage market. If it did it would become a bureaucratic monopoly, killing genuine competition, infested by rent seekers, and when things went wrong it would be tax payers forced to fork out which would be a transfer of wealth from the poor to the already quite well off.

Alexander Campbell

The government would have an incentive to underprice its loans for political reasons - putting up interest rates would be unpopular.

Need the government - as in the political side - have any input? Why couldn't this just be set by an independent committee, as Bank of England interest rates already are? Control of the mortgage market could certainly be a useful additional lever for the BoE to use in its pursuit of inflation targets...


Well, the banks would have plenty of reason to complain. The government is a master of hiding losses in a gigantic pot, and has (for our purposes) an almost unlimited capital base to play with.

If the government fails to make a profit, then it is subsidising home ownership. Why should those who do not own their homes subsidise those who do? If it is making a profit, then why stop at the mortgage business? Why not have government supermarkets, government manufacturing plants, government restaurants, etc? But then why should the tax payer subsidise profit-making ventures which they are not interested in?

Generally, when asking why the government should not do something, the answer goes as follows: such activity is funded, ultimately under the threat of violence, by the general populace. Such unpleasantness should be kept to a bare minimum. Doesn't really matter what you talk about in this context. I can see the case for health insurance, and a police force and an army. Sometimes, the government must act with force for the greater good, when it makes little sense for the individual to play for the collective. But keep it to a minimum please!!!


"The cost of financing is lower for the government than for private mortgage lenders": utter balls, as I shall explain shortly.


Chris: There may be mild majority opposition to underpriced loans, but there would be vocal minority pressure for it, too. And quite a few middle-class would see it as a way of getting their kids on the housing ladder without costing a fortune. Cheap loans would come in sooner or later because the benefits are concentrated whilst the pain is spread. This is always the way.

chris strange

Mr Dillow, that the majority of voters don't have mortgages, so there'd be majority opposition to under-pricing does not matter. given our electoral system it typically takes only a tiny number of swing voters in a tiny number of places to change an election. These swing voters generally do have mortgages.


"Government debt is priced differently from company debt because it can force people to buy it through regulation and if needed it can extort money to pay it back through taxation." Quite; another way to say that is that it is a bookkeeping illusion that "The cost of financing is lower for the government" because you are not comparing like with like.


Why not nationalize everything? After all, it is hard to think of any activity in which the government shouldn't be able to do a better job than private firms.

You write:

"The case for it doing so is simple. The cost of financing is lower for the government than for private mortgage lenders - especially now. It should, therefore, be able to lend on better terms than private lenders, potentially under-cutting the lot of them."

True. So why not just nationalize all banks? Let government be the only lender to anyone or any industry. How has that worked out in other times and places?

And you continue by asking:

"But wouldn’t the greater inefficiency of state-run organizations, plus their notorious lack of innovation, offset this advantage?"

It might. But once entrenched government agencies and workers won't care. And it can take decades to reverse course. A Ms. Thatcher doesn't come along often.

You say competition from banks would require the government mortgage giant to be efficient.

Not true.

What will actually happen is quite different. The mortgage giant will route funds and favors to politicians who will help them destroy those competing banks.

The scheme is thoroughly bad. That won't stop it. Let us hope something does.


All these arguments against my proposal seem to apply to vast numbers of other government activities too. The reasons why government will be an incompetent mortgage provider suggest it'll be an incompetent healthcare or school provider. The possibility that it'll use the system for political advantage, to the detriment of economic efficiency, applies also to the tax and benefit system. The fact that low borrowing costs are "cheating" is an argument against any borrowing.
Your arguments are just arguments for limited government in general.
My question is: what if you don't accept these arguments, if you're a New Labour supporter? What then would be the objections to my proposal?


None the less the real value of repayed principle is largely irrelevant to lenders. They make money on cash flow.


... repaid....




The US did/does this, of course. Fannie Mae and Freddy Mac may not be exactly nationalised assets any more, but they're pretty close. It's not obvious that they have done wonderful things for the US mortgage market.


Can the government really raise funds cheaper than banks? Most of the mortgage banks get their funding from retail deposits which cost less than LIBOR.


Adam - there was a time when you were right. The trouble is that mortgage banks expanded by borrowing at Libor - hence Northern Rock's problem, and the current difficulties.

chris strange

Hmm, so your after an argument that would appeal to the soft socialist types and does not use the fact that monopolies are a bad idea? Hard, but maybe point out that a significant number of the mortgage banks are (or rather where before the rules where changed) Building Societies. Social institutions based around people coming together voluntarily for mutual support. By nationalising them you are effectively saying that these kind of social institutions cannot work, only centralised action from the state. That social democracy does not work, only the iron fist of Socialism.

OK its a bit of a wishy-washy argument but that really cannot be helped if you are going to exclude evidence and reason.


Chris Strange...
well put and apt. I'm inclined to think that we have bigger problems with our financial system than just the mortgage crisis. I stumbled across a link to this:

It is interesting and thought provoking - but left me wondering what the policy implications are. Tends to a (Henry) Georgian view, I think. But I think Georgian policies are hard to introduce in a (pseudo - most rent from banks) house owning society.

Think Money

Better to nationalise and the government borrow - than the whole country go down the pan...

Idaho Real Estate

The Stimulus Package and the 770 billion dollar bailout have done nothing to help the home owner. As a 29 year veteran real estate broker I can assure you that the quickest way to heal the economy and specifically the slumping real estate markets is to lower mortgage rates to the 5% range and offer loans only to those with good credit and the means to make payments. Mortgage rates are too high for the condition of the economy and these high rates are not warranted. Lower rates would do much to stimulate home sales and heal the national economy.

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