Willy today

The usual quite glorious stuff.

Most important is the introduction of schemes that insure the nominal value of loans, such as James Crosby\’s proposal to create a government insurance scheme for raising funds for mortgages. We need similar schemes for small firms\’ working capital requirements and larger firms\’ investment needs. I would create lending organisations as Roosevelt did in the 1930s.

Yup, we need Fannie Mae and Freddie Mac. Like that worked so well, eh?

Human beings do not know the future. We may try to attach rational probabilities to certain outcomes, but that is not the point; there are, Keynes said, prefiguring Donald Rumsfeld, unknown unknowns. An unknowable future creates herd effects, waves of irrational exuberance or gloom.

Very true.

Thus, credit flows and the prices of financial assets must be constantly monitored to see if they are behaving rationally. Intervention in the financial markets – regulatory, institutional, via monetary policy and in collaboration with other governments – is vital.

And where do we find these genius humans who can indeed see into the future and thus determine rationality?

In the longer term, we need to develop a new insurance infrastructure to help banks – and borrowers – better manage risk. None of this will be delivered by market forces. Everything will have to be created by government.

Gosh!

The Bank of England revealed in its financial stability review last week that in the seven years up to 2008 British banks had lent £700bn more to their customers than they had saved, making up the difference from taking deposits from abroad via the now dead markets in securitised assets insured by credit default swaps.

That\’s amazing, isn\’t it? To insist that the market cannot, will not, deliver an insurance infrastructure to manage risk while pointing to the current market based system for managing risk…..the one part of the credit markets which has actually been open, liquid and working in recent months.

If Willy didn\’t exist we\’d have to invent him, wouldn\’t we?

7 thoughts on “Willy today”

  1. Fannie and Freddie did provide a very important serivce, leaving aside the interference that produced “bad lending”; they allowed the development of a proper fixed rate, re-financeable mortgage system. US consumers are thus insulated from interest rate volatility and monetary policy thus acts on the marginal cost of credit rather than as a form of fiscal policy on existing debt holders. If the new mortgage banks of scotland were to lend for 15 to 30 year terms on primary residence at , say 6%, then securitise these loans (with their new quasi govt status) at around 5.5% but with a tax free status for long term investors then we could simultaneously reduce and ultimately shift interest rate volatility risk from the private sector while providing an asset class to allow long term institutions to better match long term liabilities.

  2. > Fannie and Freddie did provide a very important serivce, leaving aside the interference that produced “bad lending”

    That’s exactly the point. If you give politicians control over markets and institutions they’ll interfere, it’s what they do. IT always ends in tears.

  3. US consumers are thus insulated from interest rate volatility and monetary policy thus acts on the marginal cost of credit rather than as a form of fiscal policy on existing debt holders.

    But you can’t get something for nothing. That was very nice for US consumers while it lasted, but the risk ended up being foisted on others and ultimately led to the crisis. If no free-market solution exists for your problem, it’s very likely there is a good reason for it, and by getting the Government to provide it you are engaging in a very risky experiment to find out what that reason is.

  4. The free market solution for insuring against repayment risk is everyone’s favourite – Credit Default Swaps!
    Which despite the bad press have been functioning as intended.

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