Friday, September 05, 2008

Nationalising mortgage lending

A few days back Chris Dillow asked whether mortgages should be nationalised.  After all, innovations in the market haven't exactly turned out well.

I think the missing component in his analysis is risk.  This means, in extremis, what happens when your state goes all Northern Rock?

Politicians and bureacrats are further from playing with their own money than company directors.  Beyond that, they have the taxpayers' pocketbook to play with which makes it less likely a crisis will be restricted to a small one when they are unable to finance attempts to buy themselves out of trouble.  Of course, it would be possible to try and set up the institutions to prevent this happening, by creating artificial little state mortgage companies or giving the power to councils perhaps, but those sorts of walls are always made of paper and collapse under the weight of political pressure.

The root of the current problems in the mortgage market is that those managing it bought their own hype that they had got so good at managing financial risk that they could lend incredibly aggresively.  They were massively over confident.  This is a problem that the public sector is entirely vulnerable to.  The Great Leap Forward is, perhaps, the apogee of lunatic belief that you have cracked some secret and can now ignore basic precautions against disaster.

It seems likely to me that nationalising mortgage lending would lead to fewer minor crises but more frequent complete catastrophes.

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