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Faith and credit: the deregulation of the finance sector has us all drowning in debt.

Article Excerpt
Two decades of financial deregulation has unleashed forces whose public effects were not understood at the time. Deregulation has undoubtedly brought benefits. Deregulation of some dimensions (the currency in particular) was inevitable. But the casualties of the first ten years following deregulation have been swept under the carpet.

Now we have entrenched phenomena whose negative dimensions require greater subtlety to discern, and perhaps greater moral courage--courage because criticism involves a certain paternalism regarding what is good for other people, indeed good for Australians as a whole. The average Australian is now deeper in debt. That greater debt is a vehicle for financing more expensive owner-occupied homes, greater current consumption, and leveraged investments (some of which are paper claims to tangible assets).

The housing sector provides a useful vehicle to elucidate the complex effects of deregulation. The cost of housing finance was a major concern for commentators when the Campbell Report was released in 1981. It wasn't until 1986 that home mortgage rates were deregulated and even then only for new mortgages.

The optimists point to the dramatic improvement in access to housing finance post-deregulation. The rationing--by gender, by class and by length of bank relationship--has desirably disappeared. The scale of funds available has increased. Borrowing terms have become more flexible. Fears of escalating borrowing rates were confirmed during the 1980s but rates have come down in the 1990s, due to a reduction in inflation. In short, the housing sector appears to have provided an exemplary lesson in the benefits of deregulation, product of the much vaunted 'unleashing of competitive forces'.

However, housing sector finance also exposes a downside of deregulation-and the degree to which it can become a downward spiral that takes crucial parts of the economy out of public control. Housing lending outstanding has increased from $23 billion in June 1981 to $674.7 billion in June 2005; lending has increased literally exponentially, especially since 1995.

The expansion in housing finance has been facilitated by an expansion in the number and variety of lending institutions. It has also been facilitated by the 'securitisation' of mortgage debt. Housing debt securitisation began in 1987; its scale remained trivial for a decade and then took off after 1997. Of the total outstanding housing finance to June 2005, $150 billion has been effected through securitisation, of which almost $60 billion has been transacted since June 2003.

What is securitisation? Securitisation involves the aggregation of like financial facilities into a larger parcel, then...

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