The US Government’s de facto nationalisation of Fannie Mae and Freddie Mac ought to be the coup de grace for the UK Government’s misplaced ideas about mortgage finance and the housing market. As Chancellor, Gordon Brown liked to blame the historical cyclicality of the UK economy in part on the housing cycle and in 2003 commissioned reports from David Miles (on the supply of long-term fixed-rate financing) and Kate Barker (on the supply of new housing stock). Both reports were predicated on Brown’s belief that a market failure existed because of supply problems and he got the answers he was looking for.

Few commentators were brave enough at the time to point out that the supply problem in the UK was conventional credit through the mortgage market, in other words an excess money supply problem, or that the equally-damaging boom in US house prices occurred in spite of America’s unusual preference for long-term fixed-rate mortgages. And why not, given that one (then two) non-bank institutions with implicit government guarantees were required to convert short-term sources of funds into long-term loans.

TAGS: economics, house prices