Chris Dillow is saying that the state should get into the mortgage business:
The government is expected to announce measure to stimulate the housing market tomorrow. Which raises the question: why shouldn’t it become a mortgage lender?*
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.
But wouldn’t the greater inefficiency of state-run organizations, plus their notorious lack of innovation, offset this advantage?
Why not let the market tell us, with government competing against banks? I suspect the latter wouldn’t do too well. These have been badly managed. And what innovation they have undertaken has consisted largely in new ways to lose money, rather than genuinely useful innovations such as long-term fixed rate mortgages or shared equity schemes.
There’s another factor: at the moment if a bank goes bust, as Northern Rock did, the government has to bail it out — to not do so would seriously damage the economy. So the government is already effectively underwriting some of the risks of the banking business. Then why not get some of the profits as well?
I’ve no idea if a state-run bank would be better run than the private sector, but it wouldn’t particularly surprise me since they all seem to be run by a wunch of bankers.