So we start by introducing some real competition into the mortgage lending business.

First, the banks that used to do conventional mortgage lending are in bad financial shape.

But nothing about this subsidy explains the timing of the boom in housing and outlandish mortgage lending.

Germans do not see why they should be vulnerable because of poor quality mortgage lending in American inner cities.

Another line of suspicion against public lending is that it crowds out private investment.

And much of World Bank project lending can be done by the private sector.

For example, by disfavoring lending to private firms, state owned banks distort the allocation of resources.

During Japan s lost decade, the Bank of Japan mostly bought Japanese government bonds, whereas the Fed is trying to reopen secondary markets for securitized private lending (which in the US is as important as bank lending), buying mortgage backed securities and consumer and business loans, as well as U.S. Treasury bonds.

Lending to foreign governments is in many ways inherently riskier than unsecured private debt or junk bonds.

The dubious mortgage securities are so called mortgage backed securities.

Previously, private investors in the US simply did not lend to mortgage seekers whose credit history was below prime.

Because they represent a massive senior claim, they may discourage new private lending for many years to come.

Even so, the explosion in the quantity of collateralized debt obligations and similar securities went far beyond what was needed to sustain mortgage lending.

They have considerable flexibility, owing to a range of policy tools, including variable capital and reserve requirements and direct controls on mortgage lending terms.

Public policies to subsidize US mortgage lending have been costly, inefficient, and have encouraged excessive risk taking, which helped push the system toward crisis.

With China s mortgage lending equal to only 10 of GDP, compared to 60 70 in the Anglo Saxon countries, there is huge opportunity for growth.

To be sure, financial innovation, like lending to buyers who would not normally have qualified for mortgage loans (sub prime borrowers) also played a role.

The government may also need to consider injecting funds more directly into the mortgage sector while the private sector reconstitutes itself.

Lending in the Dark

The IMF s Lending Overhaul

For example, by disfavoring lending to private firms, state owned banks distort the allocation of resources. Chinese agriculture provides another example of tension between private entrepreneurship and public sector ownership of assets.

So, if there is a debt problem, as in the US mortgage crisis, one must also look at private funds role in creating it.

During the crisis, the level of banking activity fell particularly strongly in capital intensive areas such as traditional lending to the private sector.

Stimulus programs were sold as being a temporary palliative, needed to bridge the gap until the financial sector recovered and private lending resumed.

Now European countries finance 42 of IMF lending and 62 of concessional World Bank lending.

Of course, I am focusing mainly on official loans, but private sector lending to the world s poorest countries is generally a relatively minor issue.

Moreover, the higher the gap between official interest rates and the higher rates on mortgage lending as a result of macro prudential restrictions, the more room there is for regulatory arbitrage.

After all, though home price inflation has slowed modestly in some countries, home prices in general are still rising in economies where macro prudential restrictions on mortgage lending are being used.

Just 3 make any private provision for retirement with a foreign bank, and only 1 of retail customers take out a mortgage in another EU country.

Ironically, then, the expanded access to mortgage lending that creates new homeowners in Latin America may end up protecting the region from the disaster that too loose credit created in the US.

In the UK, similarly, we have had problems with mid sized mortgage banks, and with poor commercial real estate lending by mutual building societies, as well as problems with two large banks.

The EIB should expand its lending.

Nor do existing international lending institutions.

He wants the FHA shut down and replaced with a subsidized saving program that does not attempt to compete with the private sector in evaluating mortgage risk.

Mortgage banks kept some claims on their books, but sold most of them to investment banks as mortgage backed securities.

UBS had gaps in its US mortgage products.

Fourth, reform of US housing finance remains unfinished business. Public policies to subsidize US mortgage lending have been costly, inefficient, and have encouraged excessive risk taking, which helped push the system toward crisis.

Indeed, in its 2006 annual review of the US economy, the IMF was extraordinarily benign in its assessment of the risks posed by the relaxation of lending standards in the US mortgage market.

Seven years of debt deflation, reinforced by the expectation of everlasting austerity, have decimated private and public investment and forced anxious, fragile banks to stop lending.

The World Bank Group and its private sector lending arm, the International Finance Corporation (IFC), are trying to harness this potential to support national education systems.

In the current crisis, even the private rating agencies dramatically underestimated the risks involved, which helped lure international financial investors into purchasing mortgage backed securities at exaggerated prices.

In Greenspan s words, the self interest of lending institutions would protect shareholders and the economy from lending excess.

The reversal of bank lending is staggering.

Lending, too, is being transformed by technology.

Would you mind lending me your car?