The Problem with Securitization

The New York Times has a story on “Paralysis in the Debt Markets” which says, basically, that credit has dried up because of lack of demand for asset-backed securities. In English, that means that since no one wants to invest in securities that are made out of home mortgages, the people who originate mortgages have no place to sell the mortgages to, so they don’t have any money to lend. And this is also true of commercial real estate, student loans, and so on. For example, “A once-thriving private market in securities backed by home mortgages has collapsed, from $744 billion in 2005, at the peak of the housing boom, to $8 billion during the first half of this year.”

The response of the Fed has been to prop up the securitization market by buying the stuff itself when no one else will buy it. But that program is reaching its provisional limit — according to the times, the Fed has bought $905 billion out of a budget $1.25 trillion in securities — and with the Fed hawks on the warpath, it is likely to be pulled before the private market recovers.

This is especially true since the private market may never recover. The boom in securitization was based on investors’ willingness to believe what investment banks and credit rating agencies said about these securities. Buying a mortgage-backed security is making a loan. Ordinarily you don’t loan money to someone without proving to yourself that he is going to pay you back (or that the interest rate you are getting will compensate you for the risk that he won’t pay you back). The securitization bubble happened because investors were willing to outsource that decision to other people — banks and credit rating agencies — who had different incentives from them.

Are investors going to go back to that mindset? Do we want them to? It seems to me the rational investor response is this: “I have no idea what is in those securitization trusts. I don’t trust the banks, since they are taking fees out of each deal. I don’t trust the credit rating agencies, since they are being paid by the banks, and don’t have enough staff and expertise to do the job properly. I don’t trust the models, because they’re wrong. There’s no way I can do the analysis myself. So I’m not buying.”

Maybe what’s happening is the only people buying asset-backed securities are (a) a few bold (or stupid) hedge funds who think they can do the valuation themselves and (b) recent immigrants from Mars who haven’t heard about the financial crisis. And maybe that’s where the securitization market will be for a long, long time. I agree that people have irrational optimism and are prone to bubbles, but it doesn’t have to be this bubble. People in Silicon Valley are waiting for the tech bubble to come back, but it may not happen — we got a housing bubble instead. Next time maybe it will be a buy-plots-of-land-in-the-rainforest-and-use-them-for-carbon-offsets bubble. There’s no reason it has to be a securitization bubble.

Besides, as Paul Krugman writes, why does it have to be securitization, anyway?

The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold. Or to put it differently, by the numbers there’s no obvious reason we shouldn’t be seeking a return to traditional banking, with banks making and holding loans, as the way to restart credit markets. Yet the assumption at the Fed seems to be that this isn’t an option — that the only way to go is back to the securitized debt market of the years just before the crisis.

By James Kwak

42 responses to “The Problem with Securitization

  1. reserves are plentiful, unfortunately bank capital isn’t so given the high dependency of the U.S. on securitization, the Fed has no choice but try to kick start the market, so far with little success excess for conforming mortgages.

  2. As a comment I’ll post an excerpt from my blog entry from this morning, where I also discussed the issues raised in this NYT piece:

    It’s been a year, and the banks are not lending. They continue to post phony profits, all of it extorted from the people. They continue to exist as loathsome high-maintenance high-expense parasites. But they’re not lending. So it’s been proven beyond any doubt that whatever the lack of Wall St lending was going to do to Main St it has done already, while whatever we’re paying to maintain the Big Banks in existence is money thrown down a rathole.

    Main St never needed Wall St’s version of securitized “lending”. What it needs is smaller-scale local and regional lending where the loans make good Real Economy sense and are maintained as loans on the balance sheets of the smaller banks who made them. This makes for a responsible economy all around.

    But as the NYT piece shows, the congenital mindset and its lies run deep. It quotes LSU “professor of banking” Joseph Mason: “Given the imperative for securitization markets to fuel bank lending, we won’t have meaningful economic growth until securitization markets are re-established.”

    Such an “imperative” does not exist other than through the imposition of this gangster ideology. “Meaningful growth” – does he mean the paper growth of the last decade which has now vaporized? He certainly can’t be referring to growth which created any good, permanent jobs. The fact is, there can never be meaningful growth under financialization. By definition it’s a fraud meant to cover up (1) the fact that there’s no longer and real growth, and (2) the looting of the real economy, for example the hollowing out of manufacturing.

  3. Credit rating agencies assess and label the riskiness of financial instruments (AAA being the best). As a recent New Yorker piece by James Surowiecki details, a problem arises because the rating agencies are privately owned and yet the S.E.C. anointed three of them as official ratings agencies—thus instilling a special trust in them by investors. And that was forty years ago. Today everything—from rules and regulations on financial instruments to interest rates—depends on these ratings.

    So what happens when these agencies drastically overestimate the soundness of mortgage-backed securities? In part, that is what caused our current economic situation. We have become dependent on the accuracy of the ratings, and yet the agencies that issue them are unregulated and are far from objective. I must commend Mr. Surowiecki for this insight. When the agencies gave mortgage-backed securities a rating of AAA, investment flooded to them, creating the all-too-famous housing bubble. When, in light of the housing crash, the agencies harshly downgraded the securities, it drastically accelerated the bursting of the bubble.

    Clearly we cannot continue at status quo. As in other under-regulated fields, Main Street became the victim of overzealous and unchecked standards. What can we do about these agencies? The New Yorker suggests scrapping the ratings agencies altogether, reasoning that no faith is better than false faith. I don’t know if that is the answer—it would be preferable to merely disconnect the ratings agencies from governmental endorsement.

  4. > “I have no idea what is in those securitization trusts. I don’t trust the banks, since they are taking fees out of each deal. I don’t trust the credit rating agencies, since they are being paid by the banks, and don’t have enough staff and expertise to do the job properly. I don’t trust the models, because they’re wrong. There’s no way I can do the analysis myself. So I’m not buying.”

    Ok, so take your pick.

    Say you have money and want to invest it. You want to lend money to US homeowners who are borrowing for their mortgages.

    So your choices are clear: you can either invest in a mortgage backed security created by a bank, or you can invest (ie buy bonds) in a bank that holds these mortgages.

    Based on your criteria, which you listed in the paragraph I quoted above, which would you choose?

  5. Aah, another “simple banking” proponent. This is all well and good, except that even if loans make good “real economy” sense, the institutions holding the loans on their balance sheets cannot realistically hedge interest rate risks (among others). Securitization can impose wildly imbalanced incentives if not properly regulated, but I just don’t say any way you can expect any reasonable growth in lending unless there is some way for those holding the debt on their balance sheets to hedge the risks involved, or those risks are just ignored entirely (which I’m sure plenty of thrifts dod, consciously or unconsciously, before the S&L crisis)

  6. Uh, who are they suppose to lend to…to buy what? Most people are in a situation where they don’t have guaranteed jobs (unlike bankers, who appear to have guaranteed bonuses), and their major asset, their house, is declining in value. (not to mention their 201k)
    Do we not have enough car dealers, malls, office towers, Starbucks, flat screen TV’s, granite countertops, stuff?
    Should we continue to overprice housing? Underprice risk?
    The overall economic model seems to be to borrow ALL of your lifetime earnings, and half of your offspring’s as well. We won’t be happy until we commit grandkids lifetime earnings as well.

  7. “The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold. Or to put it differently, by the numbers there’s no obvious reason we shouldn’t be seeking a return to traditional banking, with banks making and holding loans, as the way to restart credit markets.”

    I’m glad Krugman said it, because my first thought when I read the “reason” for non-lending was that there were mortgages before there was securitized debt, but if I’d said it it would have been written off as naive. Sad when common sense needs the cachet of a professional reputation and has an uphill battle even then.

  8. It would seam that the difference between “good” securitization (appropriate levels of hedges) and “bad” (that brings down the whole system) is much like legitimate short selling and short selling as a speculative attack.

    A very fine line that is difficult to right legislation or regulation against.

    Perhaps simply requiring that CDOs and asset backed securities are simply traded publicly and “on books” rather then as private side deals. At least then independent analysts can look at a firms exposure to meta risks like the whole housing market tanking rather then just a sub-sector.

    I don’t know – it seams this shift from “real” growth to “finance” growth happened about 30 years ago – about the same time that asset bubbles started to get more frequent and severe – which also corresponds to the rise of supply side economic theory and attended deregulation.

  9. Sam K. : “the institutions holding the loans on their balance sheets cannot realistically hedge interest rate risks (among others)”

    Well, as events have shown, they could not realistically hedge those risks before. What they did do was to pass on those risks to those who were more than willing to take them on, and, eventually, to the taxpayers, who did not know that they were taking them on. That game is over, at least for the next few months.

  10. The immigrants aren’t from mars, but from Asia and the MidEast – need somewhere to park those dollars.

  11. It’s as if Bankers have forgotten their business depends on trust.

  12. Pretty much everyone has caught on Winstongator. Even Martians would have gotten our radio broadcasts by now. I think the only people buying now live more than 5 light-years away.

  13. Have the companies and families that need money tried the loan shark down the street who will break legs if money is not returned? These articles seem to imply that no one has any money and can’t possibly make loan. The reality is that investors have been burned and they are no longer willing to make loans on the same terms that they were 2 years ago. Many businesses and families who were counting on easy credit are no longer viable without government assistance.

    Government intervention stopped a panic by replacing the debt market. The only way investors will get used to taking risks is to dip their toe back in, which means higher rates and worse terms for the borrower. But that is not happening. The government continues to artificially hold down rates with hopes that investors will collectively have amnesia and things will go back the way they were (or preferably lower returns on capital).

    At some point, the government will have to let the market function on its own. The sooner we take the medicine, the sooner we can get back to building businesses for the new normal.

  14. May I propose that :

    Simple banking = simple minded

    Anyone who hasn’t hedged interest rate, currency and credit default risks cannot possibly make money. I prove this in my book “Martingales and Anomalous Diffusion in Levy Processes for Dummies”

  15. Russ is right. The 20th century economy is headed down the toilet, and “growth in lending” isn’t going to slow it down. The fact that “growth in lending” is proposed as a goal just shows the depth of capture by Wall Street.

    Simple banking is the only kind that can work in the messy situation we are heading toward. In fact, we will be lucky if we can preserve simple banking. Hard money may turn out to be the only kind of lending that will work. If that doesn’t lead to the constant growth economists and bankers like to assume, that’s too bad for the economists and bankers. And too bad for the rest of us if we choose to keep listening to the economists and bankers after they have clearly proven themselves wrong.

  16. My whole point is that we should try put the incentives in the right place instead of just pretending that we can make everything better by a return to lending that makes “real economy sense.”

    The issue was *not* that the investors holding the debt didn’t hedge risks like interest rate risk, but that there were extra risks that were essentially created by the originators not having the proper incentives and/or being very poorly regulated. Banks (like Chase) that are closely tied to investment banks and therefore are able to have relatively high transparency through the origination -> securitization -> hedging MSR portfolio process have had much, much less trouble with their securities.

  17. Loan ID numbers are being assigned to all US mortgages, both new and currently outstanding. This makes it possible to track mortgage performance and thus, to analyze any basket of mortgage securities. Investors will no longer have to rely on the packagers or rating agencies to analyze mortgage backed securities. Now the folks who can and will do this are large institutional investors like Vanguard who will manage individuals’ money for a very reasonable 0.2% fee. Others manage this stuff institutionally for similar fees. There is a place for this stuff in investment portfolios; with the right data and a simple pass-through structure structured securities are not a problem. The Danes have have a very successful pass-through market since around the US Civil War.

  18. May I propose that instead of lending out money, banks lend out seeds, shovels and other capital equipment. Soon your money will be worthless.

  19. Larry Kudlow is giddy

    Give me a drum roll, Smitty. Badda boom!

  20. Larry Kudlow is giddy

    badda boom!

  21. Doug: “The sooner we take the medicine, the sooner we can get back to building businesses for the new normal.”

    What do you mean, “we”, white man? i think that citizens would be more willing to take their medicine if the financiers took their medicine, as well, instead of just pocketing the dough.

  22. As they are too big to fail, they’ve had no trouble at all in fact. I am PROUD to be able to cover their bets for them.

  23. You worked in the Borscht belt too?

  24. You’re still mad I called you out on your ethnic slurs on Chinese people three posts ago?

  25. I would like to think of myself as a person with some tiny amount of capital to lend and as a taxpayer who is paying for this market distortion. So the reference was to the collective we, meaning everybody who takes out a loan, loans to others, or who pays taxes.

    To heck with the financiers. They will always be more connected and have more influence than I could ever dream of being. I would just like to know the rules, because a shifting playing field always benefits the most connected and influential. Trying to punish the bankers is pointless, because the bankers will make sure that I am worse off than they are in the end.

    The losses have to be absorbed somewhere. People are going to suffer no mater what the government does. I would rather clean up the mess left by the debt bubble than fight it for a couple of decades like Japan.

  26. Another reason the banks won’t lend is the current mortgage rates. The banks won’t lend for the same reason you wouldn’t buy a 10 year CD at 3% right now. Sure they can borrow from the Fed at 0%, but that’s short-term. Having to hold a mortgage at under 5% for 15 or 30 years, with interest rate and inflation expectations above that figure is not a very profitable long-term business model. This is why the majority of the residential lending right now is being funnelled through the Mae’s. The market is telling us that mortgages are not risk free and the rates should probably be higher, but the rates are being kept artificially low. Look at JUMBO’s which are more like 6% – a reasonable figure assuming 3-4% inflation. The counter intuitive reality is that artificially keeping rates at under 5%, may cause more people to want to borrow, but does not cause banks to want to lend – at 6% or so interest rates the few that were priced out of getting a mortgage (if you can’t afford one at 1.25% or so higher rate you probably shouldn’t be buying anyway) will be more than offset by the more reasonable lending standards.

    I think the Fed did the right thing last Sept. / Oct. but they need to start letting a few things wobble on their own or we’re never going to know what is actually going on in this economy.

  27. Daniel Habtemariam

    Yeah, it’s kind of funny.

    I think one of James Kwak’s (and Paul Krugman’s) broader points is that the private investment market for securitized debt instruments has grown in prominence and power over the economy in recent times, but just because we’ve been relying on it for the last few years doesn’t mean it’s a particularly reliable engine for future growth.

    There was a time not long ago when investors (in Asia, the Mid-East, and elsewhere) parked their dollars in traditional production-driven fixed investments and small business ventures, which had the added benefit of utilizing human capital in the process. It’s a relatively recent trend that we’ve been seeing of new hordes of investors looking to make a buck the quick and easy way.

  28. An important factor that most commentators seem to ignore is the banks’ behavior during the crisis and its potential effect on would-be (and have-been) investors. We all know that banks data-mined and rating-shopped to mischaracterize–in the most legally acceptable way–the quality of loans they packaged. But what many forget is the banks’ treatment of the buyers of those loans during the crisis. A significant number of the buyers of securitized loans used margin. Senior secured corporate debt, for instance, did not offer sufficient spreads to attract significant third-party capital without utilizing portfolio leverage. Fortunately, the models worked. Historical volatility was low. Diversification further reduced the apparent risk. Even lower-risk funds bought the loans at 3-5x leverage. And this pattern of analysis played out across the securitization market.

    Then the banks changed the game. As underwriting dropped off the table, and residential real estate losses mounted, volume in the secondary market for securitized loans plummeted. This environment offered an interesting trade. By selling a tiny sliver of a specific security (say a senior loan secured by hard assets worth around 70% of the outstanding debt) at a severely depressed price (say 15 cents on the dollar) a bank could force margin calls on investors who had borrowed money to buy the loan. Some investors in specific issues would find themselves unable to meet the calls, and they would hand their portfolios over to the banks. 100% loss. Of course, the investors’ models had not accounted for performing loans trading significantly below their recovery value, and, in fact, no real holders of the assets were willing to sell them at those prices. But the banks were– in very small amounts. And they expected the majority of those loans to return to par. Oh well. Mark to market. Those are the breaks. This is Capitalist America, friend, not Communist China.

    Any sentient investor would attach a higher discount factor to future securitized loan purchases after this experience– more because many are disinclined to lean heavily on unreliable, private portfolio leverage… Trust was important to this marketplace, and it should be gone (of course, many things that should be true are not…).

  29. First of all, this has been the case for non-agency mortgages for a while. It would be great to have the GSEs release loan level information, but being able to track them is not the main issue.

    First of all, for much of the outstanding non-prime loans, much of the credit information needed to value the loans is not available to investors, and there are many privacy issues since what you really need is information related to other debt held by the same borrower (e.g. credit cards, auto loans, etc.)

    Also, the underwriting standards are all over the place depending on what vintage you look at. It’s pretty naive to assume that being able to track something via an ID is sufficient for doing anything useful except accounting and some really basic credit metrics.

    The structure of the securities is an issue to some extent, but again, if you can’t reasonable approximate future loan cashflows you are screwed.

  30. Yakkis you are on track to an important innovation. The only asset that the local culture has not been robbed of yet is their labor. So in place of getting paid for their labor let the carpenters and bricklayers turn their labor into mortgage money on the houses.

    You will, however, need a better book-keeping framework to track the value invested and the rights assigned.

  31. Note that 30 years ago is when a proper book-keeping began to disappear among the then merging banks. Now that you have giant banks that are running gambling casinos. A gambling bet will not post in a proper book-keeping framework. That is why real casinos have to use chips to tally their profit loss. Perhaps that tells you something, Ian?

  32. I posted this as comment #31000 on Krugman’s post on this issue. Here, I’m moving up to #17000.

    - Banks don’t want to lend to real people – originate it and sell it is much easier and much much more profitable.
    - Banks don’t know how to lend: The people who used to do this – 10 or 15 years ago – have gone away. The staff is new. See above.

  33. Yeah – good point.

    I wonder if it also corresponds to the conversion of the investment banks to publicly held companies? (I don’t really know…)

  34. Really? Regulation is going to fix this?

    Really?

    What we have is banks, who know there are no credit-worthy borrowers, unable to sell securities to investors who have just found out that, over the last twenty years, banks have shopped out all the credit-worthy borrowers and have been passing loans off to people with no hope of paying them back. The investors, quite correctly, don’t feel like playing this game anymore.

    If the banks want to hedge their loans, let them buy insurance from someone who can audit their books and, apparently, better asses the risks of loans than they can.

    I can see securitization starting back up once the fraud convictions start rolling in on the rating agencies and investment banks who slopped out sh*t as triplety-A plus rated paper. Till then, well:

    http://2.bp.blogspot.com/_pMscxxELHEg/SqArWZUi5eI/AAAAAAAAGSA/BbnOub6fGXg/s1600-h/FedAssetsSept09.jpg

    Trust is a hell of a thing to get back, once it’s lost.

    Cheers,
    Carson

  35. The way in which these markets are currently responding is indicative of a mindset (addiction) to the “new” way to make money lending money, by securitizing, so you can earn excessive fees and relend the same money over and over again. Kind of like the heroin addict who experiences less and less of a “high” each time they shoot up, so they do it more and more until finally reaching the point of overdose and death. They don’t believe, once they take the first hit that it is possible to capture that same high ever again without the drug.

    I see the same response in the financial community. Like the addicts we should put them in rehab, that is, take away all support, FED and otherwise, and let them try to find a new way or die trying. TARP was just a way to postpone the DT’s, and the FED will stop soon, because they can’t go on being the securities purchaser of last resort. Not only is it unhealthy, but it could be fatal, not only for the lenders, but for the global economy.

  36. Some people say that Solomon was a pretty wise man.

    Proverbs 11:15 He who is surety for a stranger will suffer, But one who hates being surety is secure.

  37. I will put in a letter I wrote to the FT months ago. I would say it is critical that securitization markets don’t open up again if we are going to have real growth. In summary credit growth above real gdp growth isn’t good. I wrote this so long ago I can’t recall. The fact that is still being debated shows wall streets frip on our economic policy. designed to help them and hurt us!!!
    >
    > Dear Sir,
    > > Miss Tett has written extensively about the credit
    > > crisis
    > > but once more fails to elucidate salient points
    > > regarding
    > > the issue of securitisation.
    > >
    > > She correctly points out that research from Pimco
    > > states
    > > that “Until the 1980′s
    > > the expansion of nominal gross
    > > domestic product tracked the volume of outstanding
    > > private
    > > credit closely. But since then credit has
    > > dramatically
    > > outstripped economic growth as securitisation took
    > > hold”.
    > > Meaning credit growth beyond nominal growth rate does
    > > not
    > > lead to economic growth.
    > >
    > > According to Prof. Aswath Damadaran (NYU Stern), one
    > > of
    > > the
    > > foremost experts of valuation today, the most
    > > significant
    > > input into a discounted cash flow model is the stable
    > > growth
    > > rate. This growth rate can be sustained in perpetuity
    > > allowing us to estimate the value of all the cash
    > > flows.
    > > No
    > > firm can grow forever at a rate higher that the
    > > growth
    > > rate
    > > of the economy. So, the value all things can’t
    > > grow faster
    > > than the economy (Damaodaran, Investment valuation,
    > > Chapter
    > > 12, 2002)
    > >
    > > Therefore, at a certain point the growth of credit
    > > must
    > > become unstable when it
    > > is rises faster that the rate of
    > > growth in the economy. This is essentially the nature
    > > of
    > > our
    > > financial crisis. Valuations based on the growth of
    > > credit
    > > (leverage) were not able to be supported by the
    > > nominal
    > > growth rate of the economy.
    > >
    > > There are additional features to our economy that
    > > have
    > > happened since securitisation has taken off. The
    > > stock
    > > market has grown faster than the economy, CEO pay has
    > > gone
    > > from 30X to 300X of the average American worker, real
    > > wages
    > > have fallen, and wealth disparity has reached heights
    > > not
    > > seen since the great depression. All of these issues
    > > are
    > > in
    > > fact related.
    > >
    > > Securitisation has allowed those whose pay is based
    > > upon
    > > leverage (credit)to increase many times faster than
    > > the
    > > growth of the real economy and the vast majority of
    > > workers.
    > > Securitisation has allowed the experts on credit risk
    > > and
    > > valuation (bankers) to
    > > off load these risks onto the
    > > public.
    > > This has created instability (highly distorted
    > > valuations)and a moral hazard where society bears the
    > > brunt
    > > of costs, while bankers and CEOs reap the benefits.
    > >
    > > When Ms. Tett reports that respected figures such as
    > > William Dudley of the NY Fed consider it paramount
    > > that
    > > securitisation markets get jump started if we are to
    > > recover
    > > she fails to mention that Mr. Dudley, as a former
    > > managing
    > > director of Goldman Sachs, and the majority of people
    > > who
    > > are calling for this to happen are the very people
    > > who
    > > have
    > > benefited the most from securitisatiion.
    > >
    > > I hope the American people will wake up and see that
    > > efforts to jump start securitisation are nothing more
    > > than
    > > an attempt by those who caused the crisis to restart
    > > the
    > > system that allowed them to reap the rewards and off
    > > load
    > > the risks of that system onto others.
    > >
    > >
    > > With these facts in mind one must wonder what the
    > > point of
    > > the Feds easy credit (money)policy are. Are they
    > > benefiting
    > > society? Not very much. Are the benefiting wall
    > street
    > > and
    > > the banking class? Well, Goldman Sachs profits answer
    > > that
    > > along with a stock market that does not reflect
    > > economic
    > > realities.
    > >
    > > It also answers the inflation issue. Growth in money
    > > supply
    > > faster than the ability of society to use it (nominal
    > > growth
    > > rate) has to result in inflation or asset price
    > > bubbles.
    > >
    >

  38. A fellow at another blog (“Jon”) pointed toward this data source in comments:

    http://www.federalreserve.gov/boarddocs/snloansurvey/

    and notably the January report

    http://www.federalreserve.gov/boarddocs/snloansurvey/200902/fullreport.pdf

    This contains results from senior loan officers at major FDIC insured banks. He notes that when asked why they were not making loans, they got the following responses:

    A. “Possible reasons for tightening credit”
    a. current or expected capital position (Not Important 73.5%)
    b. less favorable economic conditions (Very Important 71.4%)
    h. current or expected liquidity position (Not Important 87.8%)

    Note the LAST – nearly 90% said their current or expected liquidity position was not important. Nearly 75% said capital position not important.

    In other words, the entire “banks need better balance sheets to make loans” explanation of the crisis (which was the justification for the TARP infusions) is limited – certainly it explained some of the crisis. But by January, most banks had plenty of their OWN money to lend, yet didn’t want to lend it to the same class of borrowers whom they previously supported…

    The so-called “breakdown” of the credit securitization markets reflects a return to reality…

    In a sense, credit securities buyers are asking the obvious question: If banks (who have private information) are so eager to sell it, then why should I be so eager to buy it? In the presence of that level of information asymmetry, no market can function.

    And that is why banks existed in the first place!

    In terms of real lending constraints by banks, consider these points:

    1) If banks really needed the capital to make loans, why are they so eager to pay back TARP?

    2) Why are banks currently sitting on the mother of all mountains of reserves?

  39. All this reminds me of those pleas for help for third-world countries–the kind where a $50 loan lets peasants weave rugs or make pots or grow herbs…any kind of small business to lift them out of poverty. America is a banana republic, thanks to the banksters, and the only way the rest of will survive is to plant backyard gardens and sell cast-off Chinese trinkets at yard sales.

  40. As bob dylan would say: “how does it feel?”

  41. Alan McConnell

    “the high dependency of the U.S. on
    securitization” — I am _very_ confused.
    Why are we dependent on securitization?
    And when did this dependency start?

    I posted back in July to the effect that
    money is IMPORTANT and should not be played
    with. I said then that we need experts, or
    maybe we need non-experts, to tell us what
    financial practices serve a useful social
    purpose. I can think of a few — insurance
    of tangible goods, mortgage loans, other
    kinds of loans for business startups or
    for business development — but my list
    doesn’t reach as far as securitizations
    in the Blackian sense(Bill Black called this
    process fraud pure and simple, right?),
    credit default swaps, and derivatives.
    (What is “notional value”, anyway?)

    Again: money is important, and games, defined
    as financial actions with no social value,
    should not be played with it. And so I
    ask the knowledgeable on this E-list: what
    financial activities are of social value.
    (I don’t include financing golf clubs and
    yacht basins in Greenwich CT as having
    social value!)

    Best wishes,

    Alan McConnell in Silver Spring