securitization

Banking as the Scourge of Capitalism

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By Numerian

Banksy

"The Federal Reserve is doing whatever it can – and some of this is against their charter – to revive the failed system of TBTF banks, securitization, and debt binges which will inevitably lead to another massive bubble, leaving the public on the hook for future bailouts." Numerian

Joe Nocera, financial columnist for The New York Times, had an interesting conclusion to his recent article on Bank of America:

I admit it: I want to see the banks feel some pain. Most people do, I think. Banks did terrible things during the subprime bubble, and they still haven’t paid any real price. I find myself rooting for judges to rule against banks in foreclosure cases. I would love to see these big investors put the serious hurt on Bank of America, which will encourage other investors to pile on. I know this colors my thinking. I can’t help it.

Yet I also know the flip side. If the foreclosure lawyers start winning a lot of cases, if judges halt foreclosures on a widespread basis, if investors start to extract billions upon billions of dollars from the banks — and if banks become seriously weakened as a result — we’ll be right back where we were two years ago. The banks will need to be saved for the good of the economy. The taxpayers will have to come to the rescue. That’s an appalling prospect too.

Banks: We can’t live with them, and we can’t live without them. It stinks, doesn’t it?

This brief flourish of disgust for the banking industry received a lot of attention, almost all of it favorable. Millions of Americans want to see “serious hurt” put upon the banks, especially the big banks that are in the Too Big To Fail category. Why do we hate the banks so?

A Brief History of Securitization

Or....

Shadow Bankers Gone Wild

 

 

Preamble

Recently the New York Times published yet another article expressing surprise at the previous existence of securitized financial instruments prior to the last several decades. Securitized financial instruments, or actually securitization, has been around for at least several centuries, and whenever it becomes widely used a Great Depression, or economic meltdown, ensues.

This is the foundation for that bandied about term, “shadow banking.” Without securitization, there would be no such capability. With securitization, the process for creating debt-financed billionaires and multi-millionaires reaches critical mass.

Unfortunately, so to does the dramatic increase in unemployment and poverty.

Those so-called “experts” or “pundits” who continue misleading the populace with extravagant claims as to the recent origins of the securitization process have done a major disservice to society. This brief blog will attempt to rectify this situation.

Is Prof. Paul Krugman wrong about Securitization?

Prof. Paul Krugman has generated some surprsing criticism from the likes of Barry Ritholtz and Bonddad for an article he posted the other day in the New York Times, entitled The Market Mystique:

Here are the crucial paragraphs:

Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.
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I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.