April 01, 2009

Securitization isn't the problem

Krugman wrote something about securitization being the big problem. Ritholtz wrote a nice piece taking him to task.

Do not forget that Securitization had been around for decades without major problems. And over the entire period of time in question, credit card loans, auto financing, and student loans were securitized without incident (other than expected cyclical recessionary downturns).

The same can be said about derivatives. Handled properly, they are tools that serve a function. Let loose with no regulation/supervision/transparency/reserve requirements, you have the making of a disaster . . .

We can even say the same about Mortgages. Would you draw the conclusion that because the lending industry made so many bad loans, that mortgages were the problem, and therefore we should do away with them? You have to look at the context in which the loans took place.

Securitization is no different.

Under normal circumstances, it works fine. And if we tweak a bit around the edges — make sure that securitizers cannot shed liability as easily as they have, and adjust incentive compensation away from the current hit & run style of faux profits but real bonuses, Securitization will work just fine.

Like him, I frequently agree with Dr. Krugman, especially during Our Most Recent Financial Crises, brought to you by the folks who told you government wasn't the solution, it was the problem. Much like those folks, though, Paul is blaming the tools and not the users.

Posted by mcblogger at April 1, 2009 09:50 AM

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