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Paul Krugman is a Nobel prize winning economist and one of the leading thinkers in the Democratic Party.  He is held in high regard by many people -- myself included.  In fact, I have cited his work on several occasions and used his statements on television to refute several right wing talking points.   However, in one of his latest columns Dr.Krugman advances a viewpoint which I disagree with because it is incorrect.

From the NY Times:

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G.,Citigroup and Bank of America.

And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. 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.

Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.

.....

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As you can guess, I don’t share that vision. 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.

Dr. Krugman's criticism of the financial sector boils down to the introduction of "securitization" into the financial world.  His argument concludes:

As you can guess, I don’t share that vision. 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 bringsecuritization back to life, and I don’t believe it should try.

Let's begin with a definition of securitization:

Securitization is a structured finance process that involves pooling and repackaging of cash-flow-producing financial assets into securities, which are then sold to investors. The term "securitization" is derived from the fact that the form of financial instruments used to obtain funds from the investors are securities. As a portfolio risk backed by amortizing cash flows - and unlike general corporate debt - the credit quality ofsecuritized debt is non-stationary due to changes in volatility that are time- and structure-dependent. If the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves; if improperly structured, the affected tranches will experience dramatic credit deterioration and loss.[1] All assets can be securitized so long as they are associated with cash flow. Hence, the securities which are the outcome of securitization processes are termed asset-backed securities (ABS). From this perspective, securitization could also be defined as a financial process leading to an issue of an ABS.

Let's put this into English by using a mortgage as an example.  Your mortgage is a "cash flow product[ing] financial asset."  What that means is when you take out your loan you must provide the lender with a predictable set of payments -- namely, your monthly loan payments.  These payments are based on the length of time the loan will be outstanding, the borrowers overall credit risk, the amount of money borrowed etc..... The point is the lender will be receiving a predictable amount of money on a regular basis for a specific amount of time.

Securitization takes your loan and combines it with loans that have similar qualities.  For example, your loan is not the only loan where the borrower takes out a 30 year, 5% loan of $100,000; thousands of these loans are written every day. Securtization takes these loans and combines them into one big loan.  Then it either sells that big loan as a whole or in pieces or cuts the pool of mortgages into different bonds which it sells to different investors.  The former security is called a pass-through while the latter is called a collateralized mortgage obligation, or CMO.

The central complaint against the process of securitization is it removes the oversight function from the lender.  For example, it use to be that a bank held a loan for the entire life of the loan.  As a result, the bank had a strong incentive to perform a large amount of due diligence to make sure the borrower would repay the loan.  Compare that to a "lend to securitize" model where lenders make loans they never intend to hold as a long-term asset, thereby removing the incentive to actually perform an analysis of the borrower.  Combine that with a ratings "system" that is at best incompetent, investment bankers providing pressure on loan originators for more and more product, a regulatory oversight system which is non-existent and incredibly cheap money and you get a disaster waiting to happen.

Yet securitization provides two incredible advantages.  First, it adds liquidity to the financial sector.  Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.  This allows banks to increase the number of loans it can underwrite, thereby freeing up credit.  Secondly, it allows individual investors to target needs and purchase products for those needs.  For example, suppose an insurance company anticipated a financial payout in 3-5 years.  Securitization allows investment banks to carve pools into specifically targeted assets which will fill the insurance company's need.  This allows them to manage their portfolio far more effectively.  In short, securitization increases overall credit and provides more tools for financial managment -- both of which increase overall economic growth when property structured.

In correlation, the process of securitization has been around for almost 30 years, yet this is the first time it has been so prominently in the spotlight.  If there were a fundamental problem with securitization in and of itself it would have been exposed when the program originated, not 30 years after its inception. The reality is securitization is not in and of itself a bad financial tool.  Instead, the sum total of numerous inter-related issues such as the repeal of Glass Steagall, record low interest rates, a compromised ratings system and lack of oversight rather than are to blame, not merely "securitization".

Finally, let me end by pulling the lens back to a much broader macro-level view.  Over the last two years there has been an understandable criticism regarding the people who created this situation -- namely, the upper echelons of the financial sector. Many of the people involved in this sector made many mistakes which we are now paying for.  The mistakes were large and spread into many areas of the economy.  They are one of the primary causes of the current recession.  Additionally, the system as a whole -- its overall organization -- needs to be significantly restructured to prevent this situation from happening again. As I have pointed out, the current mess is the combination of numerous factors, not merely one boogie man called "securitization".

But that does not mean that finance in and of itself is evil or that all people involved in this area of the economy are corrupt.  I have often read the criticism that "The US doesn't make thinks anymore" as if creating financial structures is somehow less valid than making a physical good.  In fact, both activities are equally valid and should be treated as such.  Individuals who prudently manage other's money and take well-thought out risks provide a valuable service to the economy; they should not be publicly vilified because other members of their profession have made huge mistakes.  In essence, there are good practitioners and bad practitioners in any profession; but the presence of bad practitioners does not nullify the contributions of the professions as a whole.

In addition, many finance people provided invaluable advice to their clients throughout this recession -- advice which preserved their client's money during an incredibly difficult time.  Market watchers such as Barry Ritholtz, Mish Shedlock and Tim Iacona all provided invaluable advice to their clients and the public at large.  Yet the criticism of finance groups all people in this industry together -- or provides asterisks and caveats regarding industry professionals who are agreed with while still spilling a fair amount of bile at the industry as a whole.  Throughout this recession I am often reminded of the public's attitudes about criminal defense lawyers -- a profession which is ridiculed and roundly criticized on a regular basis until you need one.  Then you can bet your bottom dollar that you want Johhny Cochran at your side saying, "If the glove does not fit, you must acquit."  The point is broad brush strokes about any profession are inappropriate at best.

In short, Dr. Krugman's analysis is wrong.  Securitization has provided many benefits to the economy as a whole.  It is not the sole problem with the current situation; we arrived at out present crisis because of a combination of numerous ill-thought out events and decisions.  Finally, finance is not in and of itself bad and not all "wizards were frauds".  Securitization has been around a long enough time to indicate that properly done it does not pose a threat to the economy as a whole.  The current mess is not solely caused by securitization, but instead a combination of many inter-related events.

In short, I respectfully disagree with Dr. Krugman's analysis.  

Originally posted to bonddad on Sat Mar 28, 2009 at 08:20 AM PDT.

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Comment Preferences

  •  Securitizarion is not the biggest problem .. (116+ / 0-)

    but it is part ... if a bank doesn't have to share in the risk .. why should it care who it loans to?  It knows it can pawn off all the risk on other parties .. that is golden for them and leads to a lot of fraud

    John McCain: Bush right to veto kids health insurance expansion

    by Calvin Jones and the 13th Apostle on Sat Mar 28, 2009 at 08:25:17 AM PDT

  •  Interesting quote (9+ / 0-)

    Then you can bet your bottom dollar that you want Johhny Cochran at your side saying, "If the glove does not fit, you must acquit."  The point is broad brush strokes about any profession are inappropriate at best.

    Even though Cochran knew OJ was guilty as hell.

    Republicans : Socialism for the rich, capitalism for the poor

    by ctsteve on Sat Mar 28, 2009 at 08:28:27 AM PDT

    •  Cochran did a fantastic job (6+ / 0-)

      of representing his client against the legally admissible evidence proffered, and met the high standards set by the Constitution.
      The great verdict for his client was a testament to making the Constitution viable for all defendants.
      California prosecutors and police and labs just did not meet their heavy burden of proof.
      Defense attorneys are not required to judge guilt or innocence.
      Thanks, Bonddad.  Krugman needs to be questioned just like every other expert.    

      Cowards die many times before their deaths... Shakespeare, Julius Ceasar, II, 2

      by on the cusp on Sat Mar 28, 2009 at 09:28:25 AM PDT

      [ Parent ]

    •  huh (1+ / 0-)
      Recommended by:
      Tonedevil

      "Even though Cochran knew OJ was guilty as hell."

      Yes, Cochran should have worked less once he knew OJ was guilty.

      That's the standard we should have now.

      •  Some folks would say (1+ / 0-)
        Recommended by:
        rhetoricus

        That revealing truth and achieving justice are higher goals than getting your client off.

        Just sayin'.

        •  It was his job to present his client's case (0+ / 0-)

          Perhaps the outcome was unjust, but that is because the system is fallible (which is why we should not have irreversible penalties like capital punishment).  If defense attorneys just didn't bother putting in an effort because they thought their client was guilty, then the system would be even more flawed.  The prosecutors in the Simpson trial badly mismanaged the case, which is why OJ got off.  

          Don't like XOM and OPEC? What have YOU done to reduce your oil consumption? Hot air does NOT constitute a renewable resource!

          by Asak on Sat Mar 28, 2009 at 04:35:21 PM PDT

          [ Parent ]

        •  only folks who are either idiots (0+ / 0-)

          quite frankly.

          There is a guy on the other side called a prosecutor and he's trying his or her darndest to convict your client.

          Meanwhile, you are trying the same to gain an acquittal.

          It's called the adversarial process.

          You might want to check into it, great idea, been around for a few centuries.

      •  Working less = unethical choice for an attorney (0+ / 0-)

        In defending a client, an attorney in the common adversarial system has only 2 real alternatives:

        1. Work as zealously as they can on behalf of the client, within the (broad) limits of the professional ethics rules;
        1. Resign.

        "Working less" on behalf of a client in whom you do not believe is a direct and serious violation of professional ethics.

        I admit that this is not a perfect system, and I sometimes have some doubts about the adversarial model. On the other hand, as someone who has contributed to the defense of people even less popular than OJ (IE alleged Gitmo terrorists), it is not entirely clear to me what real alternatives exist for ensuring that the process rights of the least popular defendants--including the rights of those who are guilty as sin--are fully respected against the powerful machinery of the state.

  •  You may be right (14+ / 0-)

    OTOH, most of the purported benefits of securitization have vaporized in just one year.   I could really see just kissing off any form of derivatives forever.

    •  Missing the point of the diary (28+ / 0-)

      We're in a hell of a mess, securities were/are involved, so therefore we can avoid getting into this particular kind of trouble by eliminating all securities.

      That logic works, but so does this: Many people are injured each year in industrial accidents, power tools were/are involved, so therefore we can avoid injuries of this type by eliminating all power tools.

      bonddad's point is that securities, if properly devised and regulated, are a useful financial tool. I suspect that Krugman would agree with him about that.

      •  Yes n/t (14+ / 0-)

        "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

        by bonddad on Sat Mar 28, 2009 at 08:54:47 AM PDT

        [ Parent ]

      •  asdf (10+ / 0-)
        First, I said derivatives, not securities. Second, we may let people carry around power tools, but we don't let them carry around C4 just because it's so handy if a tank attacks.  Cost/benefit ratio, and I suggest derivatives look more C4 than power tools.
        •  No, power tools are a much better analogy. (7+ / 0-)

          I don't think you realize just how extensively derivatives have been used, and for how long, to manage risk prudently and effectively.  A Candian company is able to keep its US division running during a period of CAD weakness because they hedged their cost exposure using forwards, options, etc., and is therefore able to stabilize their costs and plan effectively for growth.  A beverage bottler in Pennsylvania can use metals futures to manage against volatility in their key input costs.  An airline (cough SOUTHWEST cough) can thrive while its competitors struggle by placing smart hedges on the price of jet fuel.

          Derivatives are not C4.  They are used millions of times over, all around the world, to largely benign-to-beneficial outcomes.  It is a fraction of a fraction of a fraction of derivative transactions that landed us in this mess - a fraction that can be controlled as bonddad suggests.

          •  At this point (0+ / 0-)

            it's not worth arguing about.  If Krugman's right they'll be gone in a year or so.  At that point it will be up to people like bonddad to prove the benefit in the aggregate is bigger than their cost.  I doubt that's possible.

            •  You're conflating two different things. (2+ / 0-)
              Recommended by:
              Alice in Florida, Lying eyes

              If Krugman's right, securitization will disappear in the next year or so.

              You said above that you're talking about derivatives.  That's another matter, not completely unrelated but certainly distinct.

              •  Unless I'm wrong (0+ / 0-)

                (always possible) derivatives are a subset of securities.  just speaking for me, I think it likely that the higher the derivative, the more likely it is to vanish in a puff of smoke.  Actual bonds on actual assets may survive, but CDOs and CDS, no.

                •  No, what you said there is right (1+ / 0-)
                  Recommended by:
                  New Deal democrat

                  Derivatives are a type of security, but what Krugman is saying should disappear is securitization, which has a more specific meaning (referring to the process of dividing financial assets into different secondary cash flow streams).  Plenty of derivatives don't rely on securitization - for instance, a stock option or a Euro forward.  I absolutely agree that the higher the degree of leverage, the more likely it is to vanish and never return.  But some sort of secondary market for financial assets will survive, which is a good thing.

          •  Conceptually, you're right. Until one part fails (12+ / 0-)

            and then the whole thing comes down.

            One analogy of finer and finer grained derivatives is a structural space frame.
             title=
            Each member of a space frame works together to share the loads and stresses on the entire frame, which reduces the size and strength necessary for any one particular element. The more elements you could put in a space frame, the lighter and less strong each part can become. It's the very same idea as derivatives,"sharing" risk across a much broader field. Derivatives make the argument that each part can have much less reserves, because they are protected by the collective reserves of everyone else.

            The problem is that the failure of any one of these little elements ricochets throughout the frame, and inevitably takes the entire thing down. Space frames are notoriously bad at taking point load stresses at any one point. In other words, if some force is suddenly put at a single point, the frame can't handle the load. Each element is too intertwined with the others, and there isn't any redundancy---because the entire effort in a space frame is to reduce the risk by reducing stresses.

            The concept of derivatives is identical. The failure of derivatives is identical.

            •  fantastic visual (5+ / 0-)

              and material analogy!!

              do a diary on this!!!!

              this ain't no party.. this ain't no disco.. this ain't no foolin'around..

              by fernan47 on Sat Mar 28, 2009 at 09:45:24 AM PDT

              [ Parent ]

              •  I'm not sure it works though (2+ / 0-)
                Recommended by:
                basquebob, DrFitz

                It's a beautiful and elegant analogy, but an ideally-regulated market with robust securitization would actually be at less risk of failure than one without.  If your local bank has no access to secondary markets, then it rises and falls with the local real economy - i.e., if the Toyota factory shuts down, and the workers start losing their homes, the local bank is screwed.  On the other hand, if the bank could convert mortage obligations into cash in the secondary market, it can actually stabilize the local economy.  The financial system starts to become massively pro-cyclical without the ability to pool and divide risk.

                Bonddad is pretty spot-on when it comes to what happened here.  There are a relatively small number of individuals, at a relatively small number of institutions, who engineered this mess with a willing hand from Republicans in DC.  

                In other words, the problem isn't securitization, the problem is when the same eight banks are allowed to USE securitization to leverage thirty or forty times over by trading amongst themselves, back and forth, gearing up each step of the way and taking a healthy bonus each time they did so.  All because our friend Phil Gramm inserted a passage in the CFMA in 2001, literally at the eleventh hour, that prevented the government from establishing any regulatory authority over the CDS and secondary mortgage markets (amongst others).

                THAT'S what went wrong here.

                •  My point is a larger one about the ability to (2+ / 0-)
                  Recommended by:
                  happymisanthropy, JerichoJ8

                  pool and divide risk, which is the heart of what the "same eight banks" were really doing. There is an ultimate limit to the effectiveness of pooling and dividing, which either can be controlled by regulation, or by making sure the whole system has much more redundancy by structurally limiting the amount of shared risk.

                  It should be clear to us today that regulation is---in and of itself---NOT a systemic solution. Or won't be until lobbyists and Republicans are stricken from affecting public policy.

                  The only answer in my mind is making banking conservative and boring again. Then regulation works.

                  •  I think that's what's going to happen (1+ / 0-)
                    Recommended by:
                    chrississippi

                    I think securitization will survive, but only in a form closer to the actual asset.  A lot of companies rely on the securitization market for funding, and there's nothing wrong with that.  That's an ideal role for banks to play in the economy.  It's also very vanilla and boring.  You don't want to choke off that kind of asset-based lending (even extending down to home equity lending) - you just want the risk to be transparent & priced appropriately, and you want put stricter leverage & capital ratios in place so that banks can't gear up to 30x on what are essentially market bets.

                    That's why the money it's taking to fix this mess is orders of magnitude greater than the amount it would take to buy up every distressed mortgage - by levering over the underlying asset so many times, the bubble hyperinflated.  Control the leverage, and you control the bubble.

                    Our regulators were unforgivably absent on this one.  Greenspan, for his part, disavowed the role of the Fed in moderating asset price inflation.

                •  Everything works great in the ideal (0+ / 0-)

                  The problem is that the ideal never actually manifests in the real.

          •  I get the usefulness (1+ / 0-)
            Recommended by:
            New Deal democrat

            But I wonder if you see that there might be a systemic risk INTRODUCED by the use of these tools that, on a cumulative basis, actually INCREASES the risk position to those businesses.

            In other words, maybe it's not necessarily a good thing that companies can uses these tools to flatten out their daily risks. Maybe what they are doing is actually just spreading the risk around so that it ultimately increases the risk of system wide collapse.

            To put it simply: is risk management a zero sum game?

            •  At a certain point, yes. There is some economic (0+ / 0-)

              benefit to pooling risks - it's why we buy insurance, for instance.  But over the long term, the return from that line of business can't continue to be what they've been.  Excessive, unchecked leverage has created the illusion of wealth that far exceeds what the underlying economy can actually support.

              At the end of the day financial structure doesn't generate any value in and of itself.  It's only insofar as financial intermediaries play a role in enabling the growth of the real economy that they create value.  That value isn't the 20%+ per year RAROC/ROE they've been getting.

            •  Exactly: atomized risk is systemic risk. n/t (0+ / 0-)

              "When the going gets tough, the tough get 'too big to fail'."

              by New Deal democrat on Sat Mar 28, 2009 at 12:59:51 PM PDT

              [ Parent ]

          •  are forwards shorts and options considered (0+ / 0-)

            securities?

            It's about the people.

            by JerichoJ8 on Sat Mar 28, 2009 at 11:03:40 AM PDT

            [ Parent ]

            •  Yes (0+ / 0-)

              'Security' includes equity, debt, and derivative instruments.  The difference is that changes in the value of equity and debt are driven by changes in the value of the underlying real asset, whereas changes in the derivative instrument's value are driven by changes in the underlying financial asset.

        •  You are correct (0+ / 0-)

          You did say derivatives. You also said "securitization", in a way that I (incorrectly, it turns out) took to mean that you considered them different words for the same thing.

          If I read more carefully, and you write more clearly, then in future we'll come to agree more quickly :)

          As to C4 and tanks, that is argument by extrapolation to an absurd extreme. The point may be true, but it doesn't cast much light.

      •  Excellent point. (0+ / 0-)

        http://www.democraticfreedomcaucus.org/dfc-platform/

        by Common Cents on Sat Mar 28, 2009 at 09:17:21 AM PDT

        [ Parent ]

      •  My take... (5+ / 0-)
        Recommended by:
        TiaRachel, Orinoco, fernan47, DrFitz, Johnny Q

        bonddad's point is that securities, if properly devised and regulated, are a useful financial tool. I suspect that Krugman would agree with him about that.

        Most likely the nature of securities is such that they can never be properly devised and regulated, much as it is the nature of power that it cannot be consolidated without corrupting.  I suspect that Krugman would agree with me about that.

        I do not buy into bonddad's story that this is all the result of people making mistakes. That is the excuse people always give when a system in which they are heavily invested (one way or another) fails...it was the failure of some individual people in the system, not the system itself, when in fact a systemwide failure is never the failure of some individual people, it is always a systemic failure, virtually by definition.

      •  But Krugman (to my reading) (5+ / 0-)

        never condemns all securitization, nor all derivatives. He condemns the recent usage of them, the idea that you can pool subprime mortages, create CDOs, and give a large fraction of them AAA ratings since asset prices never drop substantially (even after a asset price bubble!)

        Krugman's point, as I read it, is valid--the way CDOs (and CDSs) have been used is largely the source of our problems.

        You cannot depend upon American institutions to function without pressure. --MLK Jr.

        by Opakapaka on Sat Mar 28, 2009 at 09:45:57 AM PDT

        [ Parent ]

      •  i think the diary is missing Krugman's point (10+ / 0-)

        And I write that as a great admirer of both bondad and Krugman.  Krugman has been concerned for some time that the administration's response to the financial crisis -- like that of the Bush administration -- is to treat it as a liquidity problem rather than a fundamental issue like, say, wholesale bankruptcy of the banking system.  And he views the Geithner plan as unequivocal evidence that his worry is justified.  The geithner plan shovels taxpayer subsidies at the financial institutions as without the sort of protections or steps that would be required for a more fundamental change, or that would protect taxpayers.  As Krugman writes in his blog:

        [...]if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.

        Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution

        [..snip...]

        Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006

        Krugman views the excessive securitization of the last several years, driven by the factors bondad mentions, as a major contributor to the fundamental wrecked condition of the industry.  But his major concerns is that the administration either doesn't recognize the severity of the problem or isn't willing to pay the political capital to deal with it.  And I think Krugman is right.

        how can i turn italics off in my signature?

        by fightcentristbias on Sat Mar 28, 2009 at 09:54:49 AM PDT

        [ Parent ]

      •  Bonddad's Point = Picking Nits with Krugman (5+ / 0-)

        Bonddad misses what I think is Krugman's main point--that Obama thinks the financial system would be fine if we could set the clock back two years, while Krugman (and I) think this is a big, big  mistake.

        Concerning "securitization" its as if our financial industry intentionally took "shit" and put it in bags.  It then labeled these bags as "gold."  Next, it took the bags of shit (now called "bags of gold") and sold them for trillions of dollars all around the world, making a huge profit for themselves.  

        When their fraud was discovered, they still had plenty of shit that they had not sold on their shelves.  They were screwed, and would soon go belly up.    

        But no.  Our financial industry is using the corrupt influence it has purchased over the years to have our government buy the "bags of shit" at "bags of gold" prices.  This shifts the loss to us taxpayers, but enriches the financial industry.  
        They will then go back into the selling shit as gold business, and all will be well.  Or so Obbama and his Wall Street advisors think.  

        Bonddad argues that selling gold is a business which has many good points and helps society.  He's right to a degree, except our finanial industry isn't in the selling gold business.  Its in the selling shit as gold business.  That's where the big bucks are.  

        What Bonddad is doing is much like defending the heroin industry by arguing that opium poppys are pretty flowers, and the florist who sell them do good for society.  Its true to an extent, but it completly misses the main point.  
         

             

      •  I get bondad's basic point (3+ / 0-)
        Recommended by:
        drewfromct, JerichoJ8, TAH from SLC

        But I wonder if he gets Krugmans.

        Tools are needed to build things. A hammer for carpentry, a loan for financing a new business. It's all the same basic concept. Newer and better tools can help increase productivity. So we shouldn't shoot down these new tools just because they are new.

        But what if someone invents a tool that could improve a worker's productivity by 50%. Wouldn't you want that tool? Of course you would. But what if using that tool introduces a systemic risk that says that every year you use the new tool, the chances of a system wide collapse of the factory that uses that tool increases on a cummulative bases. What if that cumulative risk exists even if the workers are well trained in the use of the new tool and no one trys to get around the rules on what is an acceptable use for that tool? What if the tool itself contains that seed of risk?

        Is that extra 50% productivity now worth the near certain risk of collapse down the road?

        I think that is the question we have to ask ourselves.

  •  I don't know if Krugman is wrong or not, but... (21+ / 0-)

    it disturbs me that so many people accept that he is right, simply because he won a Nobel prize in economics.  

    He has one opinion and frankly I think the man is pissed that he wasn't asked to fix the economy.

    President Obama, are aliens real?

    by David Kroning on Sat Mar 28, 2009 at 08:30:22 AM PDT

  •  I agree with Krugman's final thoughts ... (35+ / 0-)

    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 we will return to an era of high profits of FIs - if strict regulations are put in place. As a system we have seen that FIs are eager to make very risky investmenst if they can sell those off easily and make a lot of money for the individual traders (and execs).

    •  Here is where I disagree with bonddad: (16+ / 0-)

      But that does not mean that finance in and of itself is evil or that all people involved in this area of the economy are corrupt.  I have often read the criticism that "The US doesn't make thinks anymore" as if creating financial structures is somehow less valid than making a physical good.  In fact, both activities are equally valid and should be treated as such.  Individuals who prudently manage other's money and take well-thought out risks provide a valuable service to the economy; they should not be publicly vilified because other members of their profession have made huge mistakes.  In essence, there are good practitioners and bad practitioners in any profession; but the presence of bad practitioners does not nullify the contributions of the professions as a whole.

      I disagree that creating "financial structures" is necessarily anywhere near as valid as making a physical good, and I particularly disagree that the sorts of "financial structures" that Prof. Krugman is implicitly criticizing have any place in a sound economy or even a society.

      Perhaps Prof. Krugman errs by using the word "securitization" as a universal catchall, but again I will respectfully disagree with bonddad that what was passing for "prudently manage other's money" should ever be dignified by being allowed to resume.

      The practices that Prof. Krugman and I deplore are merely the financial sector's equivalent of multilevel-marketing schemes, with all the same level of ethical function. The schemes involve extreme risk, extreme speculation, extreme overreaching, extreme overvaluation of (or just complete absence of) assets, and an unhealthy emphasis on constantly adding middlemen and expanding the process; just like multilevel marketing schemes in the marketplace of goods, the emphasis on the tottering structure of nonexistent value overwhelmed any responsibility toward selling the goods one was supposed to be selling.

      On a smaller level, even everyday practices such as "day trading" stocks come dangerously close to being unethical; if conservatism is of any value anywhere, it is in the "managing of other people's money", and as such the practice should never be reduced to a slot machine or a craps table with ever-more-remote correlation with true assets and with a Las Vegas-style factor of speculative greed that rewards the "churners' and destroys the stability of the underlying system of investment.

      •  Agree with blue in NC... (1+ / 0-)
        Recommended by:
        drewfromct

        securitization can be a useful financial tool, but it pales in comparison to the cell phone, automobile, shuttle, etc.

        The problem with the type of securitization that we just experienced is that it was mostly gambling.  

        For example, liar loans were written because the mortgage writer knew that he didn't have to keep the financial instrument on his/her books - they would be added to the backroom securitization "casino" - aka Wall Street. In Wall Street's casino, the financial instruments were regulated less than a casino in Las Vegas, Reno or Atlantic City.

        •  Even greater than the gambling of securitization (1+ / 0-)
          Recommended by:
          vetforobama

          that was created by liar loans, was the gambling that was allowed through CDSs, which would allow me to place a bet on whether or not you would repay a loan to a bank, even though I had no financial stake in the outcome.

          Kind of like an office football pool played with billions of what is turning out to be taxpayers' dollars.

    •  Securitization a minor theme in Krugman critique (0+ / 0-)

      The major one is more simply expressed here.

      We must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

      by Minerva on Sat Mar 28, 2009 at 10:43:02 AM PDT

      [ Parent ]

  •  You're not macro enough (59+ / 0-)
    The fundamental issue, and I think what Krugman is saying (and as history has shown time and again), is that the financial industry cannot be allowed to be the motor of an economy.  Financing tends to build upon financing, without any real security to act as a foundation.  It was the leveraging upon already dubious subprime loans that doomed the finance industry--and because the finance industry was (and is) the fundamental motor of the our economy, it caused the whole economy to collapse.

    What is needed is a real economy that incents innovation in real technology and home grown production.

    No stimulation without regulation.

    by Publius2008 on Sat Mar 28, 2009 at 08:33:09 AM PDT

    •  What's also needed are elected representatives in (22+ / 0-)

      Congress who are truly representing the interests of their constituents and the nation.  The problems we're facing today we're identified and clearly called out years ago.  Congress, as usual, chose to play footsie with the folks who finance their campaigns rather than deal with the problems.   And now they're all engaged in the finger-pointing blame game.   I can't believe they think the public doesn't know what a bunch of feckless losers they are...and expect us to buy into their pathetic whining and sniveling about who did what to whom when it has all been in plain sight for so long.

      As long as we have a government that is willing to legitimize usury (30% Credit card rates and pay-day loan sharks, etc.) we can expect this kind of chicanery.

      Let's face it...the financial services industry, by and large, has become nothing less than a group of white-collar thieves hiding under an umbrella of protection provided by Congress.  Even now, rather than calling these folks crooks, Congress says they're just greedy or stupid.

      A lot of folks need to go to jail.  Then we'll see a resurgence of "integrity."

      Finally, I too disagree with bonddad.  The only way we can insure integrity in financial dealings is to ensure those who play also have to pay if their schemes go bust.  

       

      The longer I live, the clearer I perceive how unmatchable a compliment one pays when he says of a man "he has the courage to utter his convictions." Mark Twain

      by Persiflage on Sat Mar 28, 2009 at 09:03:35 AM PDT

      [ Parent ]

    •  There is no such thing as a "real" economy. (3+ / 0-)

      Financial industries can produce wealth and expansion in an economy beyond what you are terming "real" economy.

      What we can't afford is an economy relying on any one industry to prop it up. It is true that we need manufacturing and technology. We also need the financial wizards and the like.

      It is a fallacy to pick the bust periods and extrapolate that a particular industry is poison to the economy. The reason we got high as we ever did is because of the financial industry as much as anything else. To point the finger at them in the downtime is so simple as to be nearly criminal (intellectually speaking).

      http://www.democraticfreedomcaucus.org/dfc-platform/

      by Common Cents on Sat Mar 28, 2009 at 09:26:02 AM PDT

      [ Parent ]

      •  Is there some question whether or not (8+ / 0-)

        the financial industry is putting the economy in the dumpster?

        Is there some question as to the asymmetrical effect that this one industry has had on the economy?

         title=

        The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.

    •  Excellent point in a thread with few (0+ / 0-)

      thanks for getting to the heart of the matter bonddad did not

      Obama used to be for single payer before he came out against it.

      by formernadervoter on Sat Mar 28, 2009 at 09:27:20 AM PDT

      [ Parent ]

    •  real money vs. fake dreams built on (2+ / 0-)
      Recommended by:
      blue in NC, happymisanthropy

      air castles. Yup.

      What we call god is merely a living creature with superior technology & understanding. If their fragile egos demand prayer, they lose that superiority.

      by agnostic on Sat Mar 28, 2009 at 09:44:28 AM PDT

      [ Parent ]

    •  The concept of a so called "real" (0+ / 0-)

      economy is an artifact. Evidently you still believe in the notion of a chimney stack insular economy producing everything it needs which is a bankrupt idea; and you do not acknowledge the huge importance of services in the US economy currently. I don't have the figures but manufacturing things plays a small role in the economy right now. What about modern information services which is huge right now. Traditional newspapers are folding as we speak while you and I are blogging away in  the cyber economy.

    •  I think that Kevin Phillips has demonstrated this (1+ / 0-)
      Recommended by:
      drewfromct

      ADMIRABLY in his books.

      How much is enough? $500K/year?

      by billlaurelMD on Sat Mar 28, 2009 at 11:33:58 AM PDT

      [ Parent ]

  •  Cut Krugman a break (53+ / 0-)

    He's writing an op-ed, where he has to pack a lot of stuff into 500 words. Writing under those conditions, you have to take some shortcuts and gloss over complex ideas, terms and concepts quickly. I'm sure if you sat down with Krugman and had a long conversation about securitization, finance, etc., you'd find his ideas were more nuanced and discriminating.

    But on the general concept of securitization, a good argument can be made that, without extremely vigilant oversight, the overall effect has been two-fold: (1) it has given banks an incentive not to care about who is borrowing money from them, because they can pass the risk on to others (so we had a proliferation of no-doc loans, inflated appraisals in the mortgage process, etc.); and (2) by "freeing up" funds to make more loans, it helped drive the Credit Bubble. Since securitization hit it big, banks have become dangerously over-leveraged. I doubt Krugman would take the position that securitization tout court is never appropriate, but it was used with wild abandon and metastasized throughout the financial system.

    Finally, academics who study the financial sector long ago identified the dangerous externality that lurks in the beast: the cost of systemic risk. Individual players do not have incentives to price risks to the system into their analysis of their own behavior, and without an overseer who forces them to do so, you get individual behavior that aggregates into imprudently high systemic risks. Which is what got us here today. Securitization feeds right into that dynamic of not correctly pricing systemic risk.

    -7.75, -7.64 www.politicalcompass.org "In the conservative lexicon, 'freedom' means the right to starve to death without anyone giving a shit." -- Me

    by scorponic on Sat Mar 28, 2009 at 08:36:42 AM PDT

    •  Excellent comment. Highly recommended. (n/t) (1+ / 0-)
      Recommended by:
      mkor7
    •  I have this question for bonddad (3+ / 0-)
      Recommended by:
      scorponic, Floande, Conure

      Krugman's basic thesis is that this is a solvency crisis rather than a liquidity crisis; all else follows from that.  Do you disagree -- and why?

      I didn't see the word "solvency" in the diary.  It should have been there.

      Victory rests on your finger! Phonebank NY-20!

      by Seneca Doane on Sat Mar 28, 2009 at 10:11:24 AM PDT

      [ Parent ]

      •  Agreed. (4+ / 0-)

        Liquidity is not the issue. Anyone who is trying to solve the crisis from a liquidity perspective -- ahem, Geithner, Bernanke, etc. -- is barking up the wrong tree. The missing link in the mainstream approach is that, even if banks were flooded with "liquidity," they wouldn't and couldn't lend because debtors are maxed out -- i.e., they're in or approaching insolvency. There is no appetite for new debt, even if credit were widely available. So unless we start talking about literally forgiving debt on a massive scale, we're not going to be able to restart the credit engine. Of course, maybe it's not such a good idea to fuel an economy with run-away debt. But that's just me.

        -7.75, -7.64 www.politicalcompass.org "In the conservative lexicon, 'freedom' means the right to starve to death without anyone giving a shit." -- Me

        by scorponic on Sat Mar 28, 2009 at 11:40:41 AM PDT

        [ Parent ]

  •  You're wrong (49+ / 0-)

    I have often read the criticism that "The US doesn't make thinks anymore" as if creating financial structures is somehow less valid than making a physical good.  In fact, both activities are equally valid and should be treated as such.

    A financial security is nothing more than a promise to pay. It is, literally, a piece of paper. You can't wear it. You can't eat it. You can't drive it or live in it. It does not keep you warm or cool you off.

    I can't recall at the moment his exact words, but Lincoln said something along the lines of labor being prior and superior to capital. A farmer can grow crops without a banker. Let's see bankers try to eat without the work done by farmers.

    Al Qeada is a faith-based initiative.

    by drewfromct on Sat Mar 28, 2009 at 08:37:07 AM PDT

    •  "Labor is prior to, and independent of, capital. (44+ / 0-)

      Capital is only the fruit of labor, and could never have existed if Labor had not first existed. Labor is superior to capital, and deserves much the higher consideration.

      We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

      by Gooserock on Sat Mar 28, 2009 at 08:39:21 AM PDT

      [ Parent ]

    •  and words are only words (5+ / 0-)
      Recommended by:
      loretta, drewfromct, raincrow, BoxNDox, DrFitz

      not things, so the only values can come directly from things?  That almost denies our very humanness--the fact that we are abstracting creatures.

      Plus, it is a very slippery epistemological slope.

      I think we should be careful to note when we are engaging in abstraction.  It is not the making of abstractions that is at fault, but the acceptance of the abstractions as concretes, the lazy substitution of "apples" for apples.  

    •  Exactly. (21+ / 0-)

      Sorry, bonddad, because I generally value your analyses, which are always thoughtful and thorough. But I think it's fair to say that there's been a problem with the way that the US economy has shifted, over the last thirty years, from an industrial economy where the public prosperity is grounded in the making of things, to a postindustrial economy proficient only at generating financial products.

      We've seen precisely how this shift has affect the majority of Americans, who watched their wages shrink even as their productivity soared and the nation's economy grew. We have seen a massive wealth redistribution upwards, and I think it has a great deal to do with the asset hyperinflation bubbles that have fabricated such fictitious wealth out of thin air.

      bd, I'm curious to see what you make of the article "Infinite Debt" in Harper's this month, which goes after the consolidation of wealth within the FIRE sector (ie., Finance, Insurance, and Real Estate).

      Nothing requires a greater effort of thought than arguments to justify the rule of nonthought. -- Milan Kundera

      by Dale on Sat Mar 28, 2009 at 08:45:20 AM PDT

      [ Parent ]

      •  RE: Economies grounded in making things. (1+ / 0-)
        Recommended by:
        DrFitz

        Okay. Look where the economies are that are making things as you put it. They aren't exactly any more prosperous than us and if you recall they are dependent on buyers and therefore are no more economically independent in this economy.

        Makers of things should be respected and we should encourage more manufacturing in this economy, but it is not our salvation. The United States and recessions and panics time and time again back in the "good old days" when we were primarily manufacturers.

        While we definitely must respect the deep recession we are in today, let's not forget that we only got as successful in the good times because of our finanical innovation as well.

        http://www.democraticfreedomcaucus.org/dfc-platform/

        by Common Cents on Sat Mar 28, 2009 at 09:36:59 AM PDT

        [ Parent ]

        •  You say economies that are making things aren't (6+ / 0-)

          ... more prosperous than us.  But it precisely because those countries are less prosperous in the first place that manufacturing was shifted to those countries.  You've got your cause and effect backwards.

          •  Yes and why were they less prosperous? (2+ / 0-)
            Recommended by:
            drewfromct, TexasTwister

            They were agrarian mostly. What can be more real than farming? Making things? How is it that they are not well off? And why is manufacturing not lifting them up by itself?

            It seems there is a requirement for some innovation in the financial sector. If I recall it is also the case that our financial industries aid in funding these other countries where manufacturing is primary.

            To be clear, I advocate a balance, but I don't think manufacturing is our sole goal or salvation.

            http://www.democraticfreedomcaucus.org/dfc-platform/

            by Common Cents on Sat Mar 28, 2009 at 09:59:26 AM PDT

            [ Parent ]

            •  agrarian prosperity vs capital depletion (0+ / 0-)

              I agree with your assessment that agrarian societys are in certain measure, more "prosperous" than our "modern" capitalistic society which depend on using up and depleting the Earths resources (human included).

              And , yes, I am cynical and I'm pissed at the 3%.  It's like they were all financial juveniles who couldn't keep "it" in their pants.  The is being the stability of Glass-Steagall.

        •  You throw the word "successful" (4+ / 0-)

          around pretty capriciously.

          Just because some people appear to be possessed of obscene amounts of money, that doesn't equal "success" of the society: especially when that "money" is mostly either phony or stolen.

          Please don't refer to out-and-out whoring as "financial innovation".

    •  so, nurses and teachers are useless? (7+ / 0-)

      It's not obvious to me that only people involved in the creation of physical goods play a role in growing an economy.

      If nurses and teachers have value to an economy, then presumably bankers do to, if they can allow people to borrow money to start a new (restaurant, factory, architecture firm, whatever). No?

      car wreck : car insurance :: climate wreck : climate insurance

      by HarlanNY on Sat Mar 28, 2009 at 09:04:34 AM PDT

      [ Parent ]

    •  asdf (2+ / 0-)
      Recommended by:
      raincrow, a night owl

      money is also only a promise to pay, and since nobody has a gold standard any more it's even more flimsy than that. But you try living without it.

    •  very nicely argued (0+ / 0-)

      n/t

      Obama used to be for single payer before he came out against it.

      by formernadervoter on Sat Mar 28, 2009 at 09:28:10 AM PDT

      [ Parent ]

    •  No banker=no growth. (2+ / 0-)
      Recommended by:
      Inland, raincrow

      The development of monetary systems, credit, and banks have allowed economies to expand and given the farmer customers rather than borrowers.

      Read "The Ascent of Money" if you want a great history of how the creation of banks and the like have improved life for everyone.

      Labor is important, but not more important.

      http://www.democraticfreedomcaucus.org/dfc-platform/

      by Common Cents on Sat Mar 28, 2009 at 09:29:08 AM PDT

      [ Parent ]

      •  Then try this expiriment: (4+ / 0-)

        Take a pile of money and leave it on the ground. Do no work, and see how long it takes until that pile of money turns into something you can eat, wear, or live in, etc.

        Now take a skilled worker without money, but with tools and material, and see if they can produce something useful for you.

        Then tell me which is more important.

        Al Qeada is a faith-based initiative.

        by drewfromct on Sat Mar 28, 2009 at 09:41:01 AM PDT

        [ Parent ]

        •  Try this experiment. (2+ / 0-)
          Recommended by:
          a night owl, Grass

          Walk up to a skilled worker and ask him to find tools and materials and make something for you. Mind you, you have nothing to offer for his services and he presently has no way to get the tools and materials he needs to be productive. Now see what happens.

          Then you tell me which is more important.

          http://www.democraticfreedomcaucus.org/dfc-platform/

          by Common Cents on Sat Mar 28, 2009 at 09:47:23 AM PDT

          [ Parent ]

          •  If I did that (1+ / 0-)
            Recommended by:
            Johnny Q

            Mind you, you have nothing to offer for his services and he presently has no way to get the tools and materials he needs to be productive. Now see what happens.

            I guess you'd have to call me a banker, now wouldn't you?

            Capitalists depend on workers to produce useful goods and services. Workers depend on capitalists to do little more than leech off them, and convince them how essential they are. But it's really an elaborate fiction. You can't eat money, no matter how hard you try. You can say that a farmer depends on a banker for seed money, but a farmer who owns his own land and saves his seed corn has no need of a banker, whereas a banker needs a farmer to grow his food.

            There is a need for both, but it is hardly equal.

            Al Qeada is a faith-based initiative.

            by drewfromct on Sat Mar 28, 2009 at 10:15:41 AM PDT

            [ Parent ]

            •  How does the farmer own his land? (0+ / 0-)

              How does the worker make things? Well it is real simple, the farmer buys the land, right? How does he do that? With money perhaps? And credit perhaps? Where does this money and credit come from? Where does the factory, the machines, and the tools come from? From someone using money and credit to open a factory with investors and bankers.

              The fact is that without money and credit from banks there would be no opportunity for workers to produce things. So one without the other is impossible and therefore they are equally important.

              http://www.democraticfreedomcaucus.org/dfc-platform/

              by Common Cents on Sat Mar 28, 2009 at 10:20:24 AM PDT

              [ Parent ]

              •  Go back in history (1+ / 0-)
                Recommended by:
                Johnny Q

                and you can find a time when farmers owned land without the interference of banks and the use of credit. Work is prior and superior to capital. Period.

                The current economic structure is  nothing more than an elaborate fiction that takes from the very many for the benefit of a very tiny few. I'm not saying that we can or should do away with money or credit, but I do contend that are priorities are massively out of whack, and the system needs major re-adjustment in order to restore a semblance of balance and fairness to those of us who actually do the real productive work that creates the wealth we should all be enjoying.

                Al Qeada is a faith-based initiative.

                by drewfromct on Sat Mar 28, 2009 at 10:55:00 AM PDT

                [ Parent ]

                •  sure you can. in the days of fiefdoms (2+ / 0-)
                  Recommended by:
                  basquebob, Common Cents

                  and the actual farmers were either the lords and kings or tenant farmers that tithed to them.

                  Unless you go back to the days of paleolithic man there is no time that people owned land and farmed without the use of credit in some form or another or "banking".  When tribes trade with a tool maker to make arrow tips or burial clothes, both are done on credit...there is a pledge to make something in return for the flint given or whatever.  that is credit.  Often even back then there was a premium in the barter system for the one who gave goods right away in return for future service or goods.

                  The phrase "banking good will" also shows how the concept has been used throughout history for a future return be it tangible or intangible.

                  Unless you are in a coop living arrangement, but even those use forms of credit and banking...and really  most individuals have a drive to better themselves be it educationally, tangibly, goods, services or power.  Obama is an example of those traits in a very good man however his ambition and drive for power are no less strong.

                  Thats it. im a green dog democrat.

                  by vc2 on Sat Mar 28, 2009 at 11:39:57 AM PDT

                  [ Parent ]

        •  How did the skilled worker obtain the tools and (1+ / 0-)
          Recommended by:
          FistJab

          materials, if not with money?

    •  Thank you (1+ / 0-)
      Recommended by:
      drewfromct

      for making the point, only more succinctly, that I tried to make upthread.

    •  This comment is perhaps *too* fundamental (1+ / 0-)
      Recommended by:
      billlaurelMD

      I assume that (even?) on DKos, most of us leftish folk are of the "progressive" "liberal" or "social democratic" variety, rather than "communists" or "socialists" (as Fox and the crazy righties like to claim).

      This essentially means that we support a "mixed market" or bounded/regulated system in which capitalism and markets are allowed to operate within limits.

      This system relies on a big social compromise that works as follows: after paying a certain amount of taxes (for social goods and framework institutions) that are set through a democratic and legally predictable system, profitable capital owners are assured that they may keep the profits they have accrued to do as they wish.

      With state coercion and seizure of the means of production off of the table as a legitimate policy tool, this means that the system needs a means for getting the owners of large pools of capital to voluntarily risk it in the private projects that produce a large portion of society's wealth. That's the role of finance and why it is rather important to our system.

      Although, for largely pragmatic reasons, I think that sticking to the general framework of this system is the best choice, I do wonder about the moral pressure points it generates.

      The positions raised by bonddad, Krugman, Jerome a Paris (in a different post today), Brad DeLong, and Obama's folk have raised are all worthy of consideration from both a moral and practical perspective--and the only firm conclusion I have right now is thank goodness that McCain/Palin/Gramm are not the ones making he decisions right now...

    •  And yet, what good is producing something (0+ / 0-)

      if you can't exchange it?  And short of subsistence existence, that means a systme of those little pieces of paper....not even that anymore, since the zeros and ones took over.....where the little pieces of paper stand in for nothing more than a promise to pay and are worth the something your produced.

      Most of what has ever been made in this country has been made in order to get those little promises to pay.  

      "It does not have, in the sense of a traditional budget, numbers..."

      by Inland on Sat Mar 28, 2009 at 11:53:13 AM PDT

      [ Parent ]

      •  You and I (0+ / 0-)

        can exchange whatever we like with no interference from anyone at all, should we choose to do so.

        The system of using money as a medium of exchange and bankers to facilitate it is merely a catalyst that, when it works properly, makes it easier and more efficient to exchange goods and services. But it is not necessarily essential.

        I'm not arguing for a return to a system based purely on barter, nor am I advocating pure communism. But I am saying that somewhere along the line we've allowed the finance industry to monopolize our economy and put us in a stranglehold by which they can extract as much money from us as they can get away with, and now they've finally gone too far. They are literally slaughtering the Golden Goose. We need to put a stop to it, if it's not too late already, and the first step is to put the situation in its proper perspective and remember that it is the bankers who depend on workers to create wealth, not the other way 'round.

        Al Qeada is a faith-based initiative.

        by drewfromct on Sat Mar 28, 2009 at 12:02:36 PM PDT

        [ Parent ]

        •  Nothing at all is "essential." (0+ / 0-)

          I can dow without bankers or currency or financing or international trade.  All I have to be willing to is limit my exchanges of goods and services to people within walking distance.

          It's all been done before.

          But I am saying that somewhere along the line we've allowed the finance industry to monopolize our economy

          Then I suggest not letting the finance industry monopolize the country insteand of pretending that we can do without finance.

          "It does not have, in the sense of a traditional budget, numbers..."

          by Inland on Sat Mar 28, 2009 at 12:30:31 PM PDT

          [ Parent ]

    •  Only if you're living in 1910 (0+ / 0-)

      Aren't we way past the point where we can privilege labor that makes cars over labor that makes intangibles?  

      I work every day writing content for a company website. Your nostalgic yearning for "real" labor denies I am performing labor or am a member of labor in a capitalist system.  

  •  Why Did Credit Need to Be Increased/Freed Up? (32+ / 0-)

    Why was that good?

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Sat Mar 28, 2009 at 08:38:01 AM PDT

  •  I believe it comes down to regulation (6+ / 0-)

    having a system of regulation constructed before many of these instruments arrived is unworkable, and so is having the industry "police itself."  

    The ratings companies were complicit in pumping up the value of CDOs and MBSs because they got a cut, too.

  •  Securitization is a tool prone to misuse (9+ / 0-)

    I have always enjoyed your diaries as I said in a recent diary, which garnered all of one comment. Therefore I can't pose as particularly wise or influential. I am a medical professional, not a financial professional. I recommend that people watch out for all professionals. We know something that most people don't; that power often leads to exploitation.

    Now, securitization can be done without mystification. In the last 25 years, mystification ran wild. People couldn't understand what was in the package and they stupidly believed the credit ratings.  The rating agencies are a serious flaw for those who believe that securitization can be positive... They became completely crooked in recent years. What's the point of having them if you know that money will sway their judgments? How could we keep them honest in the future? It's hard enough to keep the FDA honest and near impossible to keep the ratings agencies honest, IMHO. People should read Liar’s Poker, although that covers only first few innings of the securitization game.

    Krugman is a smart man but his political judgment is poor and I think that he, like Noam Chomsky, antagonizes some powerful people that he would like to influence.

  •  authoritative dismantlement (6+ / 0-)

    of Krugman's over reliance on securitization as the lynchpin of the financial sector's overreach, but it doesn't change the fact that the sector, taken as a whole, is too powerful, too greedy, and too opaque.  Conceding that there are good people in the industry, and that it does vital work, I still have no intention of holstering my anger. The financial sector, as Andrew Jackson notably said, is full of "vipers and theives".

  •  GAH! You touched the third rail! (2+ / 0-)
    Recommended by:
    raincrow, rennert

    Nobody calls Krugman wrong and gets away with it **looks around**  It's only a matter of time now..........THEY'RE COMING FOR YOUR BRAINS! RU U    U        U                 N!!!

    It's a grift. They probably had grifter parents and grifter grandparents and someday they'll each spawn little grifter kids.

    by Muskegon Critic on Sat Mar 28, 2009 at 08:44:20 AM PDT

    •  Y'know, if you actually READ the comments . . . (3+ / 0-)
      Recommended by:
      blue in NC, George Hier, Johnny Q

      . . . you'd see that there's actaully an adult discussion of the points raised by the diarist going on.

      Partisanship is good. Just say no to ". . . [t]he mushy, cowardly middle, one that never stands for anything too much or critiques anything too loudly." (kos)

      by Orange County Liberal on Sat Mar 28, 2009 at 09:38:14 AM PDT

      [ Parent ]

      •  Would it help if I (3+ / 0-)
        Recommended by:
        askew, raincrow, FistJab

        bat my eyelashes adorably?

        Naw...when I posted there was a dominance of "You're wrong! WRONG!" posts. Looks like a good conversation has popped up.

        And mostly...this whole Krugman business is approaching the silly zone. He's developing his own meta-topic bubble about his Rightness or Wrongness.

        It's a grift. They probably had grifter parents and grifter grandparents and someday they'll each spawn little grifter kids.

        by Muskegon Critic on Sat Mar 28, 2009 at 09:46:33 AM PDT

        [ Parent ]

        •  You seem to be pushing that meta-topic. (0+ / 0-)

          Perhaps you need to stop that.

          Partisanship is good. Just say no to ". . . [t]he mushy, cowardly middle, one that never stands for anything too much or critiques anything too loudly." (kos)

          by Orange County Liberal on Sat Mar 28, 2009 at 09:50:25 AM PDT

          [ Parent ]

        •  No, it would help (0+ / 0-)

          if you attempted to articulate a coherent economic thought.

          •  I agree with bondad. (2+ / 0-)
            Recommended by:
            drewfromct, FistJab

            Securities aren't the problem.
            Lack of regulation is the problem.

            Securities make small banks able to lend to more people. People who suggest there's too much borrowing as a result of securities are missing the point that More People borrowing to buy a house or a car is not the same sin as One Person Borrowing More.

            Krugman...is just one economist.

            It's a grift. They probably had grifter parents and grifter grandparents and someday they'll each spawn little grifter kids.

            by Muskegon Critic on Sat Mar 28, 2009 at 10:06:57 AM PDT

            [ Parent ]

            •  Better. (2+ / 0-)
              Recommended by:
              TiaRachel, Muskegon Critic

              Thank you.

              Now, I still disagree that bonddad is "more right" than Krugman on this one, but I agree that lack of regulation is part of the problem.

              However, I will not agree that financial services should stand equivalent in value with, or worse, take the place of, tangible productivity.

              •  shux, on the last portion of your post (0+ / 0-)

                I think bondad deserves a chance to defend the financial sector, presuming s/he works there. I suppose I, myself, have felt a desire to dogpile onto the financial sector as less valuable than making things. But a lot of that is out of my own defensive feeling that manufacturing has gotten LESS status.

                It's a grift. They probably had grifter parents and grifter grandparents and someday they'll each spawn little grifter kids.

                by Muskegon Critic on Sat Mar 28, 2009 at 05:21:41 PM PDT

                [ Parent ]

          •  I have to go to a pressing princess themed (1+ / 0-)
            Recommended by:
            billlaurelMD

            birthday party so I need to counter whoever's next obvious statement about Krugman's Nobel prize by saying the Nobel prize is an award for significant contribution to a body of knowledge, it's not a Get Out of Wrong Free card.

            Case in point Nobel Laureate Dr. James Watson, THE geneticist who suggested two years ago that blacks are genetically inferior to whites.

            He says that he is “inherently gloomy about the prospect of Africa” because “all our social policies are based on the fact that their intelligence is the same as ours – whereas all the testing says not really”, and I know that this “hot potato” is going to be difficult to address. His hope is that everyone is equal, but he counters that “people who have to deal with black employees find this not true”.  

            It's a grift. They probably had grifter parents and grifter grandparents and someday they'll each spawn little grifter kids.

            by Muskegon Critic on Sat Mar 28, 2009 at 10:19:26 AM PDT

            [ Parent ]

  •  I think Krugman was right. (42+ / 0-)

    As part of my working life I provided software systems to insurance companies, savings and loan companies, mortgage companies, and other types of businesses.  I detected in 1971 a trend that is constant in the financial industry.  There are a certain number of business managers that are always looking for ways to fiddle with the value of the assets under their control.  When I started life insurance companies had to have assets that were literally concrete, such as large office buildings in the heart of downtown Houston.  But in the early 70's a movement was underway to allow life insurance cash values to be backed by common stocks, not so concrete, but easier to hype and manipulate.  The men I knew back then would be salivating at the idea of the most evanescent of assets, the mortgage-backed-security which is actually a mortgage-bundle-backed-security which is actually a mortgage-bundle-dishonestly-rated-backed-security for which there was no concrete thing the potential buyer could look at to do his own "due diligence."  The whole thing is outright fraud.

    What the diarist is saying, it seems to me, that some people reaped significant gains from this fraud and therefore the fraud is a good thing.  But that is the way the best frauds work -- and I have seen a bunch of them, not the least of which is the HMO model.  The best frauds are believable, and have examples of success that they can use to entice more suckers into the game.

    If no one had made money on this securitization frenzy then we would not be facing this huge financial collapse.  It is precisely because that many people were making money that the thing took off the way they did.  But the profits were not legitimate, they were fraudulent.  Most of this crap was nothing more than a huge criminal enterprise.

    And our government officials have got it wrong.  Too big to fail is horse hockey.  They are really saying that these enterprises are too big to prosecute, and the definition of "too big" has two parts: (1) lots of money is involved and the big boys, the counterparties, will be pissed off if the feds don't make good, and (2) the people involved are too big and too entwined with the people running our govt to prosecute.

    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning.

    by hestal on Sat Mar 28, 2009 at 08:46:07 AM PDT

    •  it's like virtualization (10+ / 0-)

      in a way.  A separate instance of an operating system inside another that is mostly incompatible.  All works well as long as you keep your context levels straight.  As soon as you require instances that are prohibited--that is, as soon as it becomes necessary for you to step outside the context in which the virtualization has integrity (let's say loading kernel modules), the whole thing can crash.

      Which is what happened.  The securitization spilled outside its boundaries and came to require resources needed for the health of the host system, and bam, crash, bang.  

      November 2008, blue screen of death.

    •  agree - but securitization allows specialization (0+ / 0-)

      My understanding is that securitization allows more people with money to help other people borrow money. If only banks can fund mortgages, then there's a much smaller pool of money available for people to use to buy houses. (Or start businesses.) But securitization allows people who are experts in making loans to make loans, and allows people who have money to invest it, without requiring them to deal with all the issues of dealing with lendees. That's generally a good thing, right? Specialization increases productivity.

      car wreck : car insurance :: climate wreck : climate insurance

      by HarlanNY on Sat Mar 28, 2009 at 09:01:44 AM PDT

      [ Parent ]

      •  You are operating in a fantasy world. (8+ / 0-)

        The actual, real-world implementation is undeniably fraudulent.  There is not way to accurately value the assets even if the ratings agencies are honest, and there is no way to determine if they are honest, and there is no way for the buyer to make his own evaluation because he knows nothing about the underlying assets and can't see them.

        Your conclusion is foolish.  Your attitude is commonplace today in which all sorts of businesses do not take into account all costs when evaluating a business.  They want to justify what they are doing or want to do, or believe in, or want to believe in.  If one takes into account the effects, the real-world consequences of specialization from securitization, then one has to conclude that the thing has cost the nation much more than it has saved, or created.  This process is clearly a huge net loss that is equivalent to the loss of entire year's output for the entire nation.  You are trying to tell me that the finacial theory that has destroyed the economic output of the richest nation on earth for one year is a good thing.  Wow, and wow again.

        Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning.

        by hestal on Sat Mar 28, 2009 at 09:08:53 AM PDT

        [ Parent ]

        •  valuing assets and determining risk (2+ / 0-)
          Recommended by:
          loretta, baxxor

          There is not way to accurately value the assets even if the ratings agencies are honest, and there is no way to determine if they are honest, and there is no way for the buyer to make his own evaluation because he knows nothing about the underlying assets and can't see them.

          Eh? Look, the one thing today's economy is good at is manipulating massive amounts of information. (See, Google.) There is no reason why asset-backed securities can't have every bit of information about the lenders that the neighborhood banker has, and there's no reason why those securities necessarily have more risk than that incurred by an old-fashioned lend-and-hold bank loan. The problem is that the information wasn't there, not that the information can't be there.

          If one takes into account the effects, the real-world consequences of specialization from securitization, then one has to conclude that the thing has cost the nation much more than it has saved, or created.

          Right. Because it was improperly regulated, and people were incentivized to hide information and mis-state risk. That's not an inherent problem with securities.

          You are trying to tell me that the finacial theory that has destroyed the economic output of the richest nation on earth for one year is a good thing.

          Shrug. I'm a liberal capitalist. I believe that a well-regulated capitalist economy with a proper safety net can be good for everyone. I do believe that banking should be boring, but I don't believe that that means we should throw the baby out with the bathwater. Keep securitization, fix incentives, information, and risk evaluation.

          car wreck : car insurance :: climate wreck : climate insurance

          by HarlanNY on Sat Mar 28, 2009 at 09:20:21 AM PDT

          [ Parent ]

          •  What utter nonsense. (3+ / 0-)
            Recommended by:
            C S McCrum, billlaurelMD, blue in NC

            You want to cling to theory in the same way that the supply side and trickle down weirdos do.  I will try one more time to get you to think clearly.  In order for securitization to be a valuable tool it must be an entire package, including incentives, information for due deligence, and risk evaluation.  Those are essential parts of securitization, your secret love, but they failed and so did securitization.  So what you should be saying to me and the others here is how you would make it work.  Saying "fix incentives, information, and risk evaluation" is not enough.  Reality insists on defining, testing, and finally carefully implementing a complete package.  So you can dream all you want, but as I said, you are living in a fantasy world, not the real world.  

            Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning.

            by hestal on Sat Mar 28, 2009 at 09:26:08 AM PDT

            [ Parent ]

      •  Was there some kind of problem with (7+ / 0-)

        funding mortgages prior to the securitization wave? Was there not enough capital to go around?  I don't think so.  All that this efficiency has brought about is large-scale disaster.

        There were strict lending criteria and rather strict oversight during the loan process, but this did not stop qualified people from getting mortgages.

        Marginal gains in efficiency are not worth the massive complexity and attendent lack of transparency that securitization entails.  And no one is going to trust securitization and credit rating agencies for a long time, not unless the government is so foolish as to bail out this round of gambling.

    •  thanks for the excellent history lesson (0+ / 0-)

      nicely argued, too

      Obama used to be for single payer before he came out against it.

      by formernadervoter on Sat Mar 28, 2009 at 09:30:35 AM PDT

      [ Parent ]

  •  excess is out of fashion- Obama (4+ / 0-)

    Obama told the CEOs that there has been  a cultural shift where the financial sector is being held accountable for their impact on society.  

    Wall Street will not return to business as usual.

    The game board is changing, and rules are being rewritten on the fly.

  •  Two questions (12+ / 0-)

    Why is making credit more liquid and increasing the number of loans a lender can make necessarily a good thing? Isn't part of the debt problem that we have had due to too much credit being extended to people who perhaps shouldn't have gotten it?

    Also, you say that securitization has been around for over 30 years, but isn't that actually a rather short time in the overall scheme of things?

    This sig is the former home of a witty Monty Python quote.

    by AaronInSanDiego on Sat Mar 28, 2009 at 08:47:50 AM PDT

  •  Bad structures not bad actors. (20+ / 0-)

    But that does not mean that finance in and of itself is evil or that all people involved in this area of the economy are corrupt.  I have often read the criticism that "The US doesn't make thinks anymore" as if creating financial structures is somehow less valid than making a physical good.  In fact, both activities are equally valid and should be treated as such.  Individuals who prudently manage other's money and take well-thought out risks provide a valuable service to the economy; they should not be publicly vilified because other members of their profession have made huge mistakes.  In essence, there are good practitioners and bad practitioners in any profession; but the presence of bad practitioners does not nullify the contributions of the professions as a whole.

    Anyone who thinks most people in finance are evil is, at the very least, silly.  People are people. Some are good. Some aren't. All can be found in any sector of the economy.

    But Krugman's critique is not about evil people. It's about a sector structured in such a way that even good people create evil effects.  

    As a number of people have said about this, the problem isn't the people like Madoff who broke the law, the problem is the effects of perfectly legal activities on the economy.

    Which brings me to this argument:

    [T]he process of securitization has been around for almost 30 years, yet this is the first time it has been so prominently in the spotlight.  If there were a fundamental problem with securitization in and of itself it would have been exposed when the program originated, not 30 years after its inception.

    I simply don't see the logic of this.  Flawed systems take some time to play out.  One might as well say that the repeal of Glass Steagall (which bonddad correctly cites as part of the problem) has been around for nearly a decade; if it were a problem it would have been exposed earlier.

    bonddad is entirely correct about the financial advantages of securitization. The question is: are those advantages with the costs attached to them?  

    This diary raises the right questions, but I still think that Krugman's answers are more convincing.

    Self-styled progressives who call for balanced budgets are not merely parroting conservatives; they are parroting dead conservatives. - James Galbraith

    by GreenSooner on Sat Mar 28, 2009 at 08:49:57 AM PDT

  •  Sorry bonddad. Not a convincing counter-- (26+ / 0-)

    --argument. Even you, in this diary, admit Krugman's underlying point: "...securitization...removes the oversight function from the lender." Hello...look what got us in the mess we're in.

    And I don't mind Krugman "painting with a broad brush" in this case. The greedy "upper echelon" who manipulated the securitization process started the ball rolling that helped wipe out half my retirement savings and just when I was close to retirement. I do so hope they have and will suffer much, much worse. Though I doubt it. Our govt. is helping make sure they have a better chance of being "made whole" than the rest of us.

    39 Years Of Yellow-Dogging And Then 1 Year Of WTF

    by Larry Bailey on Sat Mar 28, 2009 at 08:51:06 AM PDT

    •  Better to find more economically sound ways (9+ / 0-)

      for wealthy people to play with newfound riches once tax rates are cut.

      In the old days, wealthy people were steered towards charitable contributions as a means of avoiding tax burdens.  Instead, we cut tax rates and reduced much of the incentive to make charitable donations.  We gave the wrong incentive - encouraging money to chase ever complex and questionable investment schemes.

      And what did we end up with? A scenario where a $100,000 mortgage default results in 25x that amount in financial sector investment collapse.

      A conservative is a man with two perfectly good legs who, however, has never learned how to walk forward. FDR

      by Betty Pinson on Sat Mar 28, 2009 at 09:02:26 AM PDT

      [ Parent ]

      •  They were also (2+ / 0-)
        Recommended by:
        figleef, Betty Pinson

        steered toward real investment in plant, equipment and labor to avoid taxes. In eastern Colorado in the 1950's the cowboys usually worked for a wealthy man who lived in Denver and lost money or broke even on his trophy ranch to take the tax write off. That's why millionaire actor Ronald Reagan had a ranch.

        "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

        by johnmorris on Sat Mar 28, 2009 at 10:03:32 AM PDT

        [ Parent ]

        •  Agree, there are better things (0+ / 0-)

          to invest in than mortgages that people can't afford.

          A conservative is a man with two perfectly good legs who, however, has never learned how to walk forward. FDR

          by Betty Pinson on Sat Mar 28, 2009 at 10:47:05 AM PDT

          [ Parent ]

        •  Yes, but investment in real innovative plants and (1+ / 0-)
          Recommended by:
          billlaurelMD

          equipment in the US went DOWN since the Reagan revolution.  Most investment in the US took the form of an orgy of M&A deals before moving on to a series of investment bubbles.

          •  and now that's exactly what we need (0+ / 0-)

            to steer this ship of state from its path toward the iceberg in the energy and infrastructure sectors.  Exactly at the time when NO ONE wants to lend because of this financial clusterf**k. Sometimes I think the powers that be (and were responsible for this) planned it this way.

            How much is enough? $500K/year?

            by billlaurelMD on Sat Mar 28, 2009 at 11:52:15 AM PDT

            [ Parent ]

  •  Securitization is fine. . . so long (10+ / 0-)

    as the risk is defined accurately, and adequate reserves are kept, just like insurance and financial institutions must act  throughout the country.

    What we call god is merely a living creature with superior technology & understanding. If their fragile egos demand prayer, they lose that superiority.

    by agnostic on Sat Mar 28, 2009 at 08:52:02 AM PDT

  •  The question is how do we remove (3+ / 0-)

    the perpetual incentive to make loans of any quality whatever and get them out the back door as fast as possible (if the lender does not hold the loan)?

    I think that there could be ways. Make the lender issue credit default swaps with the securities and limit the amount to a level that they can cover comes to mind, but then maybe they should just have held on to the mortgages in the first place since the amount they could lend would be limited in either case.

    Honest and prudent ratings agencies and buyers would help.

    Yes there are honest and sensible financial workers but at virtually all of the biggest firms they were afraid to speak up or were systematically ignaored.

    We have only just begun and none too soon.

    by global citizen on Sat Mar 28, 2009 at 08:53:00 AM PDT

  •  I was surprised (5+ / 0-)

    to see Krugman to condemn securitization in such broad language. I think the real problem is with a particular kind of securization called the originate-to-distribute model. Under this model there was every incentive to make a questionable loan, but because the losses would not be reflected on the bank's balance sheet, there was no disincentive to make these risky loans. We need to find a way to make sure that banks are accountable for the loans they make, but I think we need securitization in some form to keep up with the demand from credit-worthy borrowers.

    •  Securitization (3+ / 0-)
      Recommended by:
      billlaurelMD, lotlizard, DrFitz

      is nothing more than another form of savings. We don't need to create opaque savings instruments to provide capital for credit. The worst part of the current crisis is that the "toxic assets" represent the lion's share of the wealth created by Americans over the last 30 years. While our wages have been flat or falling, the ownership class has clawed out most of the vale added in our economy and deposited it in these instruments which are now worthless. In other words, they took all our money and gambled it away. That's not an industry, that's a scam.

      "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

      by johnmorris on Sat Mar 28, 2009 at 10:00:22 AM PDT

      [ Parent ]

  •  The problem with securitization is the lack of (6+ / 0-)

    information on the underlying assets as the instruments is passed up the investment chain.

    •  precisely (2+ / 0-)
      Recommended by:
      raincrow, Orange County Liberal

      If secondary investors could accurately evaluate the risk of what they were purchasing, under a variety of economic scenarios, then they could price them accurately. The problem with these last 10 years is that everyone lied (or fooled themselves) about risk, and assumed that just because someone said something was good, that it was. Sunlight would have minimized the effect of the housing crash on the rest of the economy.

      car wreck : car insurance :: climate wreck : climate insurance

      by HarlanNY on Sat Mar 28, 2009 at 09:11:35 AM PDT

      [ Parent ]

  •  Actually don't know if Krugman is right or wrong (10+ / 0-)

    but I do understand now why he is not in politics...

    and I hope the admin at least reviews what he says rather than dismissing it. Unlike many people that are critical of various admins...I do believe that Krugman does want to take on the issues...
    it's not personal it's business.

    The Truth is nonpartisan!

    by fedupcitizen on Sat Mar 28, 2009 at 08:55:52 AM PDT

  •  Agreed. But this will not stop him from whining. (2+ / 0-)
    Recommended by:
    fedupcitizen, jtown
  •  Krugman Is Not Wrong - You Overlook (28+ / 0-)

    The respected diarist overlooks a key point he himself makes in the diary:

    Yet securitization provides two incredible advantages.  First, it adds liquidity to the financial sector.  Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.

    "Adding liquidity" is exactly what eliminates oversight. Banks holding loans and having a direct interest in the performance of that loan is a tremendous value that should be built into the banking system, not cut out.

    Second, using "that cash to make another loan" is exactly what fueled the OVER-demand for these loans. So long as banks could pump n' dump these loans and just take a fee each time, then the bank has no oversight role and has every incentive to flood the market with easy credit. Guess what happened?

    No, Krugman is not wrong. Not about this.

    Texas: Molly Ivins, Ann Richards, Bill Moyers, Barbara Jordan, Lloyd Bentsen, Jim Hightower, Dan Rather, Lady Bird, Sam Rayburn, Willie Nelson, LBJ

    by TX Unmuzzled on Sat Mar 28, 2009 at 09:01:03 AM PDT

    •  on liquidity (2+ / 0-)

      The problem with having only banks making loans is that they can only make loans in proportion to their deposits. But it's not obvious to me that legitimate demand for investment and deposits should always be proportional. So selling the mortgage to an investor (who does not have to be an expert in making loans), should be a good thing.

      The problem with "pump n' dump" is that the secondary investor lost information about risk. If the real risk of a mortgage (or bond, or whatever) were available, then people wouldn't have bought the loans from the banks so willy-nilly. The problem isn't securitization, it's that risk was not properly understood, and there were big incentives to lie about risk. Solve that, with appropriate regulation, and securitization can help an economy grow.

      car wreck : car insurance :: climate wreck : climate insurance

      by HarlanNY on Sat Mar 28, 2009 at 09:09:59 AM PDT

      [ Parent ]

    •  Score! You win the argument (2+ / 0-)
      Recommended by:
      TX Unmuzzled, Nebraskablue

      nicely done.

      I had to go pretty far down this thread to find good analysis and there isn't much of it, but your take is one the few best.

      thanks!

      Obama used to be for single payer before he came out against it.

      by formernadervoter on Sat Mar 28, 2009 at 09:33:10 AM PDT

      [ Parent ]

    •  What if everyone had paid their mortgages? (0+ / 0-)

      That is to say, what if the economy in general was sound and people's wages were increasing, the budget was balanced, no wars were draining the treasury, oversight from the government was competent, etc etc.

      In that situation creating more credit and providing more loans would empower more people to financially move forward and progress.

      I think we underestimate how so many things contributed to this mess and one part of it is the securitization problem, but there were a whole lot of other factors that often get a free pass for this easy boogeyman.

      http://www.democraticfreedomcaucus.org/dfc-platform/

      by Common Cents on Sat Mar 28, 2009 at 09:43:55 AM PDT

      [ Parent ]

      •  Ran your post through the snark-translator and... (7+ / 0-)

        That is to say, what if the economy in general was sound and people's wages were increasing, the budget was balanced, no wars were draining the treasury, oversight from the government was competent, etc etc.

        In that situation creating more credit and providing more loans would empower more people to financially move forward and progress.

        I think we underestimate how so many things contributed to this mess and one part of it is the securitization problem, but there were a whole lot of other factors that often get a free pass for this easy boogeyman.

        If everything had gone to plan, this would have been a great plan!  So let's blame all those things that ruined our plan, and for heaven's sake, let's not question the wisdom of the plan.  

        We just couldn't have predicted that there might someday be a severe recession or depression, or that people's wages might stagnate or go down, or that the budget wouldn't be balanced, or that there would be war, or lack of government oversight, etc. etc.

        So let's not blame this "easy boogeyman" of securitization.  Let's try it again.  It'll work this time.

  •  krugman needs to stop complaining, and start (3+ / 0-)
    Recommended by:
    liberalconservative, FistJab, PeggyD

    offering solutions directly to the Obmama's team, rather than calling them indirectly idiots in the damn press.

  •  Maybe he is right. (4+ / 0-)

    Maybe he is wrong. Nobody can know, just as nobody can know if Obama is right or wrong. But Obama is the man we elected to chart our course, and for that reason, and because I respect his thoughtfulness and intellect, that I will follow Obama's lead. Not because I'm sure that Krugman or any other non-elected economists are wrong.

    I'm in the pro-Obama wing of the Democratic Party.

    by doc2 on Sat Mar 28, 2009 at 09:02:40 AM PDT

    •  Yup (4+ / 0-)

      That's just what they had in mind in Philadelphia back in 1776.

      •  Agreed, but I think you mean 1789, (1+ / 0-)
        Recommended by:
        FistJab

        when they wrote the Constitution, not '76, which was the Declaration (and said nothing about how we would organize our country).

        I'm in the pro-Obama wing of the Democratic Party.

        by doc2 on Sat Mar 28, 2009 at 09:27:08 AM PDT

        [ Parent ]

        •  In Point of Fact (4+ / 0-)

          The Constitution of 1789 actually created a stronger and more robust central government and executive branch than the more decentralized and parliamentary driven Articles of Confederation.

          Be that as it may, both the political blueprints of 1776 or 1789 sought to restrict a strong, unitary executive that would be given broad powers and then "trusted" due to its having been elected.

          The whole premise of the United States was to restrict the power of the executive. We have, of course, wandered very far from that original premise and, to some extent, what we are experiencing today is the price we are paying.

          •  Where in the Declaration does it discuss (1+ / 0-)
            Recommended by:
            FistJab

            restricting the executive? Are you referring to the stuff dissing George III?

            I'm in the pro-Obama wing of the Democratic Party.

            by doc2 on Sat Mar 28, 2009 at 09:39:47 AM PDT

            [ Parent ]

            •  The Entire Premise (1+ / 0-)
              Recommended by:
              Larry Bailey

              Of the Constitutional Convention was to restrict the executive. You know, declaring independence from the power of the Crown was in and of itself an act of doing away with executive power and replacing it with republican government. That no strong executive authority was created to replace the Crown (which some wanted to do) is in its very nature a restriction on executive authority.

              •  Yes. The Constitutional Convention. (1+ / 0-)
                Recommended by:
                FistJab

                Not the Declaration of Independence, which was written and signed before the Rev. War, not after.

                I'm in the pro-Obama wing of the Democratic Party.

                by doc2 on Sat Mar 28, 2009 at 09:46:26 AM PDT

                [ Parent ]

                •  Typo (1+ / 0-)
                  Recommended by:
                  Larry Bailey

                  I meant the Continental Congress.

                  Neither the First nor Second Continental Congress created a strong executive branch of the continental government. A weak executive council, made up of members of the congress, was created, largely in line with Franklin's (and others) distrust of executive authority.

  •  say_what? (4+ / 0-)
    Recommended by:
    formernadervoter, raincrow, jtown, FistJab

    "Krugman is Wrong"

    ?

    omfg

  •  Diary has wrong definition for "securitization" (5+ / 0-)

    "What that means is when you take out your loan you must provide the lender with a predictable set of payments -- namely, your monthly loan payments."

    Uh...no.

    What you provide is SECURITY for the loan, the house asset that the bank has if you cannot make the payments.

    The bank hopes you can make the payments but that is not the bank's security. The security is the asset.

    Loans based purely on ability to repay are called "NON-SECURED" loans.

    Krugman is right in that the problem is that the supposedly "securities" had no security, no underlying asset that covered the risk.  The same secured loan, the orginal mortgage with the house as the security on the loan was sold and resold so that it was in effect, five or ten mortagages on the property that could only really secure one mortgage.  Add to that the inflated nature of the base security and you have the house of cards that is the current financial crisis.

    Not sure I follow Krugman's reasoning as to why secured loans would not work fine in the future as long as they are regulated and are actual secure with a real asset.

  •  Not All Securitization (12+ / 0-)

    Collateral is also securitization. Krugman is of course not arguing for eliminating collateral from our economy. He's arguing for the kind of excessive securitization that Reagan/Bush created by deregulating. That securitization enabled the junk bonds that crashed the credit economy in the 1980s, requiring the $1.5 TRILLION (in a $3T GDP) S&L bailout (after funding Iran/Contra and all kinds of other covert/criminal enterprises without transparency or legitimacy).

    The problem with excess, unregulated securitization is illustrated clearly by Krugman, and isn't much different this ($45T) time around:

    Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

    But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. 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.

    Transparency, controls, feedback to loan originators from failed repayments, limited (and honestly hedged) leverage, accountable risk ratings, and other regulation must limit the opportunities that securitization has always proven when allowed to run amok.

    Krugman is wrong when you read him wrong. Of course, it's always the writer's responsibility to ensure they're being heard properly. But this one isn't so hard to read, and many of us are reading it the same way, correctly, together. Let's accept the obvious facts that securitization has gone too far, that some is necessary, and that whenever we fail to strike the balance on the side of caution, we lose our shirts. And probably that we'll get only one more chance to do this wrong, or the next time around there won't be anything with which to do it right.

    "When the going gets weird, the weird turn pro." - HST

    by DocGonzo on Sat Mar 28, 2009 at 09:10:26 AM PDT

  •  Bondad notes "Many of the people involved.... (7+ / 0-)

    in this sector made many mistakes which we are now paying for..."
    My question is why aren't they paying for their "mistakes" as the pain is not shared at the nobility class.

  •  BREAK UP THE BANKS !!! (10+ / 0-)

    ..."too big to fail" is as outmoded, unfocused and impractical as Bush/Cheney's fearfully obscene, disproportionate and genocidal response to 9/11.

    This economic crisis was the plot and plan of a dedicated cadre of dead-enders, end-of-days dominionists and madmen. They don't even believe in science or evolution, so how can we trust anything they have done or said? There is absolutely nothing that Bush/Cheney's self-styled terrorists and subversives have to offer. Nothing. And their philosophy is utterly authoritarian and enslaving. The scheme to break the bank was on in 1999.

    I give them credit for knowing precisely how and when this scheme could be executed and how it would be timed. This is no accident, and it is no mistake at all.

    The longer that Obama pussyfoots, playing along with the fascists - self-serving establishmentarians like Geithner, Gensler, Summers, Rubin and all the rest of his Goldman crowd - the longer the "downturn" will last. If he thinks they will unwind the mess, he is absolutely mistaken. These miscreants have nothing on their mind but greed, a demonstrable propensity for selfish gain above all else.

    I have yet to see any of them recoil in nauseous disgust which is precisely what will be needed.

    More Truth Here: www.exiledonline.com

    by ezdidit on Sat Mar 28, 2009 at 09:12:23 AM PDT

    •  Single points of failure (3+ / 0-)
      Recommended by:
      Fabian, ezdidit, Notreadytobenice

      Very poor design...that is just common sense.  Conspiracy or not.

      Hey Look! The pigs are at the trough eating your future.

      by mojavefog on Sat Mar 28, 2009 at 09:15:49 AM PDT

      [ Parent ]

      •  Democrats Dot Com has an email for you ::: (0+ / 0-)

        Treasury Secretary Geithner proposed a $1 trillion plan to help Wall Street make a killing buying "toxic assets" with our tax dollars and guarantees. And he proposed a complex regulatory scheme to keep huge financial institutions from wrecking our economy once again.

        But there's a better and simpler solution: break up those huge financial institutions. If they're "too big to fail," then they're too big to exist.

        Sign our petition to Congress:
        http://www.democrats.com/...

        Returning to the banks and insurance companies that existed before the Reagan era would not hurt our economy. As Paul Krugman writes, "that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation."

        Our friends at A New Way Forward have a plan:

        NATIONALIZE: Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts.

        REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.

        DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place - new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function.

        Sign our petition to Congress:
        http://www.democrats.com/...

        On Saturday April 11, A New Way Forward will lead protests all across the country to demand these changes. Find one near you:
        http://www.anewwayforward.org/...

        And if you're in New York City on Friday April 3, join the National March on Wall Street:
        http://www.bailoutpeople.org/...

        Thanks for all you do!

        More Truth Here: www.exiledonline.com

        by ezdidit on Sat Mar 28, 2009 at 01:51:59 PM PDT

        [ Parent ]

  •  There is never one path (4+ / 0-)

    to any solution.....I have some faith that Obama will change course if the current path does not yield results.

    Hey Look! The pigs are at the trough eating your future.

    by mojavefog on Sat Mar 28, 2009 at 09:12:45 AM PDT

    •  Will...not...happen (0+ / 0-)

      But you can dream, can't you?

      This is a guy who used to be for single payer before he came out against it.

      A guy who used to be for Palestinian rights before he was silent in the face of massive Israeli assaults (illegally using our weaponry, btw, for which he was/is also silent).

      No, this guy ain't moving to the left, where the solution lies on this crisis.

      He is going to wait out his failed center/right non-solution, all the while telling us to have patience and enough of you Obamamaniacs will continue to follow.

      Obama used to be for single payer before he came out against it.

      by formernadervoter on Sat Mar 28, 2009 at 09:38:40 AM PDT

      [ Parent ]

      •  Right (0+ / 0-)

        and the move to the left you suggest...will...not...happen. Americans are more interested in American Idol.  None of this change is going to happen until a large percentage of the population is feeling real pain...and we are not even close.

        Hey Look! The pigs are at the trough eating your future.

        by mojavefog on Sun Mar 29, 2009 at 08:39:01 AM PDT

        [ Parent ]

  •  hmm (7+ / 0-)

    First, it adds liquidity to the financial sector.  Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.  This allows banks to increase the number of loans it can underwrite, thereby freeing up credit.

    but that credit isn't just free money.  that's the problem with the system.  there is more "credit" than there are actual assets in the system.  securitization allows the system to become overly leveraged.  it creates false value.

    the increase in credit also inflates prices through simple supply and demand.  the result of all of this is something we are all familiar with... an economic bubble.

    "Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that." - Martin Luther King, Jr.

    by burndtdan on Sat Mar 28, 2009 at 09:17:49 AM PDT

  •  Selling your loan doesnt remove oversight (4+ / 0-)
    Recommended by:
    loretta, Fabian, raincrow, LillithMc

    This assertion by Krugan and others on this site is problematic b/c it presumed the institutions or organizations that securitize loans do not have the ability or the desire to monitor the debt instruments they possess.  If they responsibly run their business they do.

    Buffet has been a successful stock fund owner b/c he responsibly overseas the stocks he purchases, and buys only solid companies with good management. He makes mistakes periodically, but does not willy nilly purchase instruments that are fundamentally flawed or overly risky.

    Krugmans argument presumes everyone securitizing loans were in on the scam, and willingly purchased stocks that were risky, unsecured or both. While this may be true in some cases, Bonddad is correct to assert this type of behavior would have crashed a lot sooner than it did if it were true.

    Part of the problem was that many loans that were made more recently were given to risky borrowers.  When those loans were securitized, they merely securitized a greater risk than already existed.

    Combine these facts with the repeal of Glass-Stegal and you have a recipe for disaster. Banks make risky loans to people who are on the margins, remove oversight of these kinds of financial transactions, and then banks that make the risky loans can sell those risky assets to remove the risk from their books.  Lack of oversight and greed can then successfully overlook or conceal the risk inherent in the financial instrument.  With increased financial activity and repealing Glass Stegal at the beginning of this decade, you have the 10 year frame for a disaster like this to take shape.

    I agree Bonddad, blaming securitization merely ignores the other factors that contributed to the problem.

    The only thing we have to fear is fear itself - FDR. Obama Nation. -6.13 -6.15

    by ecostar on Sat Mar 28, 2009 at 09:17:51 AM PDT

    •  The banks and finance companies (0+ / 0-)

      replaced oversight and due diligence with flawed mathematical models built with fundamental assumptions that are wrong. The banks convinced regulators to accept their mathematical models as proof of the eminent sensibility of all of this. The problem with securitization is the measurement of risk by these mathematical models, and the fundamental assumptions within the models themselves.

      In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

      by Areopagitica on Sat Mar 28, 2009 at 10:24:40 AM PDT

      [ Parent ]

      •  Problem with securitization isnt that risk is (1+ / 0-)
        Recommended by:
        Areopagitica

        measured by mathematical models, it's that absent REAL oversight, the mathematical models factor in potentially misleading or false information.  Thus, the models are imperfect.  The more misleading or imperfect the information, the more risky.  Furthermore, many companies relied too heavily on mathematical models to determine risk.

        Overusing mathematical models is a consequence of arrogance and laziness on the part of senior level management.  They over-relied on mathematical models b/c they were too lazy to pay for real qualitative research and they were arrogant b/c they thought they could eliminate risk by using mathematical models.  This led to risk taking behavior out of line with the real risk.

        Eventually, the buck stops at the top.  As I mentioned, Buffet frequently assesses good companies by the quality of the management.  Qualitative measure cannot be easily modeled.  No risk can be fully modeled. They were arrogant to think they could.

        The only thing we have to fear is fear itself - FDR. Obama Nation. -6.13 -6.15

        by ecostar on Sat Mar 28, 2009 at 11:34:37 AM PDT

        [ Parent ]

        •  Over-reliance (0+ / 0-)

          on mathematical models is a consequence of arrogance. I agree completely with that sentiment. I guess my point is that these models are symptomatic of the flawed 'science' of economics, which is used to justify a broad range of financial behavior and government policy. But nobody is tackling the failures of this science or questioning its central tenets. And bonddad's post makes clear that most trader and financial types don't see this as a problem. It's like phrenologists being neuroscientists and that being the normal course of the world.

          Economics as it is, is a science that is deeply flawed and does not rely on empirical foundations. This is the real scandal, and I think history will show that (if humanity survives that long). None of the regulatory apparatus being talked up does anything to address these fundamental flaws. A systemic risk regulator, while nice in theory, means nothing if the systems are always noisy and therefore subject to interpretation. There are methods of analysis that exist and can be developed that would give a more realistic appreciation of the financial markets, but it isn't going to happen any time soon, especially since the institutional bias is to support the notion that these methods worked well until this great mystery of downturn came.

          In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

          by Areopagitica on Sat Mar 28, 2009 at 11:51:32 AM PDT

          [ Parent ]

  •  Bonddad you didn't address executive compensation (0+ / 0-)

    Many feel that excessive and distorted executive compensation practices in the financial sector played an significant role in the current economic meltdown.

    Bonddad, do you agree or disagree and why?

    "It's not enough to be right. You still have to use your nice voice." -said by my then six-year-old daughter; "Love binds us all."-willb48

    by be the change you seek on Sat Mar 28, 2009 at 09:17:54 AM PDT

    •  Where does the wealth come from? (1+ / 0-)
      Recommended by:
      BlueGenes

      Manufacturing -

      And high technology. But we are coasting on the achievements of the past.

      Thats a serious problem. We need to invest in this country instead of looting it and playing games with numbers. Otherwise, this country will eventually slide down towards becoming a hellish kleptocracy.

      All and all, I think Krugman was right.

      The path we are unfortunately still on is terrifying.

      Denial is comfortable, but it won't solve our problems. Those good jobs we are exporting wont be replaced by anything comparable unless we make a decision that we are all in it together.

  •  A Very Interesting Debate (3+ / 0-)
    Recommended by:
    maracucho, Fabian, raincrow

    In short, is securitization itself the essentially abuseable (Krugman), or is it linked to other abuses (Bonddad).

    I don't know. But I do know this:

    when I got not one, but two, stated income loans, and a home equity line of credit double the amount I put down not but three years after I bought the property, you can bet the farm that the whole mortage industry was compromised.

    And that is something to keep in mind when discussing whether securitization itself is a problem.

  •  Partnoy on Fresh Air (2+ / 0-)
    Recommended by:
    lotlizard, blue in NC

    I'd like to hear your comments on the Partnoy Piece on Fresh Air.

    One flower is made of the whole cosmos. - Thich Nhat Hahn

    by Espumoso on Sat Mar 28, 2009 at 09:19:28 AM PDT

  •  Excellent Tempered Comment (with typo note) ... (2+ / 0-)
    Recommended by:
    liberalconservative, raincrow

    See the following sentence ...

    Securitization has been around a long enough time to indicate that property done it does not pose a threat to the economy as a whole.

    I presume you meant to write "PROPERLY done ..."

    Securitization has been around a long enough time to indicate that PROPERLY done it does not pose a threat to the economy as a whole.

    And, since this is the very crux of your argument, I think it should be corrected, and by the way, let me say that I do wholeheartedly agree.

    And, while we are on the subject, another main point that we all should consider is the fundamentally incorrect assumption that "privatization" is the same as "de-regulation" ... which it is not, and I would assert that "privatization" in certain instances, with proper regulatory oversight, for non-shared infrastructure, does promote market efficiency through competition, but "privatization" is NOT the silver bullet to solve all of the problems in an inefficient monolithic bureaucratic governmental utility/agency, and in virtually ZERO instances is a lack of regulatory oversight wise or prudent ... at the very least, each corporate enterprise must be held accountable and be able to provide a clear, honest and accurate vision of their actions and state of affairs .... most especially, if that is an enterprise which serves a critical need for  public health and welfare ... and, in certain industries, like energy, there is an overarching issue affecting our very humanity, which also must be held to a higher standard of governance, or guidance, even if it is driven by self-governance, it must be responsive to a public need. Now, I am not necessarily suggesting a punitive role for the government oversight, it could merely be a reward based system, or a reputation based approach, wherein "contributive" market participants were provided certain tax incentives, or something of this nature, or maybe/merely for the government to act as an information providing resource so that the general public could be made aware of the activities, and quality of certification, of a given enterprise's products or services ... Note the role of ANSI (AMERICAN NATIONAL STANDARDS INSTITUTE) in the technology industry ... as but one example of this function/role.

    ~we study the old to understand the new~from one thing know ten thousand~to see things truly one must see what is in the light and what lies hidden in shadow~

    by ArthurPoet on Sat Mar 28, 2009 at 09:19:44 AM PDT

  •  problem: don't make drug addicts pharmacists (7+ / 0-)

    ..to be healed/the broken thing must come apart/then be rejoined.

    by Zacapoet on Sat Mar 28, 2009 at 09:20:37 AM PDT

  •  bonddad, you are incorrect (5+ / 0-)

    Krugman's commnentary makes eminent sense.

    Obama used to be for single payer before he came out against it.

    by formernadervoter on Sat Mar 28, 2009 at 09:21:53 AM PDT

    •  I agree with Krugman, too (0+ / 0-)

      Securitization does not spread risks. It shifts the risks. Dangerously. Perversely.

      The risk of lending should be borne by the lender and the borrower, not some unknown and largely unknowing third-party who is not party to the transaction.

      The problem really is in teh incentives, and it is inevitable. If the lender looks at the loan as a salable asset, rather than the income-producing asset it is supposed to be, there is no check on the bank to structure the original loan fairly and smartly. Rather than focusing on what the borrower will be able to repay, the bank looks at how it can make the loan look more attractive to a prospective buyer. That leads to the bait-and-switch teaser rates that sunk so many homeowners.

      When the original lender is not concerned about whether the borrower will be able to repay the loan, they loan to those who should not get loans and they bury terms that will bury the borrower even as they make the loan a more attractive purchase. It is almost inevitable because the securitization shifts the risks. It has nothing to do with properly structuring the deal. It is a house of cards waiting to colapse.

      Coming Soon -- to an Internet connection near you: Armisticeproject.org

      by FischFry on Sat Mar 28, 2009 at 10:25:41 AM PDT

      [ Parent ]

  •  Uh oh: You're really tearing at a nerve here. (2+ / 0-)
    Recommended by:
    raincrow, FistJab

    Can't wait to go back and read the comments.

  •  Krugman's other larger point is we need to spend (3+ / 0-)
    Recommended by:
    TiaRachel, raincrow, Areopagitica

    Which I agree with.  As horrible as WW2 was (70 million dead) it did allow the US to get out from under the gloom that the Great Depression caused.

    The U.S. after spending so much money in WW2 on objects that would cause mass destruction ended up in BETTER financial shape after the war then before it.  Our debt ratios were lower after the war then before it.  

    The Krugman argument, as I understand it, is that America has been shackled for quite some time because of low GDP growth and the best way to fix the problems is to have an assertive spending program as we did to get thru WW2.

    In many respects that what the Nazis did in the 1930's.  

    The reason why the American economy didn't grow much after the Civil War is because the government was occupied with paying off the debt instead of growing the economy.  And that is what the current Republicans want to do now.

  •  Here's how a financial system works (18+ / 0-)

    without securitization:

    In 1983 my wife and I bought some land (on a land contract). I then designed the house I'd been researching and thinking about for 10 years - a passive solar house with no furnace - in WI - and some other unconventional features. Then we needed a construction loan.

    I went to the small-town bank in the town my wife grew up in. I sat down with the bank's VP (and he was actually the VP, not just some ceremonially-titled middle manager). We discussed what I wanted to do, how much money we'd need, what my financial situation was, and then he said "Come back in a week and I'll have an answer."

    He then asked around about us and our reputation including talking to my sister-in-law, who tended bar at the restaurant he usually ate lunch at. When the week was up, we sat down again and he said "Yeah - we can do this". He set a date for closing on the land contract - that was rolled into the construction loan.

    At the closing he handed a $20,000 check to the people we had bought the land from, and as we were leaving, he handed me a loan application and said, "You probably should fill this out so we have something to show the regulators."

    As construction progressed, either he or the bank president would show up on site every few weeks to see how things were going. When we finally moved in, they rolled the construction loan over into mortgage loan that the bank held. We paid probably 1% higher interest on the loan than the going market rate, but as rates fell in the 1980s (we started somewhere around 12%) we could adjust the rate down 1% each year for something like $50.

    By the time we rolled the loan over, the bank VP had left to become president of a different, nearby local bank. When we had some problems with the appraisal, I called and talked to him and he pointed us to another appraiser who everybody respected and we got that straightened out.

    That's finance without securitization. If you want the other side of the story - what a system with securitization looks like - you can just read some of the recent diaries about how BoA and Citi treat their credit card customers or nearly put people out of business with their lending practices. And with the homogenized, conformist securitized system (and it can't work any other way), you can forget about building a house that doesn't have the requisite number of bathrooms per bedroom, and you can forget about innovations like solar (active or passive) or other energy saving features that make the house less than standard. They call them "conventional" mortgages for a reason - they're designed for all the little pink houses made of ticky-tacky.

    And you can decide which system is likely to offer more stability to the financial system, which assesses and handles risk better and which insulates people in Arizona or Michigan from the kinds of scams banks like Wamu were practicing in New York state.

    But of course the president of that local bank didn't make $150 million a year in bonuses either - that's what securitization is really about.

    Je suis Marxiste, tendance Groucho

    by badger on Sat Mar 28, 2009 at 09:27:41 AM PDT

  •  Bondad may be right; Krugman may be wrong, BUT (1+ / 0-)
    Recommended by:
    FistJab

    right now, this morning, what is more important is to help Scott Murphy win in NY20.

    Blatant threadjacking? You betcha! Go recommend Eric Massa's diary and then join him in phonebanking for Murphy and the Democratic Agenda.

    don't always believe what you think...

    by claude on Sat Mar 28, 2009 at 09:29:20 AM PDT

    •  Ummm... no. (1+ / 0-)
      Recommended by:
      BlueGenes

      The election of a single member of Congress is far less important than which vision of the future of economic organization wins out.

      Decisions are being made now that will be governing people's lives long after Scott Murphy is dead and buried.

      A special election for an upstate NY Congressional district is pretty minor on the scale of national events.

      --Shannon

      "It is better to die on your feet than to live on your knees." -- Emiliano Zapata Salazar
      "Dissent is patriotic. Blind obedience is treason." --me

      by Leftie Gunner on Sat Mar 28, 2009 at 11:24:43 AM PDT

      [ Parent ]

  •  If this is the argument... (4+ / 0-)
    Recommended by:
    IM, TiaRachel, blue in NC, Areopagitica

    ...I'm with Krugman.

    The central complaint against the process of securitization is it removes the oversight function from the lender.

    Well, that's one hell of a complaint, IMO. I'm inclined to line up with Krugman on that basis alone.

    Yet securitization provides two incredible advantages...This allows banks to increase the number of loans it can underwrite, thereby freeing up credit.

    Score another one for Krugman. We have too little credit now because we have had way too much for decades now. Any changes that would be expected to keep credit much tighter in the future have my support.

    Secondly, it allows individual investors to target needs and purchase products for those needs....

    Securitization allows investment banks to carve pools into specifically targeted assets which will fill the insurance company's need.  This allows them to manage their portfolio far more effectively.

    Huh. We seemed to have started with "individual investors" and ended with investment banks and insurance companies. Regardless, I'm not willing to trade strong oversight and tight controls on credit for effective portfolio management... by banks, insurance companies, or actual individual investors.

    •  Securitization didn't remove oversight (2+ / 0-)
      Recommended by:
      Free Spirit, Dragon5616

      repealing long-standing financial regulation, the SEC looking the other way, and the credit rating agencies blessing every instrument as gold even if it was obviously crap was what removed the incentive to make sure structured finance instruments were worth the paper upon which they were written.

      The financial industry worked very hard to get rid of the oversight that worked very well after the Great Depression.

      The industry needed those rules eased in order to sustain their profits and grow the business. They had run out of creditworthy customers and they needed to generate new business, but couldn't until the regulatory hurdles were removed so they could offer financial services to riskier customers.

      Sub prime credit is actually a good thing. It helps people improve their standard of living and it strengthens communities. The problem was they were intentionally putting riskier (and even prime) customers into loans they could not afford to repay. There was so much money circulating in the system looking for a "home" (a substantial portion of it only on paper) they deluded themselves into thinking the risk was far lower than it really was. As a result inflation in housing spiraled out of control along with people's debt to income ratios. At some point it had to collapse under its own weight and it eventually did.

      Now is the time to investigate, prosecute, and imprison the former Bush regime. -6.0 -5.33

      by Cali Techie on Sat Mar 28, 2009 at 10:33:24 AM PDT

      [ Parent ]

      •  I'm with you. (2+ / 0-)
        Recommended by:
        Free Spirit, Cali Techie

        I think the real culprit here is deregulation, inept (or corrupt) ratings by the rating agencies, and inept (or corrupt) due diligence by the regulatory agencies that did exist.

        People are greedy, and without proper oversight, will always game the system.

        "Obama is just too smart to be stupid." --NYmind

        by Dragon5616 on Sat Mar 28, 2009 at 10:39:24 AM PDT

        [ Parent ]

        •  I used to work for one of the ratings agencies (2+ / 0-)
          Recommended by:
          Free Spirit, Dragon5616

          I was in IT so I didn't rate anything - we were basically treated like domestic help, as if we were completely invisible unless someone wanted something, but being "invisible" I did get to watch how the sausage was made. Every now and then I'd have a conversation with an analyst at a very high level and I'd assert I didn't see how the structured finance model was sustainable if every instrument was rated at A or better. Almost universally the analysts would scoff and say something along the lines of "That's why you're not an analyst." There were a couple of analysts who did suggest maybe I should join their ranks and they didn't mean it in a snarky or sarcastic way.

          In the end it turned out I was right. However I don't believe the analysts were corrupt or inept at least not individually. Every one of them I knew were incredibly smart and astute. The system is corrupt in that the ratings agencies are paid by the creators of the instruments they rate. Profitability hinged on repeat business so there was every incentive to be a bit more lax when it came to standards. At the end of the day the analysts did what the company paid them to do, which was give the best possible rating to every instrument that crossed their desks. That conflict of interest needs to be addressed.

          Now is the time to investigate, prosecute, and imprison the former Bush regime. -6.0 -5.33

          by Cali Techie on Sat Mar 28, 2009 at 11:26:59 AM PDT

          [ Parent ]

  •  So, it sounds like securitization was a (2+ / 0-)
    Recommended by:
    makemefree, Cali Techie

    convenient tool for a lot of unscrupulous people at the bottom end of the food chain.  But didn't those creating and buying the asset backed securities wonder as the sub-prime market became a widely reported growth industry?  I mean, shouldn't they at least have suspected their AAA rated instruments were being created from this market?

  •  not a refutation, just a contradiction (3+ / 0-)
    Recommended by:
    AaronInSanDiego, ftm, makemefree

    This diary does not refute Krugman, just asserts a contrary view.  Not very well argued.

  •  Banks have been able to re-sell mortgages (4+ / 0-)

    for a very long time, WITHOUT resorting to the dangers of securitization.

    Fannie Mae. Freddie Mac.

    The extra liquidity provided by securitization & its derivatives is IMO not worth its very palpable risks.

    Member, The Angry Left.

    by nosleep4u on Sat Mar 28, 2009 at 09:35:51 AM PDT

  •  Firewalls were intended to limit damage (4+ / 0-)

    I agree with you, bonddad.

    The current crisis is a perfect storm of deregulation and ridiculous hubris.  If Gramm-Leach-Bliley hadn't passed and if all the federal regulators hadn't been 'encouraged' to go laissez-faire, this might have not happened.

    Securitization is ok, so long as the people providing the insurance to the investements are not using the SAME leveraged pool of money to cover those investments.  In short, the financial sector is a python that has eaten itself.  The money that should cover the losses on the investments was the exact same money that was lost on those investments.

    OOPS!

    A left-of-center blow-harded member of the goose-stepping blog-stapo since 2004.

    by floundericiousMI on Sat Mar 28, 2009 at 09:36:06 AM PDT

  •  Securitization caused this Depression (4+ / 0-)

    The evidence that Mr. Krugman is correct is overwhelming and omni-present. Mr. Krugman is not the only critic who has accurately pointed out what would happen though...

    "I'm not a Maverick, but I used to drive one."

    by StephenLahanas on Sat Mar 28, 2009 at 09:38:57 AM PDT

  •  The big problem with securitization (6+ / 0-)

    You add layers upon layers of complexity - even in a well regulated system which we DON'T have.

    You multiply the chances of unintended consequences. Because financial arrangements are going in so many different directions at once, it becomes increasingly difficult to predict, let alone understand, what is happening with the economy at any given moment, or how policy changes will ripple through the system.

    You increasingly decouple risk from reward - and people become reckless.

    Crack cocaine makes you feel really great at first - then it consumes you. That seems to be the way securitization has played out.

    One more comment. It's one thing to say bankers, etc. are bad people and the root of all our problems, but it's quite another to say finance has become too large a proportion of our economy. A healthy and well-functioning financial sector is vital to the operation of the overall economy - but it has become the tail wagging the dog. When money starts chasing money to the exclusion of all else - you get a reverse Midas effect: everything turns to crap.

    "No special skill, no standard attitude, no technology, and no organization - no matter how valuable - can safely replace thought itself."

    by xaxnar on Sat Mar 28, 2009 at 09:40:46 AM PDT

  •  well although this idea (2+ / 0-)
    Recommended by:
    lotlizard, Areopagitica

    In correlation, the process of securitization has been around for almost 30 years, yet this is the first time it has been so prominently in the spotlight.  If there were a fundamental problem with securitization in and of itself it would have been exposed when the program originated, not 30 years after its inception. The reality is securitization is not in and of itself a bad financial tool.  Instead, the sum total of numerous inter-related issues such as the repeal of Glass Steagall, record low interest rates, a compromised ratings system and lack of oversight rather than are to blame, not merely "securitization".

    appears reasonable, i would have to say that given the general lack of cultural sophistication and  altruism in the financial sector, moving loans far from their point of origination is not a good idea.  Were human beings more evolved, i.e. responsible, wise and selfless, it might work.  given our present state of evolution, NOT SO MUCH.

    securitization was bound to fail.  thirty years time is nothing for macro economics trends.

    with all due respect.  i do not buy your thesis at all.

    in fact, when contemplating refinancing my mortgage, i am faced with the daunting prospect of buying out my credit union mortgage with a loan which will be securitized and that scares me to death.

    i need to refinance at a lower rate so that i can get my head above water.

    neither do i buy the idea that low interest rates are a problem.  we should always aim for the lowest interest rate possible.  since the bible defines all interest as usury, i am wondering how this idea was able to gain traction in western culture at all.

    sorry that the financial wizards won't be able to make a fortune from such contracts.  too damn bad.

    i don't think humans working in the financial sector are evil, but the system as constructed is evil.

    by analogy, our educational system perpetuates an almost infinite list of oppressions, but that does not mean all educators are a priori, oppressors.  we are all, however, participating in an oppressive system.

    this ain't no party.. this ain't no disco.. this ain't no foolin'around..

    by fernan47 on Sat Mar 28, 2009 at 09:44:05 AM PDT

  •  You are too concentrated on the machinations not (5+ / 0-)

    the humanity.

    1. All the "steps" in the the process from loan origination to securitization to final pay off are fee based, fees which are all passed back down stream to consumers of the "product".
    1. Removing or disseminating the risks and responsibilities makes everyone less accountable and less human. Consider the fact that the biggest "stress factor" for some one trying to refi right now is finding out who has the authority to deal with their situation or the moral dilemma of paying an originator twice to deal with a flawed "product".
    1. Greed breeds greed. Yes, we need money and financing in our modern society. It is the lubricant that brings labor and material together to produce goods and services, but when it becomes the major or only societal goal and not just a tool, it corrupts beyond regulation. Some financial institutions have become too big to exist.

    Until we evolve to the point of being able to digest cellulose and float on clouds we can't be wholly dependent on a "cubicle farm factory" that produces nothing but paper and promises.

    IGTNT...Honor the Fallen...Respect Their Loved Ones.

    by geez53 on Sat Mar 28, 2009 at 09:44:25 AM PDT

  •  Have to disagree (3+ / 0-)
    Recommended by:
    TiaRachel, BigDuck, BlueGenes

    on making products. While financial systems are a part of an industrial economy, it is a problem that finance is the proportion of our economy that it is. This goes hand in hand with the lack of regulation, in that our current system is improperly incentivized toward short term profits.

    Financial structures are not as valid as physical goods. They have their place, but they rest on a base of actual production and without that be there can be no financial system. If the only activity people engaged in were financial services we would all be dead in a matter of days from dehydration, but if the only activity people engaged in were production we would still have food and water. These are obviously extreme examples, but the point is that the financial sector requires other sectors for it's very existance, while other sectors do not require a financial sector. The financial sector makes it easier for the other sectors to do their work, but they are not dependent on it for their very existence. Forgetting this is one of the underlying causes of our current difficulties.

    I generally agree with the core points of the diary. I think securitization is more of a problem than you do, and think it needs to be constrained, but it is not the sole problem. Financial systems are highly complex and no single element is going to be entirely responsible for either their successes or their failures.

    Live Free or Die-words to live by

    by ForFreedom on Sat Mar 28, 2009 at 09:47:26 AM PDT

  •  Yes it is a combination (6+ / 0-)

    but that does not make Krugman wrong. As a non econ, it seems to me that the whole concept of the last 30years in every way has been wrong. It is unhooked from the real economy and functions on the absurd idea of growth for growths sake that is not based on anything but profit for 'investors'.  It may make the banks more liquid but it does not in any way help the real economy.

    When a society gets to a point where all you make is profit on debt, it becomes a inside game, a house of cards. All economists think in mathematical models, that leave out the real generators of wealth the people who work and spend. It's ass backwards to have the entities who are supposed to manage the money, become the makers of so called 'product'.

    When a company like GE makes weapons, controls the information we get, and is allowed to be a financial player who's making money on our debt, they have too much power both in the government and in all segments of our life. Same with Goldman -Saks. The FDIC is no longer a separate entity there is no base to this model but human misery for most and funny money for the top.

    Every time these Visigoths of Capitalism rig it so they can 'grow' the economy financial schemes that have no base other then maximum profit we go broke. We now have a corporate state where we all pay so these by their nature entities can eat each other and get bigger and bigger, strangling out the real economies that sustain the world's people.

    Who cares about investing is obscene wealth for the top when it has totally unhooked itself from anything other then amazing useless money. When the real economy the people who live in the world are dependent on these too big to fall corporations the necessities that sustain a real life and all we get is credit I say we need to dust off the anti trust laws and start investing in companies that provide jobs which pay a living wage, slave labor produced  products which are not shipped across the world for world, and a government that is not run by the very entities that make profit a empty God.

    This market is anything but FREE. It is unaffordable for most, so what are we the working stiffs supposed to do go fuck ourselves? You economists say don't vilify the financial sector. Why not? it is disgusting and controls our lives with no regard for anything but obscene profit. Why don't we enact the anti trust laws we have? Why don't we reinstate Glass Seagal and follow the advise of the cappie who got the ball rolling and said that if your employees can't afford it your in trouble. Ass backward to bet on debt and not provide society with any means to pay it back.                  

    "And if my thought-dreams could be seen They'd probably put my head in a guillotine" Bob Dylan

    by shaharazade on Sat Mar 28, 2009 at 09:47:28 AM PDT

  •  Securitization of mortgages and pre-payment risk (2+ / 0-)
    Recommended by:
    filby, DrFitz

    One beneficial aspect of securitization that you fail to mention (but of course you are well aware of) is how it actually reduces some risks compared with an individual mortgage.

    The unusual feature of mortgages as an investment is that if interest rates go down then people are more likely to re-finance their existing mortgage. So the investor (buyer of the mortgage) thought he was going to get 5% for the 30 year life of the mortgage, but if rates go down he might only end up with 4%. Of course if rates go up, he is still stuck with 5%. This makes individual mortgages undesirable investments.

    When you package many mortgages together, you can model the prepayment rate under various scenarios, and you have a less risky investment. (Where the rating agencies went wrong is they extended this modeling of prepayment risk to default risk and neglected to realize that default risk was strongly correlated, and so packaging a bunch of mortgages together still produces an investment with default risk.)

    If you outlaw securitization, mortgages will become much more expensive. That's fine for folks that already own their homes and never want to sell; not so good for folks that don't own yet or homeowners that want to sell their home or for homebuilders and construction workers.

    •  I suppose the whole point is (1+ / 0-)
      Recommended by:
      k9disc

      if you think making things like the homes market, health and the fire-department appealing to (short-term) investors at the expense of the long-term health of those sectors - where you stand on how well the market words in the long run.

      I think the current melt-down has got a lot of people thinking that the unfettered market does NOT lead to long-term growth.

    •  But those models (0+ / 0-)

      are inherently flawed, in that they were not able to predict the current situation (this indicates their failure as models). If you have a model that doesn't work in the physical sciences, you change the model. It seems in finance and economics, you try to change reality rather than the model.

      In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

      by Areopagitica on Sat Mar 28, 2009 at 10:13:14 AM PDT

      [ Parent ]

    •  Yes, but overinflated prices made possible (0+ / 0-)

      by more freely available mortgage credit is an even bigger problem for first-time buyers.  The current bubble burst has only put prices back to levels they were at less than a decade ago.  The difference between interest costs with and without all the complex modeling is relatively minor by comparison.

  •  Bonddad has it wrong, again (12+ / 0-)

    Yet securitization provides two incredible advantages.  First, it adds liquidity to the financial sector.  Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.  This allows banks to increase the number of loans it can underwrite, thereby freeing up credit.

    He clearly makes the argument that increasing the availability of overall credit is a good thing. In fact, it was the incredible expansion of credit relative to overall GDP that is the root cause of our troubles. The securitization process was critical in allowing this credit bubble to form. Any prescription for fixing the economy needs to deal with limiting the excessive provisioning of credit.

    •  Rather weak strawman by bondad.... (2+ / 0-)
      Recommended by:
      IvanR, CornSyrupAwareness

      Of course, Krugman was talking about the excesses of securitization not the instruments if they had been properly regulated, and if rating agencies had been actually doing indendent rating.

      The Johny Cochran example is apt.  He was able to distort the system because of the resources of O.J. to get him aquited.  While he was within the norms of "legal ethics" his goal was to win, not to advance justice.

      And so the Bankers and others in the trail of this disaster followed the ethics of their profession, which included distorting regulation systems, laws, principles and ethics, for their ultimate goal....to get rich.

      All the actors of great wars are following their narrow nationalistic principles, yet the aggregate results is immense human suffering.  

    •  Another "Drive By Diary" (0+ / 0-)

      to boot. It is one thing to fan the flames knowing that the crowd here tends to favor Krugman's positions. It is another to avoid any discussion except for a few pats on his own back.

      One flower is made of the whole cosmos. - Thich Nhat Hahn

      by Espumoso on Sat Mar 28, 2009 at 05:28:52 PM PDT

      [ Parent ]

  •  History (2+ / 0-)
    Recommended by:
    shpilk, filby

    In the early 1970's the federal government in order to raise funds increased the interest rate on T-bills.  This caused a rush of money to leave the S&L's.  Reagan allowed an S&L bill that was a license to steal and I believe began this mind-set of privatizing gains and socializing losses.  I remember calling 32 mortgage lenders in 1974 and all of them were closed for business.  No money to lend.  This was before "securitization".  "Securitization" allowed money to be raised for mortgages on Wall Street.  This is not a process that leads to corruption and crime.  It is simply a process that needs to be regulated with a process that is honest.  It worked fine for over twenty years.  Mortgages were monitored for failure rates.  Mortgage lenders who wrote poor loans were disconnected from the process.  Underwriters were diligent, well-trained and knew how to keep foreclosures from happening for the most part.
    It is not that hard to monitor the process.  We need to take a deep breath and tell the truth.  We have had a government with a criminal mindset for a long time.  They were the problem.  Not "securitization".

  •  I always read (5+ / 0-)

    and almost always agree with your posts. But this time I think you're wrong. For openers:

    If there were a fundamental problem with securitization in and of itself it would have been exposed when the program originated, not 30 years after its inception.

    From:

    http://www.investopedia.com/...

    By 1968, there were some 140 hedge funds in operation.

    In an effort to maximize returns, many funds turned away from Jones' strategy, which focused on stock picking coupled with hedging, and chose instead to engage in riskier strategies based on long-term leverage. These tactics led to heavy losses in 1969-70, followed by a number of hedge fund closures during the bear market of 1973-74.

    by the '80's we had failures, and government bailouts, at Long Term Capital Management and the Tiger Fund. One of the activities that brought down the S&L's was loan securitization. The financial industry in the US has grown into a monster and it haas to be slain, IMHO.

    "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

    by johnmorris on Sat Mar 28, 2009 at 09:54:46 AM PDT

  •  dear bonddad: please reread Liars Poker (12+ / 0-)

    (if you haven't read it already) and get back to us on this.

    That book is the firsthand account of the genesis of mortgage backed securities by Salomon Bros nutcases back in the 80s. It was the financial industry's end-around move in response to the S&L meltdown which left them bereft of a  roulette wheel.

    Read that book and then compare the attitudes reported by Michael Lewis in those insanely greed-crazed firms to Matt Taibbi's description of AIG yesterday:

    And we're talking about financial professionals, the most shameless group of tirelessly envious gossips ever to walk the face of the earth. The likelihood that Cassano would pull in $280 million for himself, and his equally greedy, hopelessly jealous employees wouldn't know not only exactly how he made that money but every last ugly detail about his life -- from what skank he's sleeping with to what side of his trousers he hangs on -- is almost zero.

    I know plenty of people who work in this world, and I've met very few who didn't hate with every cell in their bodies anyone in their own companies who made more money than they did or got bigger bonuses at Christmastime. Gossiping about each others' bonuses, and bitching about each others' compensation, is the national pastime for these people.

    In short, these "industries" are, by their nature, culturally toxic, as much so as their products are. Just as their "products" remove contractual obligations from the context of the real properties that they are based on, their "values" remove their professional culture from the context of morality. It is that very disconnect, between value and wealth, that has poisoned both our economy and our culture.  That's why Krugman is right.

    "Well, yeah, the Constitution is worth it if you can succeed." -Nancy Pelosi, 6/29/07.

    by nailbender on Sat Mar 28, 2009 at 09:56:51 AM PDT

  •  Tough time to sell securitization (1+ / 0-)
    Recommended by:
    BlueGenes

    It would seem that putting mortgages into a pool, while making good sense, creates all kinds of opportunities for misbehavior.

    The time to clean this up would have been BEFORE the collapse, not after. This also rings hollow because nobody warned us that this system was a Ponzi scheme before it collapsed, so the financial industry is to blame for covering up what a disaster this was creating before it was too late.

    And now you want to start the merry-go-round again?

    You have a lot of skeptics out here, my friend.

    And for now, I'm sticking with Krugman. He has quite rightly called "shenanigans."

    "As Putin rears his head and comes into the air space of the United States of America, where do they go? It's Alaska" -- Gov. Sarah Palin

    by makemefree on Sat Mar 28, 2009 at 10:01:06 AM PDT

    •  Krugman is picking securitization (0+ / 0-)

      to shore up a flawed argument that the banking system should be allowed to fail. It's a convenuent scape goat and he picked it because he thought that it was complex enough for most average folk to buy the notion that securitization was in and of itself the problem instead of oversight. This diary has exposed this phony argument by Dr Krugman. He is standing on thin ground as it is.

  •  wizards were frauds (4+ / 0-)

    As you can guess, I don’t share that vision. 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.

    I agree with this, I disagree with other prints.

    Why are we demanding a full endorsement, or a full disapproval of Krugman?

    Help phone bank for or donate to Scott Murphy for Congress! The election is 3/31/09. We can win this election or we can lose it. The choice is ours!

    by MinistryOfTruth on Sat Mar 28, 2009 at 10:04:46 AM PDT

  •  the leverage bubble (3+ / 0-)
    Recommended by:
    Minerva, lotlizard, Nebraskablue

    Paul Krugman is right in this case but has explained his logic poorly.  Bondad's counterargument is at best a half truth.

    The problem with securitization is that it effectively gives the financial system higher leverage, which bondad points out as a strong benefit.  In fact the opposite is true -- higher leverage leads to greater vulnerability within the system.  Higher leverage brought more money into the marketplace, creating an asset valuation bubble compounded by higher velocity of money. Both of are now unwinding to normal levels which is both inevitable and desirable.  This recession, if allowed to follow its natural course, could heal a great deal that is wrong with the economy.

    At the heart of our current problem is faulty risk prediction models that enabled securitization to gain traction.  We would not have seen mortgage backed securities grow in importance if the risks had been fully disclosed.

    Obama, in trying to reflate the securitization bubble, is on the wrong side of economic theory, practice, and history.  We can only come out of this well by fighting his efforts.

    The Shock Doctrine by Naomi Klein -- best book ever, I nominate for a Nobel Prize!

    by xaxado on Sat Mar 28, 2009 at 10:10:12 AM PDT

  •  Your right bonddad (2+ / 0-)
    Recommended by:
    carlos the jackal, Nimbus

    securitization is not the problem. The problem is the mathematics used to create these products. The truth, that nobody in the financial world wants to talk about, is that the equations used to determine risk, the statistical sleights of hand, etc. are all premised on the fundamental and erroneous assumptions of economics as a mathematical science.

    The problem, as I see it, and as a lot of others see it, is this very fact. Only in finance would something like the Li gaussian cupola become widespread without any kind of empirical research to back it up. But then again, there is little empirical research backing up or exploring any of the fundamental tenets of economics.

    What you fail to mention as well, is by creating these securities, banks increase their liquidity and also decrease their capital reserves, as the have been able to treat these time-bombs like capital. This is not good for the economy or sound banking practice.

    In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

    by Areopagitica on Sat Mar 28, 2009 at 10:10:57 AM PDT

  •  Securitization serves a useful purpose but (1+ / 0-)
    Recommended by:
    BlueGenes

    like a lot of other factors in this crisis - too much of a good thing is bad.  The financial sector went hog wild with securitization.

    Basic financial concepts such as diversification and risk assessment were abandoned in favor of greed.

    Krugman's last paragraph is absolutely correct.

    RebelCapitalist - Financial Information for the Rest of Us.

    by dennisk on Sat Mar 28, 2009 at 10:11:24 AM PDT

  •  I agree with this diary (2+ / 0-)
    Recommended by:
    soms, factPlusContextAlmostTruth

    As a former student of political economy, the creation of credit and financing mechanisms are what keep the global economy afloat, and also allow opportunities to spread opportunity and wealth to the world's middle classes and poor. The problem is that the lack of regulation across this supply chain of credit has led to the result where a privileged few have brought down the entire world economy.

    I've had a hard time understanding Krugman's criticisms of Obama/Geithner of late, but after reading his last column (the one cited in this diary) it became clear to me that Krugman is making a philosophical and ideological argument, not an economic one.  He wants to tear up the system and replace it with something else.  Obama wants to preserve and reform the system.  If Obama is FDR, Krugman is Huey Long.

    I would like to see if Krugman can sketch out what a new financial system would look like, as I think it would make for an interesting debate and there may be a few ideas that can be incorporated into the current framework (just as Huey Long's ideas pushed Roosevelt to move more aggressively towards developing safety net measures).

    Alternative rock with something to say: http://www.myspace.com/globalshakedown

    by khyber900 on Sat Mar 28, 2009 at 10:15:28 AM PDT

  •  The real issue is injection of captial into (1+ / 0-)
    Recommended by:
    BlueGenes

    speculation. The marginal tax rates were reduced drastically in 1980s, and literally trillions of dollars that would have gone to the government were given instead to roughly the top 10 to 20%.

    This extra money could not be spent, and rather than being invested in long term savings or bonds, it was put into the casino of the stock market.

    As it peaked, hundreds of "hi-tech" companies were born in the 1990s that never offered one single constructive asset; they hired hundreds of thousands of people [if not millions, really] and created nearly nothing of sustainable value. Yet, their combined market values were measured in the hundreds of billions, if not trillions.

    When you give a bunch of people windfall money and they don't know what to do with it, they create bubbles that burst eventually.

    Why is no one discussing this?

    When are we going to reject Reagan's VooDoo economics and implement fair and honest progressive taxation?

    •  If only that were that easy (0+ / 0-)

      If the money were invested in the markets it would still be circulating throughout the domestic economy creating more economic activity. The real problem is the hording of capital in offshore tax shelters to avoid paying any taxes. Around $14 trillion has moved into these offshore anonymous savings/investment acounts since 1996. This capitol is completely removed from the economy, which is far bigger issue than just the loss in tax revenue to the health of the domestic economy. Removing large amounts of domestic capital without any product in return sucks the energy out of the economy. With amounts this large it can be blamed for much of the economic stagnation, deflation, and recession of the last few years. And yes we can blame this on the Voodoo economics of the Reagan era and it's modern day adherents (rethugs), because of their deregulating, gutting enforcement agencies, and overall non-enforcement of laws to prevent this type of activity.

      The current income/payroll tax system has been totally corrupted by special interests, self-serving politicians, and lobbyists. The whole system needs to be torn down and rebuilt from scrach. This whole system needs to be looked at with fresh new eyes. The Fair Tax Act does have some good points but completely untaxes the investor class which is totally unacceptable. But it could be fixed and is a good place to start the debate to make the federal tax system truly progressive, simple, and fair for everyone.

  •  You make 3 incorrect assumptions (5+ / 0-)

    1.

    Securitization has provided many benefits to the economy as a whole

    .

    In its present form it has provided a financial bubble that is going to be extremely expensive to the vast majority of the population to clean up. A huge growth of debt to "rescue" the banks and make good the losses to the foreign and domestic big players in the securitization industry.

    1.  

    It is not the sole problem with the current situation; we arrived at out present crisis because of a combination of numerous ill-thought out events and decisions.  Finally, finance is not in and of itself bad and not all "wizards were frauds".  

     This is the key error in your disagreement with Krugman.  These were not "ill thought out decisions and events", these were quite deliberate and conscious decisions. The outcome, a huge transfer of wealth upwards, was well thought out.

     Just the expansion of the homeowning class thru extremely generous and easy terms of a few % to get from 67 to 73 the number of families owning made a large number of homeowners able to trade up, to play their starter homes into bigger homes, and at the same easy terms to induce many marginal borrowers into the game.

     Home prices were inflated to enable the mortgage industry to entice, induce and encourage the speculation. The bubble than spread across all tiers of homeowners/buyers and became vastly inflated to a massively disastrous level.

     The existence of securitization as the core strategy in finance in the biggest tier of banks meant the model swamped and marginalized the many conservative smaller banks. This created an unsustainable activity that was unsupported when the scam artists among mortgage brokers and the layers of leverage upon leverage, dishonest appraisals, accounting got rolling. Remember it was in the mega bank's interest to write as many loans as they could because they were not going to hold them!!

     Even among supposedly "regulated" parts of finance, a huge scam like Madoff could get rolling because of corruption at the agency tasked with regulating it. The same goes in spades for the shadow banking, unregulated parts of the economy.

    1.  

    Securitization has been around a long enough time to indicate that properly done it does not pose a threat to the economy as a whole.

      There is NO PROOF of your statement.  There is a Geithner proposal now to have a  commodity exchange dedicated to securitized instruments, and a supervised and review of these kinds of instruments and registration of the players but it is very preliminary and tenuous as to its efficacy and long term prospects.  The insurance on these instruments became a scam in itself as some players  delivered them figuring the risk was quitre high but in any event they would be paid. that is why the foreign banks are demanding 100 cents on the dollar. The US financial primacy it very seriously in doubt. There may be insufficient dollar funds to pay off the major counterparties to these debts.

    cast away illusions, prepare for struggle

    by Pete Rock on Sat Mar 28, 2009 at 10:19:53 AM PDT

  •  Great diary and thanks for the facts (2+ / 0-)
    Recommended by:
    soms, Ishmael Moongoose

    regarding financial services. The demonizing of the finacial services sector by a prominent scholar like Krugman baffles me. I think your diary is the first one which helps to get to the bottom of why this thinking. I do believe Dr Krugman is leading a group-think that is premised on the notion that goods are physical things only. This flies in the face of factual information about what has happened to wesern economies over the last thirty years. Goods are no longer physical things they are intangibles as well, called services. To give an example in the UK the financial services sector combined with associated services like legal,accounting and management consultancy accounted for 14% of GDP in 2007 and 3 % of the valuable permanent jobs.
    Yes there has been problems in the sector and it has affected other productive sectors but advanced economies are moving towards a post-industrial economic order now which is dominated by services and not just making physical goods. The survival of the US as an advanced economy depends on making the transition to a high value-adding services economy; and demonizing an important sector like financial services is counterproductive to that transition. Britain ironically was forced to make that transition, as a much smaller economy for its own survival, under conservative Margaret Thatcher and John Major. Without letting go of obsolete manufacturing technologies and unproductive coal mines and steel plants Britain would be more like Russia today. Killing the sophisticated financial services sector instead of creating a single effective regulatory framework and authority to oversee it, would hurt the US economy and would ensure Obama can't turn it around and fulfil social promises he made. There is no social benefit when an economy is ancient, based on obsolete manufacturing and unable to attract international money. Ask any Russian.
    I don't know what Dr Krugman is trying to achieve by his "let the banks fail" meme but i do know that it would be a dangerous path for the Obama administration to take because it will allow a flight of needed investment capital out of the US which will cause an economic freefall, manufacturing or no manufacturing. I have seen economies that suffered that kind of failure and it is not nice at close quarters and governments can kiss goodbye to social reforms and health care programs in such economies. America is not too big to fail and Dr Krugman, in trying to tell us that we can afford to let our banking sytem fail, suggests that.

    •  Over-specialisation (0+ / 0-)

      But don't admit the point?

      Finance is a service, but it is only one service.

      "To give an example in the UK the financial services sector combined with associated services like legal,accounting and management consultancy accounted for 14% of GDP in 2007 and 3 % of the valuable permanent jobs."

      Let`s assume for a moment that there is a economy there the production of say music accounts for 14% of GDP. Would you call this healthy?

      The over-dependence on financial service is exactly the problem with the british economy.

      By the way, do consider Iceland a exemplary economy too?

      •  Yes Iceland is an exemplary (0+ / 0-)

        economy. They have a social democratic economy with ample safety nets for its population and minimal unemployment rates. They were enjoying this utopic state until a new prime minister came along and decided it was boring and wanted Iceland to become a high flying financial services centre with de- regulated markets etc. That caused a bubble and led people to overborrow and when the bubble burst the people were angry and fired the government. They were angry because they knew they had it good until some ultra right wingers came along with the free and unfettered markets false religion which took it all away. Iceland could have become a successful financial services centre if the right wing orthodoxy had not derailed them. It is an example to all. Lack of sound regulation is bad, not the financial markets themselves. The UK has a great example of a solid and effective regulatory framework.

    •  Exporting your manufacturing base (0+ / 0-)

      and considering a financial sector a suitable replacement is fine. Until you end up at some point in a trade war.

      If don't produce enough essential goods at home (or better yet locally), we cross the line from 'interconnected' to 'dependent'.

      "Cynicism is a sorry wisdom." - Barack Obama

      by BlueGenes on Sat Mar 28, 2009 at 05:52:16 PM PDT

      [ Parent ]

      •  Ahh but I am not advocating export (0+ / 0-)

        without replacement. It is okay to export a chimney stack based manufacturing base provided you replace it with high tech manufacturing. The Swiss used to make mechanical watches and their industry was nearly wiped out by the japanese digital watch. They gave up chimney stack technology and went high tech. They were able to re-invent the mechanical watch into an electronic hibrid version that was more accurate and durable than the cheapskate digital watch. They still dominate the world today in high value watches.(although the cell phone is threatening to do them in again) Production of basic things should naturally be exported to developing countries where there are more people unemployed. But nobody is saying there should be nothing to replace these lost jobs. Green technologies, clean fuels, knowledge management and high technology are things that should provide a sound replacement of old manufacturing factories provided the right investments are made in education and services. We ignore the importance of the services economy at our peril. Australia for example makes a lot of money selling higher education to other countries. Services are the future.

  •  Sane Business Practices (2+ / 0-)
    Recommended by:
    TiaRachel, HKPhooey

    Anything to separate personal interactions from financial transactions adds risk, you should know the people you're doing business with.  Anything that adds to the complexity and abstraction of finance adds risk, you should know what business you're doing.

    Securitization has both of these faults.  That doesn't mean it's always bad, but it does mean that it has serious risks that should be weighed against what benefits it offers.  It also means that it's kind of insane to base our entire credit market around an unproven and risky technology.

    I'd rather credit be a little less liquid and not worry if the loan agreement that I made with a responsible lender who cares about their reputation is going to get sold off to someone who will trigger emergency clauses if I sneeze.

  •  thanks, bondad, i have a couple questions: (2+ / 0-)
    Recommended by:
    BlueGenes, Dragon5616

    You say that it would take only a few years for problems to develop with securitization if there were some inherent problem with securitaization, but 30 years sounds about right to me for the problems with securitization develop, wind through the system, and blow up. Could you show how it would be the case that it would have happened from the start?

    Also, are you saying the problem is not securitization itself, but the way in which it was structured or administered? If that's the case, could you explain how securitazation could possibly be structured, so the loan originator gives a damn about the viability of the loan?

    •  I don't know about your first question, (1+ / 0-)
      Recommended by:
      steve234

      but as regards your second question, isn't that a problem with ratings? If due diligence was not done in issuing the original loans, wouldn't the rating agency be responsible for rating them BBB instead of AAA? Then, the proper risk would be assessed to the securitized loans, wouldn't it?

      "Obama is just too smart to be stupid." --NYmind

      by Dragon5616 on Sat Mar 28, 2009 at 10:30:44 AM PDT

      [ Parent ]

  •  I don't have (1+ / 0-)
    Recommended by:
    k9disc

    an opinion whatsoever on Krugman but I'm wondering, is more credit really the best idea here?

    "ENOUGH!" - President Barack Hussein Obama

    by indiemcemopants on Sat Mar 28, 2009 at 10:38:27 AM PDT

  •  Not all growth is equal (4+ / 0-)

    First, it adds liquidity to the financial sector.  Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.  This allows banks to increase the number of loans it can underwrite, thereby freeing up credit.

    You say this like it is necessarily a good thing. What happens when this multiplier effect grows from a couple of times the base money supply to ten times the money supply? Is the country really ten times wealthier? Or is it just poised on a cliff of financial risk that is ten times higher than it would have been before?

    Freeing up more credit means that there is more money to invest and more investment means more growth. I think Krugman and others essential argument is that the value of growth does not increase in line with the growth itself. 5% growth is not necessarily twice as good as 2.5% growth. Especially when that 5% growth leaves the economy as a whole exposed to serious systemic risk.

    I get the point that the new securitization vehicles of the last 30 years have helped finance some of the huge growth we have had during that period. But at what cost?

  •  an issue of an ABS? (1+ / 0-)
    Recommended by:
    Pinecone

    I don't understand how this affects my anti-locking brake system in my subaru.

    "If religion is the opiate of the masses, then fundamentalism is the amphetamine." Miz Vittitow

    by MillieNeon on Sat Mar 28, 2009 at 10:48:44 AM PDT

  •  Thanks (2+ / 0-)
    Recommended by:
    Pinecone, BlueGenes

    for showing that it is possible to disagree with Dr. Krugman civilly, rationally, and without putting your brain in storage. I wouldn't even have opened this piece if it didn't have your sig on it.

    However, I wish that you had pursued this rather important point

    The central complaint against the process of securitization is it removes the oversight function from the lender.

    instead of glossing over it for the rest of the diary, since it seems to me that this is the really really big problem with securitization. Perhaps Dr. Krugman assumed too close a relationship between securitization and lack of oversight, but having mentioned it, you didn't bother discussing it at all.

    The only thing we have to fear is fear itself.

    by sidnora on Sat Mar 28, 2009 at 10:49:47 AM PDT

    •  I am under the distinct impression that this lack (1+ / 0-)
      Recommended by:
      Pinecone

      of oversight is being addressed as we  speak by both the Congress and the adminsitration. The hearings last week with Mary Schapiro of the SEC held by Dodd's Banking Committee explored exactly the need for more stringent reulatarions and removal of stovepipes in already esxisitng agencies and laws.

      In addition Bernanke and Geithner werre everywhere all the time last week explaining and analysing what needs to be done and  why.

      people need to pay a bit more attention to what is actually being done in the two months since the Obama people moved in.

    •  Can we talk about Kona coffee? (3+ / 0-)
      Recommended by:
      sidnora, Notreadytobenice, BlueGenes

      Not really as off topic as it sounds...

      I love coffee and I really love Kona coffee - 100% Kona coffee from small estates in the Kona district of The Big Island.  But an interesting thing happened in the 80's (coincidence?  why think so when conspiracy is so much more fun .... ;-)) ... companies began selling "Kona Blend" - which in reality was only 10% Kona coffee (and you didn't even know what grade Kona Bean it was ... Peaberry, Extra Fancy, Fancy, etc.).  And then more recently with the internet and big stores like Costco in the mix, you have all kinds of choices of Kona coffee ... but unless you know something about the beans being bought - their grade, whether grown organically or not, the nature of the estate where they were grown - you are pretty much buying in the dark, and crap beans can be marketed so that you think you are getting the quality you'd find from Pat Pearlman's Estate or one of the other excellent organic estates
      So ... it isn't the securitization per se (five pounds of Pearl Estate is five pounds of fine Kona coffee), but rather the securitization where crap is packaged as if it wasn't crap.  If the junk "liar loan" mortgages had been sold as "junk liar loan mortgages" instead of AAA grade mortgages, people would have bought them at major discount to start with, and the losses would have been pre-absorbed in the purchase price.
      And with that, I will go back to another cup of Kona Rainforest

      •  I first had real 100% Kona in Hawai'i (1+ / 0-)
        Recommended by:
        Pinecone

        when I came back home, all I could find is the 10% crap. I knew it wasn't the same in the first sip. I can understand why lots of people would try a blend once, but I don't understand why fund managers weren't doing their homework and we're buying repeated roasts of 10% bean when they knew it wasn't the same thing. The question becomes 'Did the bean traders know they we're pulling one over on the coffee drinker.'

        I like your analogy, the 10% Kona thing has been quietly pissing me off for years.

        "Cynicism is a sorry wisdom." - Barack Obama

        by BlueGenes on Sat Mar 28, 2009 at 06:26:33 PM PDT

        [ Parent ]

  •  I love Daily Kos, I truely do. Where else can you (3+ / 0-)
    Recommended by:
    Meteor Blades, Larry Bailey, Pinecone

    find a debate with the level of this one? I'm siding with the dangers of securitization in this one. Thanks, bonddad, for your wonderful diaries.

  •  “securitization . . . (1+ / 0-)
    Recommended by:
    HKPhooey

    > allows banks to increase the number of loans it can underwrite"

    Which is the crux of the problem . . . since bank lending is itself leveraged (loans can exceed assets) this is of necessity "inflationary" in the market in which the bank is lending.  Available (loan) dollars increase without a corresponding increase in the securing assets . . . producing a "bubble", as recently in housing or commercial real estate.  The resulting price increase skews the market, and may drive overproduction and a resulting crash (sound familiar?).

    If the increased lending becomes widespread it infects the entire economy, producing first the appearance of prosperity as some gain (much) more wealth, but finally inflation for all.  When such a system crashes the long term outcome rides on one decision . . . should the resulting losses be confined to the wealthy (who accrued the benefits on the leading edge of the bubble), or should the losses be socialized, and born by everyone (preserving the inequality as enhanced during the speculative rise).

    It appears that our government has opted for the latter.

    > "If there were a fundamental problem with securitization in and of itself it would have been exposed when the program originated, not 30 years after its inception."

    Not necessarily so.  There is a fundamental problem with overfishing, for example, but it is not "exposed" when the overfishing begins.  Everything looks rosy . . . production goes up, costs go down, everyone is happy.  Then . . . the wall . . . which may not be reached until decades after the overfishing began.  So too with smoking (the cancers don’t start immediately) where the worst health effects appear only years into the habit.  And so too with "securitization" . . .

    > "Securitization has provided many benefits to the economy as a whole."

    No, securitization provided many benefits for the wealthy, and the appearance of benefit for everyone else.  The "wealth" that was ‘created" by the financial sector was not evenly distributed across the economy as a whole . . . it went primarily, predominantly, to the upper few percent who were positioned to benefit from it.  Granted, some appeared in pension funds and other collectively held portfolios, but that was never realized wealth for the vast majority.  Most people simply got more debt.  What we are going to get when this is all wrung out is anything but beneficial to the economy as a whole . . .

  •  It's obvious this diarist has sold out! n/t (1+ / 0-)
    Recommended by:
    Pinecone

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Sat Mar 28, 2009 at 10:52:54 AM PDT

  •  No one is ever right 100% of the time (0+ / 0-)

    Not sure why we needed to waste space on the rec list to clear this up.

    •  As a consumer of DK I do not consider any (1+ / 0-)
      Recommended by:
      Pinecone

      diary written by someone who knows whereof he/she speaks to try and help us all understand better the rather arcane details of the financial system to be a waste of of time or space.

      If it doesn't interest people then don't bother to read it.

      •  You mean like Jerome's diary? (0+ / 0-)

        The explanation of the finanical system in this diary would be great if it wasn't being used to take an unfair shot at krugman as the title clearly suggests.

        •  what on earth is unfair about people having (0+ / 0-)

          different opinions about anyone?  this is still a nation where differing opinions can be debated and defended.  The diary was not disrespectful or insulting.

        •  Unfair? (0+ / 0-)

          Please explain how.  The diarist disagrees with Krugman's position, and provides a reason why. If you actually read the diary instead of only the title you would know this.  You may disagree with the diarist's opinions, but that does make the diary or his point of view "a waste of space".  

  •  "Spreading risk" almost always involves fraud. (1+ / 0-)
    Recommended by:
    Betty Pinson

    Beyond the first tier, the parties have almost no way of evaluating the actual risk of default. It's only a "security" whose value now depends on representation of its future sales price.

    Where perception is reality, the truth is irrelevant.

    by legalarray on Sat Mar 28, 2009 at 10:54:30 AM PDT

  •  Mistakes - Pray tell... (0+ / 0-)

    what mistakes were made?

    "Over the last two years there has been an understandable criticism regarding the people who created this situation -- namely, the upper echelons of the financial sector. Many of the people involved in this sector made many mistakes which we are now paying for.  The mistakes were large and spread into many areas of the economy."  Bonddad

    I have reviewed the comments that address Bonddad's dairy, but none of the comments or Bonddad's diary seems to clarify what mistakes were made by the "people involved in [the financial] sector."

  •  Right or wrong, he is an antidote to the right (2+ / 0-)
    Recommended by:
    tameszu, k9disc

    http://www.politico.com/...

    I have been one of Krugman's critics, not whether he is right or wrong, as I am not an economist I don't have that expertise to judge his theories.

    But I have maintained that Krugman is politically tone-deaf, but this article in Politico based on Newsweek's cover story makes me think that in fact Krugman is providing a much needed balance to the Rights position that Obama is doing too much.

    Politically he is actually affording Obama cover. Frankly I don't think any of the economists know for sure, they just have theories, philosophies and agendas.  Obama has to please all the people all the time for the furore to die down.

  •  Obtuse diary. You could say deregulation is (3+ / 0-)
    Recommended by:
    Sagebrush Bob, HKPhooey, washunate

    neither good nor bad. You could say the same about uranium.

    Yours is almost a chicken/egg first argument.

    Greed is fed in exponential barrel fulls by securitization, which led to deregulation, record low interest rates, a lack of oversight and a compromised ratings system.

    You're wrong. Securitization failed. CDO's and CDS failed. They are inherently flawed.  CDO's remove risk from originating lenders. CDS should be termed insurance and done away with.

    My SantaDad used to tell me stories about a man who came down a chimney, it didn't make me believe him just because I called him dad.

    It's about the people.

    by JerichoJ8 on Sat Mar 28, 2009 at 11:01:26 AM PDT

    •  Obtuse comment (1+ / 0-)
      Recommended by:
      slinkerwink

      Bonddad actually knows something about the subject; so does Krugman, in opposition.

      All you do is fling bombs by saying "CDOs failed", which is an overbroad and and ignorant statement, exactly equivalent to the idiocy of righties who say in response to the present crisis that "Fannie and Freddy and government support for low-income mortgages have failed."

      Also, your comparison between Bonddad's advocacy of securitization as a finance tool and his putative inability to criticize "deregulation" as a political economic orientation commits a horrible category error. "Deregulation" refers to a broad ideological attack against the regulatory state, whereby any government action is viewed negatively. Securitization refers to a specific finance tool for spreading risk that has not generally been used or advocated an ideological manner. Trying to depict it as a villain commits roughly the same kind of highly unwise error that the Bushies make in advocated a war against "terror" or "the world's worst weapons (of mass destruction)"--lots of rhetorical benefits, but entirely unhelpful to making good policy.

      •  I think there is an ideological component (0+ / 0-)

        Securitization is part of the ideology increased efficiency and rationality through the judicious use of abstraction.

        I'm not knocking that ideology (personally, I buy into it to a large degree), but it's open to abuse.  I understand the notional benefits of securitization, but I think the above commenter is getting at something important: how do we prevent these tools from creating a set of perverse incentives?  

        This actually isn't totally fair to direct at you, but I will anyway.  I'm sure you're some kind of expert, but I'd appreciate it if you'd engage our concerns rather than telling us to shut up and stay in our place.  

        "If you can't lower heaven, raise hell!" - Mother Jones

        by al ajnabee on Sat Mar 28, 2009 at 11:41:28 AM PDT

        [ Parent ]

    •  you're right on (0+ / 0-)

      Bonddad's posts going off into commentary about policy these past couple months have been very confusing and incomplete. It's to the point where I'm really not sure what he's advocating. This is one of the best, clearest, most concise pieces Krugman has written. We should be holding this up as an example for how professionals can bring their world to society at large, explaining concepts in a few paragraphs.

      And instead, Bonddad has some sort of critique that's not really explained. We're just supposed to trust him that Krugman is wrong about the wizards being frauds. Despite trillions of taxpayer dollars being spent bailing out these people who aren't frauds.

      I hope Bonddad gets back to focusing on evidentiary analysis, because his forays into commentary have been most disappointing.

  •  if there (2+ / 0-)
    Recommended by:
    k9disc, HKPhooey

    is a record in all of history of a country that made itself prosperous for the long term based the bulk of its 'products' being debt instead of making things, I'd like to know where and when that happened.

    I agree with Krugman on this one and don't agree with everything he writes.

    Hope. Don't make into another 4 letter word.

    by FreeTradeIsYourEpitaph on Sat Mar 28, 2009 at 11:01:36 AM PDT

  •  All the things Bondad pointed out (9+ / 0-)

    like repeal of Glass-Steagall and other dereg stuff were the logical outcomes of securitization as envisioned by the people who started it.  The fact that it took 30 years for the full meltdown to get rolling is insignificant in the big picture.  Corruption and greed was bound to take hold of a system like we have (had?) and the current meltdown is almost a perfect replay of past capitalist crises.  The FIRE sector should be a mere utility, either run by the government or heavily regulated, not thought of as some field for "entrepreneurship" and big profits.

  •  Stalling for the next big "bezzle" (4+ / 0-)

    Health care debt.

    If Obama is successful in passing his underfunded version of health care reform in the US, everyone will be required to purchase private insurance laden with out of pocket costs and deductibles.

    The hottest area of finance these days - due to explode if Obama succeeds - is health care related credit.  What more could you ask for?  Everyone will be required to purchase private health insurance, there will likely be no cap on premium costs, the government helps put up some of the money, but there will still be plenty of consumer debt to be financed in the unregulated market.

    Don't believe it?  Its already been going on..

    Lance Paulsen figured it out, he just got too greedy.  There are plenty of others in the financial markets ready to jump in when Obama's health care reform kicks in....

    http://www.nytimes.com/...

    Before it filed for bankruptcy in 2002, National Century provided loans to a variety of health care companies that were backed by payments expected to be made by insurance companies and government programs like Medicaid and Medicare. Mr. Poulsen then packaged the loans into bonds and sold them to institutional investors and Wall Street firms.

    In many cases, the company deliberately lent more to the facilities, many of which were owned by Mr. Poulsen, than their receivables were worth. The scheme finally came apart in the spring of 2002 when investors began to question the value of the loans, which forced National Century into a liquidity crisis.

    A conservative is a man with two perfectly good legs who, however, has never learned how to walk forward. FDR

    by Betty Pinson on Sat Mar 28, 2009 at 11:09:18 AM PDT

  •  What happens to "pool performs as expected" (0+ / 0-)

    in the second part of this statement? It isn't just improper structure that causes failure. It is also outside influences which affect performance.

    If the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves; if improperly structured, the affected tranches will experience dramatic credit deterioration and loss.[1

    ie Those football players in Florida had a boat that would float even if it turned upside down. They were in better shape than 99.9% of the planet. Only one man lived.

    It's about the people.

    by JerichoJ8 on Sat Mar 28, 2009 at 11:10:22 AM PDT

  •  I'm missing something. (1+ / 0-)
    Recommended by:
    HKPhooey

    You're implying that banks' selling off loans and lending more money creates a larger number of essentially responsible transactions.

    But that's totally out of character with the idea of having many small banks competing for the opportunity to lend to responsible borrowers.  In that scenario, the market itself does an excellent job of making certain that all of the responsible transactions are seen to.

    Indeed, in a mature system, securitization -- the creation of new transactions by removing information -- should be presumed suspicious, as the new transactions should be assumed to be exclusively irresponsible.  Or else someone else would already have gotten there.

    Is my analysis wrong?

  •  Krugman is a little full of himself (0+ / 0-)

    Frontpage Newsweek cover story:
    http://www.newsweek.com/...

    He enjoys his outsider's power: "No one has as big a megaphone as I have," he says. "Aside from the world going to hell, it's great."

    •  Get yourself a Nobel Prize (0+ / 0-)

      and then complain :-)

      He thinks he's one of the greatest economic thinkers drawing breath right now.  Modest?  No.  Wrong?  Certainly not.

      Noting wrong with modesty.  It's a virtue, sure.  But some people have more to be modest about than others.

      "If another country builds a better car, we buy it. If they make a better wine, we drink it. If they have better healthcare . . . what's our problem? "

      by mbayrob on Sat Mar 28, 2009 at 12:40:03 PM PDT

      [ Parent ]

  •  Securitization is the fissionable core... (2+ / 0-)
    Recommended by:
    k9disc, HKPhooey

    ...of a weapon of financial mass destruction.

    Of COURSE it is harmless used properly in the right hands. In the real world, i.e., the one we actually live in, it was abused. Given our political system, that was inevitable. The profits to be gained were just too great.

    Furthermore, of COURSE the problem isn't a straightforward securitization of mortgages, as you argue in setting up your straw man. The problem is all the exotic instruments that were built on all sorts of debt.

    Just as we try to keep plutonium and U235 out of the hands of terrorists, we are going to have to keep securitization out of the hands of the finance industry.

    The top 10% have captured 50% of the income gains in the past forty years. The top 1% gained more than all the bottom 50%. Now THAT'S class warfare.

    by expatjourno on Sat Mar 28, 2009 at 11:49:22 AM PDT

  •  May I add this from George Carlin... (3+ / 0-)
    Recommended by:
    mbayrob, Burned, MinistryOfTruth

    "It's Called the American Dream Because You Have To Be Asleep to Believe It"

    link to his dialogue:

    http://journals.democraticundergroun...

  •  Where's your Noble Prize? (0+ / 0-)

    No, he's not.  Can't wait till we do this all again after Obama's second term.  

    Systemic change, not painting the slum.

    "Seeing every side of the argument causes paralysis." - (paraphrased - Abbie Hoffman).

    by angry liberaltarian on Sat Mar 28, 2009 at 12:06:09 PM PDT

    •  Ridiculous (0+ / 0-)

      So because Dr. Krugman has a Nobel Prize (which is "noble", by the way), the only people allowed to disagree with him are other Nobel Prize winners?  Stupid comment, because it offers nothing but dissent for the purpose of dissent.  Sounds very republican to me.

      •  Systemic Change is Republican? (0+ / 0-)

        You.Are.An.Idiot.

        And yes, I saw my typo as soon as I clicked Post.

        Since when is calling capitalism crap Republican?  That's progressive anarchism.  Not conservative freeper.

        "Seeing every side of the argument causes paralysis." - (paraphrased - Abbie Hoffman).

        by angry liberaltarian on Sun Mar 29, 2009 at 11:33:37 PM PDT

        [ Parent ]

        •  The title of your comment is (0+ / 0-)

          "Where's your Nobel Prize".  As if that's some kind of argument or refutation of the diarist's opinion?  My point, which you clearly missed, was that your comment offered nothing other than dissent with no reason for the dissent.  Incidentally, when people have no argument, they tend to resort to name calling.  I called your comment stupid, not you.  Perhaps I should reconsider.

  •  Tautology -- gotta love it (4+ / 0-)

    "If the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves; if improperly structured, the affected tranches will experience dramatic credit deterioration and loss."

    The best test for its "properly structured," presumably, is that "the credit risk of all tranches improves"....

    On now to "performs as expected"....

  •  God, you'd think by the response that Bonddad (1+ / 0-)
    Recommended by:
    jtown

    wrote a troll diary?

    Krugman is human, right? That means he can be wrong sometimes.

    Or else ALL HAIL KRUGMAN!

    Help phone bank for or donate to Scott Murphy for Congress! The election is 3/31/09. We can win this election or we can lose it. The choice is ours!

    by MinistryOfTruth on Sat Mar 28, 2009 at 12:13:02 PM PDT

  •  Securitization = 50/1 reserves = FAIL (1+ / 0-)
    Recommended by:
    Nimbus

    Securitization is another corpgov newspeak term for overleveraging oneself to insolvency. Insolvency will never be good for anyone's economy.

    Anyone who gets themselves ramped up to 50/1 overleveraging is as insolvent as the day is long, and deserves nothing more or less than bankruptcy. Bear Sterns, WaMu, AIG and Lehman Bros are clear examples of what happens when you get drunk with 'Securitization'.

    Anyone who believes that we need to 'kick-start' or get the economy moving again doesn't realize that we were living in a one-time credit binge bubble with no historic precedent. This is a 'L' shaped depression that has only seen Act One (residential housing). Act Two (commercial property) has the curtain going up as we speak....

    No amount of BS liquidity from the FED is going to stop it.

  •  The main critique I have of Bonddad's analysis (1+ / 0-)
    Recommended by:
    washunate

    is the idea that banks selling their loans to get funds for more loans may not be wise.  Yes, it increases credit avaliability, but I have to ask whether that is a good thing, even though the diarist assumes it is a good thing.  Add to that securitization process the debacle of the CDS process, and you get leverage on top of leverage, and lenders and investors wanting more and more people and businesses to borrow.  That fed the bubble, which has now burst.  I think that is behind Krugman's critique.  It is also not clear to me that when banks securitize the loans and sell them they are completely off the hook if the original, real asset-based loan defaults.

    While it is true that all these processes can be regulated, I think more fundamental questions of whether a system that is designed to create more and more leverage is a good think or "think".  I'm not convinced that it is.  Ask anyone in Iceland today, and I think they will agree.

    Hey, Republicans, the whole world is watching.

    by TAH from SLC on Sat Mar 28, 2009 at 12:28:07 PM PDT

    •  CDS agreed, securitization not necessarily (0+ / 0-)

      The idea behind securitization is the same as any other debt instrument, including bonds (particularly Revenue bonds).  You take on the debt of an entity and thus receive interest payments.

      Yes it does add leverage and credit availability but is not necessarily debt on top of debt.

      CDS/Derivatives are a different animal as that is essentially placing bet after bet on the same debt, which is pretty much always a bad thing.

      "An army of principles can penetrate where an army of soldiers cannot." - Thomas Paine

      by Mister Gloom on Sat Mar 28, 2009 at 12:37:12 PM PDT

      [ Parent ]

  •  Securitizarion is the biggest problem (2+ / 0-)
    Recommended by:
    bigchin, Plubius

    When I bought my house it was something I actually clearly remember as I don't think the people loaning me the money went to great lengths to make sure I could play the loan (but they were all over how much they could loan me) and immediately after closing they sold my loan.  That is a huge red flag to greed and a huge failure in due diligence.

  •  This Diary just goes to show ... (8+ / 0-)

    ...that one can hold both Krugman and bondad in high esteem, yet occasionally disagree with one of the other. This time, bondad, I disagree with you, but salute you for taking this issue head-on.

    "The truth does not change according to our ability to stomach it." -Flannery O'Connor

    by Meteor Blades on Sat Mar 28, 2009 at 12:42:45 PM PDT

  •  Sorry, Bonddad sounds like an apologist. (2+ / 0-)
    Recommended by:
    bigchin, annominous

    Securitization was dreamed up by financial geniuses.  They opened Pandora's box but forgot to dream up regulations.

    In the decades that this gambling has been going on, why haven't the financial geniuses taken the opportunity to regulate themselves?

    Because they were too busy making money.  

    These SOB's screwed with the one asset that should be accessible to everyone, a home.  Sure, securitization was supposed to help with accessibility but it ended up having the opposite effect.

  •  "Guns don't kill people. People kill people." (1+ / 0-)
    Recommended by:
    bigchin

    I have a lot of respect for Hale, but he's off base here.

    He may be right that securitization is a good thing.  Well, we've had way too much of a good thing.

    The financial sector is now twice the size relative to the economy it was in the 1970s.  The sector has far too much political and economic power.  And the large firms, we've found out, are too large to be managed effectively, and they are too large relative to the economy for the damage they do when they fail.

    Mostly, this is what Krugman is saying.   And on this count, yeah, Krugman is right.

    "If another country builds a better car, we buy it. If they make a better wine, we drink it. If they have better healthcare . . . what's our problem? "

    by mbayrob on Sat Mar 28, 2009 at 12:45:14 PM PDT

  •  Krugman is right. CDOs are fraud. (5+ / 0-)

    What Paul actually means, is that you cannot bring securitization to the levels of 2006 no matter what you do. Fannie Mae and Freddy Mac will still be securitizing loans just as they did 25 years ago.
    Fundamentally, securitization is not a good idea, because no natural market exists for these securities as evidenced by what is happening today. In other words, securitization is not a prudent investment option.
    Conceptually, the reasoning why securitization is not a prudent investment is very simple.
    First, securitized financial products are not uniform. You simply cannot fit very complex financial products that are produced as a result of the securitization process into a traditional definition of asset-backed bonds. You cannot do that because the "what-if" scenarios of the securitized financial products are by far more complex that the "what-if" scenarios of bonds. Take, for example, a scenario where the underlying contract fails. With a traditional mortgage, the lender simply gets the ownership of the collateral. With securitized financial products we have a big mess even in this simple case. Yes, CDOs are issued as bonds, oftentimes debenture, but that is a big lie. CDOs are as bad (or good) as junk bonds. Just more complex. Just as junk bonds, CDOs can NEVER be a prudent investment.
    Second, securitized financial products cannot be understood by 95% of investors (I am extremely generous with this estimate). Investors, for the most part, are financially illiterate. Perhaps, 50% of investors understand equity. Perhaps, 30% of investors understand government and corporate bonds (before "fake" derivative bonds, I could simply call them bonds). In order to understand securitized financial products you have to have an actuarial training. Very, very, very few people have it. You run into trouble each and EVERY time you buy what you do not understand. Banks thought they understood securitized financial products. They did not. We come back to the main point again - financial products that investors cannot understand can NEVER be a prudent investment.

    Financial engineering is the biggest fraud of our time. It must be stopped.

  •  Krugman at Google Talks (0+ / 0-)

    It is dated by still interesting.
    Krugman at Google Talks

  •  Paul Volker in the 80s on Glass Steagull (9+ / 0-)

    As the GOP was pushing as far back in the 80s for the repeal of the Glass Steagull act Volcker remarked ( paraphrased) "I'm against dissolving the act  as banks would securitize  mortgages".

    BD states:

    Yet securitization provides two incredible advantages.  First, it adds liquidity to the financial sector.  Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.  This allows banks to increase the number of loans it can underwrite, thereby freeing up credit.

    What isn't stated is that Banks still have contingent liability on the mortgages and the ability to sell them into securities,  made them incredibly reckless in who they loaned money to which is why this cancer that was a manageable problem a year ago has quickly metastasized into a global meltdown

    I'm not sure what BD feels he has to defend the status quo. But it's very clear that when Clinton was presented with a defacto dissolution of the GS act , he signed off on it. I presume he was thinking that this isn't any big deal as they are already crossing the boundaries.

    Not to mention that Democrats started to understand that they had to get connected with Wall Street to get on the donation list.

    Since Wall Street has gone though a massive lay-off , I imagine for the lower wage workers they couldn't agree more with Krugman. The ones that are being paid by taxpayers for failure are simply delighted that they were able to pry open another vein of gold , that being the US Treasury and US's line of credit.

    Goldman Sachs is delighted with the Status quo. They got 12.7 Billion plus another 4 Billion in Collateral for the Credit default swaps bets they had won on AIG's book which we took over. They knew they were selling junk when they were out hustling the Mortgage backed Securities they put together and had them rated triple AAA by corrupt ratings agencies.

    They knew that the CDOs and Mortgage Backed Securities were so crappy they had their own trading desk buying Naked Credit Default Swaps on the very junk they were selling. Then to spike the financial steroids a bit, they shorted the banks who has made the mortgages.

    It was a heads Goldman wins, Tails We lose with their man in the treasury and their people still in the treasury. There is a slight chance they had some inventory of CDOs they were caught with at the end, but I'm willing to bet 90% plus of the Swaps were naked bets on failure that we taxpayers made good and then on 9/17 two days after AIG got it's money,  they truned into a Bank holding company  which got another 10 Billion from the treasury.
    So far we have given them 27 Billion give or take. I'm willing to bet after they have made some money on the 10 billion, they will return it and lose the Bank holding company. Got to have those 8 figure bonuses

    This has been repeated is numerous ways to all the large financial conglomerates and worse, they are still making those naked bets.  Who do you think is selling them? I imagine companies  who feel like they own the US Treasury as I'm sure the betters are very concerned with counter-party capitalization.  In fact many people are taking out naked bets on the failure of the US by defaulting on it's bonds. Although I wonder who they think is going to make good on those once the US fails.
    Some of them may not be naked, but the fact the premiums are climbing should suggest that taking over AIG's books and injecting capital into Banks who didn't take out Swaps or took swaps out with counterparties that were unable to pay suggest
    that all derivatives should be reviewed for legality.

    If Swaps were simply called what they should be called: Insurance, and regulated as such from both the buyer side and the seller side, we could stem the flow of taxpayer funds into the banks and AIG.

    Make the side bets illegal retroactively. I don't care what the argument is for them. There is no question they are quickly pushing the US to bankruptcy as individuals get rich at our expense.
    They were invented in 1994 and JP Morgan started pushing them big in 1997 but they didn't really take off until 2002 and onward.

    In other words,  the world of fiance operated fine without this junk.

    Bd Writes

    But that does not mean that finance in and of itself is evil or that all people involved in this area of the economy are corrupt.  I have often read the criticism that "The US doesn't make thinks anymore" as if creating financial structures is somehow less valid than making a physical good.

    To which Volcker says:
    We need more Civil engineers, not financial engineers".

    If one looks into  Buffet's position on derivatives, beyond stating what everyone heard "they are financial WMDs" he also was quoted as saying that he was trying to unwind the derivatives that one of his subsidiaries had entered into.

    So, we have Krugman, Volker, and Buffett against and BD for. I'm going with the Nobel prize winner, a Fed Chairman who already has pulled the US out of a meltdown and one of the richest guys in the world. One is operating from theory, the others positions come from operating experience.

    I 'm still wondering why BD feels it necessary to use his author capital to defend what is clearly a indefensible position. The fact is, he lumps mortgage backed securities into all securities as if it was (Yawn) just another security.

    Although he does spend a paragraph extolling the incredible benefits of securitizing mortgages, he leaves out the part that is causing people to realize that the 80s LBO craze , the 90s Dot.com craze, options backdating, banks helping Enron hide it's problems and finally the big blow up that could take down the world mortgage backed securities with Credit default Swaps as the great multiplier that Wall Street were not isolated problems but a fundamental problem on wall street and it's engineers he claims  are honorable with just a few bad apples in there seem beyond ridiculous.

    The fact is the so called honorable ones knew what was going on but there has been precious few whistle blowers through-out the years. If half are  engineering a new scam and selling it and the honorable are making money advising people to stay away from it, they are benefiting from the scam unless you are blowing the whistle on the scam like the trader who blew the whistle on the Commodity scam last year.

    Lets looks at that for a second:

    How Goldman Sachs was at the center of the oil trading fiasco that bankrupted pipeline giant Semgroup.

    So they were buying derivitives or futures to put a short squeeze on another company as did others driving the price up to $147 a BBL making other people like funds wealthy who took long positions on Oil and held them. They were Bets it would go up. No hedging here. That was a loophole that was finally plugged on June 22nd. In other words until 2000 no company could take a bigger position than 500 million I beleive. That was done away with by none other than Phil Graham. Fortunes were being made on commodities even as experts were quoted as saying it wasn't speculation, it was China and India. Another Scam first purchased by legislation and then acted on.

    The irony is almost too much. By the end of 2008, workers who commuted had no money until gas fell at the pump and by then they were paying past due bills as their taxes were being used to bail out Citigroup. Taxpayers are bounced from one scam to another: Exxon ended 2008 with a earth shattering 45 Billion dollars in profits from the indirect tax on consumers and those same people then sent in money that was spent on Citibank making bad mortgages and securitizing them.

    So now broke , out of money out of job, car repoed, Exxon is happy, Wall Street is very happy with their new partner, The politicians are happy as contributions from those new partners have never been better, Citibank is happy, JP Morgan, GoldMan Sachs, Bank of America ( except the shareholders), everyone is happy with the results of financial engineering except the people being called on to pay for it.

    And Wall Street is pissed about being vilified? I suggest they get used to it. It could and probably will get much worse.

    It's a long way to go , just to get to back to when it was bad.

    by Dburn on Sat Mar 28, 2009 at 01:21:10 PM PDT

    •  Very good counterargument (1+ / 0-)
      Recommended by:
      Dburn

      Wall Street and the financial sector in general have been playing games like this for the past three decades, upping the ante year after year until they finally unleashed the meltdown we now have on our hands.  It's like letting the power company play around with the nuclear power plant to see if they can get more juice out of it by letting it run a little hot.  At this point I don't know how you untangle the knot they've created.

      And as for those BD would have us believe are blameless, I'm reminded of the adage: All that is necessary for the triumph of evil is that good men do nothing.

      •  Thanks John (1+ / 0-)
        Recommended by:
        John H

        Wall Street and the financial sector in general have been playing games like this for the past three decades, upping the ante year after year until they finally unleashed the meltdown we now have on our hands.  It's like letting the power company play around with the nuclear power plant to see if they can get more juice out of it by letting it run a little hot.  At this point I don't know how you untangle the knot they've created.

        And as for those BD would have us believe are blameless, I'm reminded of the adage: All that is necessary for the triumph of evil is that good men do nothing.

        I agree totally. I think they had a expert on PBS a few years ago who said (paraphased) "stop looking at the energy sector, the ones benefiting most from this administration is the financial sector. It just dwarfs the energy sector.

        Once they realized the regulators were not regulating thanks to the Bush administration, it all started up big time in 2002. In another related financial scheme, collection companies started bidding on blocks of discharged bankruptcy debt from the major banks in question. In one case Sherman Financial bid 7 million and got 7 Billion worth of discharged debt in 2002 .

        They managed to scare the crap out of 5% worth of the ex-debtors and collected 359 Million that year with a cost of 7 million. After tax profit was 85 million. By 2008, they had grown quite a bit where 2002's results were Q2's results in 2008. Presumably they are really growing now as this loophole remains open. The loophole:  banks can auction off the discharged debt, but it is illegal for these firms to try to collect. If a person contacts an attorney a quick settlement averaging a Thousand dollars is offered and usually taken.

        There is a company that's even bigger than that went public. Yep the boys of Wall Street got behind  a company that is illegally collecting on discharged debt and brought them to the stock market for 7%. We too can invest in what promises to be a very lucrative market unless congress wakes the fuck up.

        Slimy enough? Wait there's more. There's always more...

        About 4 years ago , Sherman Financial bought a tiny slimy bank that specialized in subprime. Why did they buy it? Well, they'd call from their list of ex-debtors with a specific debt that was discharged. Then they would ask the person nicely if they would like a credit card. First response is sure (for some). Then the collector says 'Great, we'll just put 50% of the balance of what you owe XYZ bank on here and send it out immediately".

        No surprise that that one worked and what did they effectively do? They created a new debt out of the discharged one. When the person got the card it was at max interest rate with no available credit so he was sure to run into a overlimit fee.

        Here is another example of the banks that we are bailing out doing very bad things in collusion with not only collection companies but law firms that specialize in collections with the helping hand of Wall Street.

        It's not as big as all the other stuff. I would classify this one as dancing on the figurative graves of the taxpayers who were forced by the Health Care problem and the economy into bankruptcy court.  

        It is one , however, that I am putting a package together for a producer of a prominent news show unless someone does it before me. When the time is right, like around election time next year, I'll see if I can do some good. I realize waiting is going to make some people agonize, but you want to present it in such a ugly fashion that no republican or democrat would ever consider blocking a bill to close the loop hole on the banks and Obama has appointed enough USAs to see if we can toss a few of these fucks in jail.  

        Once that loophole closes and the law is strengthened on collections of discharged bankruptcy debt, it cuts off the oxygen of these companies and believe me, they are spending money like there is no end. So expensive criminal prosecutions may not be in their reserves.

        They fly very low on the radar. They don't even want the politicians to know who they are so no political contributions to worry about.  

        If they don't do soemthing about this one, we will never see any of these assholes go to jail. This is just petty cash even though Sherman Financial has crossed the billion dollars in revenue benchmark. It may be a multi-billion dollar company with after tax margins of 25% by now with the massive increase in filings.

        Just when you think they couldn't get any lower...

        It's a long way to go , just to get to back to when it was bad.

        by Dburn on Sat Mar 28, 2009 at 04:09:17 PM PDT

        [ Parent ]

  •  Kaletsky is arguing something very similiar (1+ / 0-)
    Recommended by:
    LaFajita

    to Krugman, I think, in this article.  That the whole edifice is rotten.

    http://www.prospect-magazine.co.uk/...

    If you want to truly understand something, try to change it. - Kurt Lewin

    by anim8sit on Sat Mar 28, 2009 at 01:22:07 PM PDT

  •  Securitization led to unnecessary speculation (2+ / 0-)
    Recommended by:
    scorpiorising, anim8sit

    And rampant speculation led to the boom and bust cycle the 1933 to 1979 era sought to avoid.

    Krugman is right, you're wrong.

  •  You are using Fallacious Logic here (5+ / 0-)

    just because some form of a "securitization" economy "worked" for 30 years does not mean that it is sound or unquestionable or even non-problematic. 30 years is not a very long time, historically. Regardless, this is not a rational argument. Especially not in a capitalist system, which is changing and transforming all the time (and is defined by its ability to displace its own limits).

    You haven't substantively shown how the last 30 years of economic policy are NOT to blame for this mess (and I agree with Krugman that they are). This has been coming for a long time and many people are/were not surprised. The idea that things could go on any longer than they did, or that this could be sustained indefinitely, just because it worked (for whom, I might add?) is patently ridiculous ...

  •  Krugman is RIGHT! (2+ / 0-)
    Recommended by:
    LaFajita, washunate

    You Can't Fix Stupid!
    Start over!

    First they ignore you, then they laugh at you, then they fight you, then you win. -- Mahatma Ghandi

    by neoconsuck on Sat Mar 28, 2009 at 01:32:24 PM PDT

  •  As long as (1+ / 0-)
    Recommended by:
    howardfromUSA

    wealthy coporate interets own the campaign finance system there is no hope.

    KOS is flat dead wrong on this one. I absolutely cringe when I hear how much corporate bribe money candidates are taking in.

     

  •  Krugman is an idiot (1+ / 0-)
    Recommended by:
    JuliaAnn

    now that he is disagreeing with Obama's Wall Street gang. But he was a genius a year ago when he was disagreeing with Bush's Wall Street gang. Kinda funny how that works...

    Gentlemen, you can't fight in here! This is the War Room!

    by bigtimecynic on Sat Mar 28, 2009 at 01:53:50 PM PDT

    •  I don't mean to knitpick but... (0+ / 0-)

      Please attribute your signature to Stanley Kubrick, Dr. Strangelove...

      First they ignore you, then they laugh at you, then they fight you, then you win. -- Mahatma Ghandi

      by neoconsuck on Sat Mar 28, 2009 at 02:11:18 PM PDT

      [ Parent ]

    •  Lame response (0+ / 0-)

      Seriously, this is cheap as hell.  You're accusing the diarist, essentially, of being dishonest.  Do you agree or disagree with the argument laid out here?  Why?  Great.  Instead you ignore every bit of substance and pretend to understand why the argument is made and attribute it to bullshit partisanship.  

      I know it was just a little jibe and all but it's a really assholish thing to say when someone spells out their argument cogently as the diarist has done.  

      "We can't freeze in our tracks when faced with the perceived paradox of maintaining our critical minds while giving some faith to a leader and a plan."

      by Sun dog on Sat Mar 28, 2009 at 02:51:05 PM PDT

      [ Parent ]

  •  recc'd for the discussion this created (0+ / 0-)

    i believe that the financial sector overtook production and created mass mergers and brought about an economy that prefers share holders and profit first and the well being of citizens, employees, the nation, world and environment last and that has brought about much of the neglect and fissures we are seeing.  The derivatives are a major factor combined with deregulation and absent oversight.  We need to remake an economy that sees the moral hazard in rewarding greed over well being and an economy that deters great divisions of class and opportunity.  We have  made it almost impossible for poor and middle class kids to get an education without mountains of debt for decades. Priorities, I hope , really do shift because we have caused so much unnecessary pain to so many with the libertarian social policy of the last few decades.

    Fool me once shame on you; fool me twice won't get fooled again. George Bush

    by ganymeade on Sat Mar 28, 2009 at 02:05:47 PM PDT

  •  I respectfully disagree (0+ / 0-)

    I have often read the criticism that "The US doesn't make thinks anymore" as if creating financial structures is somehow less valid than making a physical good.  In fact, both activities are equally valid and should be treated as such.  Individuals who prudently manage other's money and take well-thought out risks provide a valuable service to the economy; they should not be publicly vilified because other members of their profession have made huge mistakes.  In essence, there are good practitioners and bad practitioners in any profession; but the presence of bad practitioners does not nullify the contributions of the professions as a whole.

    I think high finance wizardry, and the "making of money from "money" is actually a sign of a bankrupt society in many ways. It also has led to a lopsided distribution of capital (not to mention lopsided tax laws where hedge fund winners pay less taxes than your neighbor who works at a convenience store for minimum wage). Our inability to see what we are doing to ourselves with this crap is a testament to how far off we've moved from any sense of reality.

    Well thought out risks. The biggest one I am taking is to live in this country at all. We spend nothing on people, we reward risk takers and financial shaman, and we worship the high priests of Wall Street.

  •  Reality offsets the stated advantages. (1+ / 0-)
    Recommended by:
    Capt Morgan

    Yet securitization provides two incredible advantages.  First, it adds liquidity to the financial sector.  Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.  This allows banks to increase the number of loans it can underwrite,

    You can also write "make another bad loan," and "increase the number of bad loans it can make." Since the base incentive for the humans involved is that they make money without having the trouble of creating a tangible thing of real worth, it is inevitable that not only will the number, but the percentage, of bad loans will increase.

    You could effectively end the financial sector (not basic banking), and it's true you will not have as many bubble-booms as you enjoy (you being a relatively small percentage of the population), but then again you will not later pay as much in misery and dislocation when it inevitably collapses.

    Yet securitization provides two incredible advantages.  First, it adds liquidity to the financial sector.  Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.  

    They weren't making a profit by holding the mortgage? Is there a point of sufficient wealth, or is there a point where the ever-growth dream is a whacky mania?

    In short, securitization increases overall credit and provides more tools for financial managment -- both of which increase overall economic growth when property [sic] structured.

    But at some point, as every depression illustrates, the "wealth created" by financial shenanigans is based on credit without sufficient backing, and the politicians get a cut for undermining proper structures. So experience has established for some centuries now.

    This all sounds, to me, like a complex rationale behind the urge to get something for nothing. An understandable urge, but not one that a society needs to indulge in order to thrive and to be stable. If anything, the opposite.

    Until we break the corporate virtual monopoly on what we hear and see, we keep losing, don't matter what we do.

    by Jim P on Sat Mar 28, 2009 at 02:17:23 PM PDT

  •  The Loan's value is the property. (1+ / 0-)
    Recommended by:
    John H

     Claiming the re-payment is  a 'steady stream of income' and therefore can ALSO be counted as an 'asset' is a complete  contrivance.

    •  That is not correct. Do you securitize loans? (0+ / 0-)

      the VALUE in mortgage securities traded is in the steady stream of interest income.  If people keep paying on their mortgages --regardless of the home value then the mortgage security is secure for the investor.  In fact, most loans made in 2006-2008 at 95% LTV or greater are now underwater in terms of home value.  But only (only!)about 5-8% of them are delinquent.  So the other 95% of the securities are an asset in that the investor is still getting a steady stream of interest income.

      The reason mortgage securities are in a bad place is because 5-8% delinquency is a huge number when the models were built around a 3% delinquency expectancy range.

      President Barack Obama - World's Smartest Hopester.

      by FORUS50 on Sat Mar 28, 2009 at 02:55:04 PM PDT

      [ Parent ]

      •  And where is the 'value'? The "PROMISE" to pay is (0+ / 0-)

        intrinsic to the value of the loan. If the 'promise to pay' was not implicit there would be no loan.

        "Cashing in" on "The Promise to Re-pay" is creating 'value' where NONE exists.

        Also called "Counterfeiting".

  •  Everyone will have to make up their own mind (0+ / 0-)

    Both you and Krugman make good points and I strongly agree with you that we shouldn't tarnish everyone in finance with the same brush.

    I'm not in finance, I'm a programmer...and I guess I prefer the idea of a bank loaning out their own money and getting it back from their own customers. Yes, it puts a "damper" on growth but I see that as a good thing...let banks expand slowly but surely.

    Perhaps there is a place for securitization but I think that place should be a whole heck of a lot smaller and implementation and access to those types of financial products should be restricted. It can take 30 years to find out the long term effects of a commonly-taken drug...so I'm not sure why you feel 30 years is long enough in this case when so many other components of our economy could have been covering up or compensating for the weaknesses in using securitizations (i.e., a real estate bubble that lasted, how long???? 15-plus years??)

    One of the things I like about building applications is that "something out of nothing" sense of accomplishment...but thinking of making money "out of nothing" kind of makes me squeamish.

    All the above said, I always love reading bonddad diaries, maybe more than I like reading Krugman!

  •  I'm with the other dissenter (2+ / 0-)
    Recommended by:
    Shockwave, column 5

    I'm basically a Republican (from before the fundies took over the party) but for me securitization is the key problem. Sure there were other factors, ridiculous tax rates for hedge fund managers and the well to do (which includes me), too easy money for far too long (Greenspan), repeal of Glass-Steagall, etc., but the crucial factor was divorcing risk from reward in lending which is what securitization enabled. Banks, mortgage brokers, and non customary lenders could originate mortgages, collect the plum origination fees and then sell the risk to the next guy. In the process they repackaged so much garbage that the rating agencies under pressure began issuing AAA rating on CDOs that merited nothing more than junk bond status. Banks, institutional investors, and private individuals fell for it. It was like a vast game of musical chairs with many investors caught holding the bag when the music stopped as it always does. Now the whole world is paying for it. The tax tables need to be rebuilt. Securitization needs to be tightly regulated. Hedge funds need regulation. The shadow lending market needs to be brought into the light. And Glass Steagall needs to be restored.  

  •  Mortgages Of An Era Long Gone (1+ / 0-)
    Recommended by:
    FORUS50

    As a mortgage collector from way back (early 1990's) I can tell you that PRIME mortgages used to have a delinquency rate of less than 1%.

    When the financial instrument in question is solid, I believe securitization does work.

    NOW, when you're talking about securitizing shitpile, well, you see what happens.

    I love Daily Kos as well for the spirited debate and varied points of view. I do think there is tendancy to accept the words of Paul Krugman as if he was some supernatural being, incapbable of being wrong.

    Krugman is a human. And being just a human he will be wrong many times in the future. Just like the rest of us.

    If Krugman is wrong, who cares. He loses nothing. If Obama is wrong, he is accountable to us and history. In that scenario my money's with Obama.

  •  Everybody is wrong (1+ / 0-)
    Recommended by:
    BrighidG

    The entire system is just too messed up for anyone to figure it out.  Everyone seems to agree that nobody knows what is going to happen next.  

    Some knots just can't be practically untangled; you have to cut it or throw it out and get a new string.

     

    Unsustainable is unsustainable, which means it will eventually end.

    by Must Have Been The Roses on Sat Mar 28, 2009 at 02:37:37 PM PDT

  •  Gasp....what????? (0+ / 0-)

    Krugman is Wrong

  •  Congrats on your HuffPo syndication! (0+ / 0-)

    I was scrollin down earlier today and saw "Hale 'Bonddad' Stewart" and was like....what a second!  I know that handle!

    How'd you start working with HuffPo?  Did you contact them or did they contact you?

    Feingold is my hero.

    by Marc in CA on Sat Mar 28, 2009 at 02:42:29 PM PDT

  •  What truly amazes me... (0+ / 0-)

    We saw the collapse of Enron over seven years ago for lots of the same sleight-of-hand derivative bullshit that caused this mess, and everyone on Wall Street just kept right on gaming the system like nothing had happened.  Of course the fact that we had a certain Jackass-In-Chief for the past eight years explains a lot of it, but still.

    And of course that means it's all Obama's fault...

  •  Krugman is right (1+ / 0-)
    Recommended by:
    washunate

    and he's not the only one.

    "In true democracy every man and woman is taught to think for himself or herself." Mohandas Gandhi

    by Sagebrush Bob on Sat Mar 28, 2009 at 02:47:48 PM PDT

  •  Securitization (0+ / 0-)

    I would agree that securitization provides a function for the financial system.  However, without regulation these securities traded in dark markets with only minimal information available. The ratings agencies did not do their jobs.  And the trading of these securitized assets created a whole host of problems that no one contemplated.  These junk assets replaced real assets and the result is a banking system devoid of real capital.  I think that if the banks continue to use these securitized assets then they need to pay a premium into a government fund similar to FDIC (Yes, I know that premiums have not been paid into FDIC for years which more than anything reveals the power of the financial industry and the corruption of the political process.)  By setting aside funds, the next time a financial crisis occurs (and another one surely will) perhaps there will be some money available to bailout the firms but this time with their own money rather than that of the taxpayers.  The Congress needs to put the brakes on this process so that is does not run away again.

  •  Simply (0+ / 0-)

    because you don't want, or are afraid Krugman is right-doesn't make him wrong. Sadly, his position is the bitter pill we are afraid to swallow.  
    As an architect I will be the first to argue that what is built has "value" and what is drawn is merely paper.  good luck to us all.

  •  Krugman Attacks Securitization (0+ / 0-)

    only to pass up all these other factors associated with the post-1980s era of dergulation as seen in the Atlantic article on the "Cult of Finance,"  titled The Quiet Coup and diaried yesterday by dday.

    While I don't agree with Simon Johnson's slant throughout much of the piece, the following is worth noting pertaining to this diary and Dr. Krugman's apparent blindered focus on securitization as the root of all evil.  

    From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

       • insistence on free movement of capital across borders;

       • the repeal of Depression-era regulations separating commercial and investment banking;

       • a congressional ban on the regulation of credit-default swaps;

       • major increases in the amount of leverage allowed to investment banks;

       • a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

       • an international agreement to allow banks to measure their own riskiness;

       • and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

       The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

    To me, there seems to be plenty of contributory evil to share the blame in our present economic upheaval, and we would be loath to ignore these points when Obama, Orszag, Geithner, Volcker, Bair, and the rest of the Administration's economic wunderkind and "wonderelders" tackle what's wrong with this country's antiquated and broken banking-financial-tax systems.

    "Give me but one firm spot to stand, and I will move the earth." -- Archimedes

    by Limelite on Sat Mar 28, 2009 at 02:55:35 PM PDT

  •  You lack credibility and objectivity here (4+ / 0-)

    Objectivity, obviously given your chosen profession. And credibility given these words from you in 2007:

    Over the last few weeks, there has been a lot of talk about financial derivatives, collateralized debt obligations (CDOs), collateralized loan obligations (CLOSs) and subprime debt.  Regrettably, a great deal of this talk has predicted "the end of the financial world."  While problems have developed, talk of wide-spread fallout is pretty exaggerated.  Below I will explain why.

    CDOs and CLOs are two of the newest developments in the structured finance markets. While there are understandable concerns about these new structures, structured financial products have already demonstrated their effectiveness over the last 25 years. There is no reason to think they will behave differently now.

    .   .   .

    While there will be problems, the problems will occur because an individual manager made a really stupid decision by taking on way too much risk.  As mentioned above, CDO and CLO structures are designed to mitigate risk.  And that is what I fully expect them to do.

    •  Nice research. (1+ / 0-)
      Recommended by:
      CornSyrupAwareness

      It seems the cat has bitten its own tongue now...

      First they ignore you, then they laugh at you, then they fight you, then you win. -- Mahatma Ghandi

      by neoconsuck on Sat Mar 28, 2009 at 03:15:41 PM PDT

      [ Parent ]

    •  yeah, I don't get why Bonddad keeps going down (0+ / 0-)

      this road. Is he trying to leverage his establishment credentials at a blog like this to get a job in finance in the future? I just don't get his analysis these days. He's not even making an argument, he's just saying other people's ideas are wrong without showing how, whether it's Krugman in this particular piece or talk of nationalization or other kinds of potential public policy that runs counter to the Conventional Wisdom of Wall Street.

      This post could be lifted straight from the PR department at Goldman Sachs.

  •  This Appears to Be the Latest Meme at Kos (1+ / 0-)
    Recommended by:
    washunate

    And it's getting old and sounding bitter.  So no tip or rec from me.  

    Peace.

    •  I think the dialog here is mostly constructive... (0+ / 0-)

      But obviously it's hard to discuss the collapse of American capitalism without becoming a tad emotional...

      Today unemployment exceeds 10% in seven states today -- when the National average exceeds 10%, another wave of economic panic is likely to ensue.

      Tent cities are popping up under overpasses in many urban centers.

      Yes.  The "god almighty" stock market may be up 20% (until yesterday) but it can't last without real profits from real firms.  And where does profit come from when 40% of U.S. GDP directly results from the "financial system" of which 2 of every 3 dollars goes into securitization, which is essentially insolvent to the tune of $4 Trillion (conservatively).

      And Obama/Geithner's solution(?) -- is they (private equity) put up $50 and we put up $300 -- that's a "fix"?!

      Where do the bailouts end?

      How far can we stretch the bone marrow (as Lender of Last Resort) of the U.S. taxpayer?

      This is meme #1, #9, #99 and #999 as far as I'm concerned.

      First they ignore you, then they laugh at you, then they fight you, then you win. -- Mahatma Ghandi

      by neoconsuck on Sat Mar 28, 2009 at 03:53:52 PM PDT

      [ Parent ]

  •  Given that most of the holders of these securitiz (0+ / 0-)

    ed mortgages ARE NOT REGULATED it is foolhardly as the diarist attempts to do to be in favor of the process.  If there is any doubt on this point just look at the present economic mess this world is in due almost single handidly to the marketization of these securitized mortgages.  I think that the present experience shows that despite all the vaunted pluses for the securitized process (pointed out by the diarist) on balance the negatives (namely, the removal of due diligence) far and away out weigh those pluses.  Nice try, BUT KRUGMAN IS RIGHT!

  •  I disagree on a couple of points (5+ / 0-)

    1. There is a fundamental problem with the process of securitization.  It removes the economic necessity for lenders to act in good faith when making loans.  Regulatory frameworks may be able to compensate for this flaw in the securitization market, but only to a degree and only if said regulations are effectively enforced.  Sadly, the past few decades have taught us that we can't expect such regulatory frameworks to be enforced in the long term.   The ruling elite has to many incentives to play ball with the financial world on it's own terms.  Yes, there is a certain "re-regulate" meme percolating through Washington at the moment, but that will fade as Wall Street is able to reassert itself over the next few years and the general public loses interest.  

      The only long term solution is the complete deconstruction of the securitization market.  Otherwise we will simply be back in this situation in 5 to 10 years.

    2. This statement is deeply false:

      I have often read the criticism that "The US doesn't make thinks anymore" as if creating financial structures is somehow less valid than making a physical good.  In fact, both activities are equally valid and should be treated as such.

      No, they aren't equally valid.  Yes, there may be some value to the service provided by "Individuals who prudently manage other's money", but that value (like the value of many other services) is highly ephemeral, where as the value of a physical good is long lasting.

    3. Finally I have to take issue with this:

      Individuals who prudently manage other's money and take well-thought out risks provide a valuable service to the economy; they should not be publicly vilified because other members of their profession have made huge mistakes.

      I'm sorry but the reason the investment industry as a whole is being vilified is because the investment industry as a whole has screwed up.  Yes, there are a lot of well intentioned investment advisers out there who genuinely tried to be "prudent" with their clients money, but our entire society was fed a fantasy that 401k investment vehicles where a prudent alternative to conventional pension plans, and this has been proven false.  Much of an entire generation has seen large swaths of their retirement savings wiped out because of the excesses of the financial industry.  This is a systemic failure and that means everyone who is part of the system is as fault to one degree or another.  Well intentioned and "prudent" financial advisers have spent decades telling Americans that system works.  Now they've been proven wrong and the American people are right to be angry with those who sold them this bill of goods.


    This country does not have the luxury to entertain idiocy as if it is reasonable. --Digby

    by Thought Crime on Sat Mar 28, 2009 at 03:30:44 PM PDT

  •  Here's the fallacy in the diarist's argument (4+ / 0-)

    Instead of having to hold a mortgage until it was paid off, a bank could sell it for cash and then use that cash to make another loan.  This allows banks to increase the number of loans it can underwrite, thereby freeing up credit.  

    This doesn't free up credit, it just dilutes responsibility and increase risk.  If there is someone out there with money to buy the mortgage from the bank, in a logical world that someone could just as easily make a loan directly to a home buyer.  So the amount of available credit is not really increased.

    Or rather, the amount of BAD credit is increased, while the amount of good credit stays the same (at best). By relying on securitization, the market has broken any knowledge the investor might have about the loan and the collateral, except for an abstract rating.

    So rather than using sound measures of creditworthiness, banks in the last 15 years aggressively made loans backed by thin air, often on misleading terms, in the belief that maximizing the number of transactions is a good in itself (it is so only for the bank, which pockets the hefty transaction fees) and in the knowledge that it would be no skin off their teeth should the borrower default - seeing as the bank would already have bundled and sold the mortgage.

    I'm with Krugman on this one, though I wish he weren't quite so hard on Obama.

    Silvio Levy

    •  And even then the diluted risk is put back (1+ / 0-)
      Recommended by:
      codairem

      together again in the form of concentations of credit default swaps that these slicer and dicers then take out to hedge their bets in case the securitized mortgage they bought (but have no idea whether it the borrower underlying it is a good credit risk) go bad.  So the whole process --- which the diarist nowhere paints a portrait of --- combines the worst of both worlds.  So the creators of these instruments are they Financial genusis?  No.  Con artists?  YES!

  •  The single biggest problem IMO (0+ / 0-)

    is a tax structure that promotes short term profit taking over long term risk management.

  •  agreed (0+ / 0-)

    that securitization is not in itself bad. But does there not need to be some mechanism whereby the bank making the loan retains some of the risk - and also a clear line of authority to adjust mortgage terms when appropriate.

  •  moral hazard (0+ / 0-)

    a clear moral hazard is that the bank can loan the money and then offload the collection part - where is their incentive to be sure the borrower can or will repay?

    and that is what happened.

    the banks and mortgage lenders created a bunch of bad loans, took their fees, and offloaded them.

    their must have a motive to make sure the loans are good and that is it has to be them who are servicing the mortgages.

    Harry Mitchell is my new congressman, replacing JD Hayworth.

    by 2liberal on Sat Mar 28, 2009 at 04:05:41 PM PDT

  •  I haave dipped in and out of this diary today and (0+ / 0-)

    before I shut down for the night, in regard to many personal anecdotal stories that have been posted regarding individual's hassles with various corporate glitches, I just want to say that the people you get to talk with, the customer's representaitive, are in the main ordinary men and women, whose jobs depend on dealing with angry, sometimes abusive, often insulting, customers, who sometimes even say I don't want to talk to you, I want to talk to an American.

    They are not the problem and they cannot provide you with the solution.  They are the worker bees.

    If you want to change global corporate capitalism, do so   with one united voice, If the message is serve the people, then the people also need to accept responsibility for understanding the contracts they sign and the legislation they allow their own eladers to pass.

    Don't yell at me. Yell at your leaders.  Do it through the ballot and not with the bullet of verbal abuse.

    Disclaimer, this is NOT a perdsobnal attack on any single indoividual, just reflects how I feel on the verge of the G20 summit in London.  Pay attention.

  •  Krugman is guessing like everyone else, so (0+ / 0-)

    their is a fucking chance that he could be wrong. More importanly, anyone with comman sense knows that their are multiple ways to solve a problem.
    Stop giving Krugman credit, for problems he has not solve! Krugman needs to stop acting like John McCain, " I know how to get Bin Laden", but you have to elect me president, so that I can tell you how. Krugman is doing the same thing "I know how, to solve the problem", but you have to put in charge before I tell you how.  Fuck him, I'm done with Krugman, and with the people who have promoted him to GOD!

    Krugman is no better than Limbaugh, he wants Obama to fail!

  •  I couldn't help but think of the China Syndrome (2+ / 0-)

    When I read this diary. Bonddad basically says it was just a bunch of bad apples, and not the system itself that created the mess. What he's not seeing is that the system, and I don't just mean the financial system, but the entire human system that built it, inevitably leads to the circumstances for failure.

    When profit is the sole motivation, profit will always beat any attempts to control it. So it struck me as the China syndrome, mainly because the consequences of failure of the financial system are too great for the amount of risk that was involved in securitization. A shortcut here, a bit of lack of oversight there, a payoff there, and voila, we have a financial meltdown. And this deterioration of the failsafes that were supposed to mitigate the risk is not because of some unfortunate set of unforeseen circumstances or a few rogue individuals as bonddad seems to believe, it is completely predictable entropy.

  •  No, Virginia, you DO need enough lifteboats (0+ / 0-)

    for everyone.

    Hey, fellow Republicans, I've got a great idea for bringing the economy into the 21st Century. Let's repeal every lesson we learned the hard way since the Panic of 1837!

  •  The isolation of Paul Krugman from the other (1+ / 0-)
    Recommended by:
    washunate

    economists who are saying the same thing, makes me wonder if there isn't a little jealousy going around.  

    After all, it is Paul Krugman who will be on the cover of this week's edition of Newsweek.

    •  The fact that Krugman will be on the cover of (0+ / 0-)

      Newsweek says more about their own agenda than anything else.  

      Newsweek, Time, Washington Post, NY Times etc...  they are all putrid.

      "Live in the sunshine, swim the sea, drink the wild air." - Ralph Waldo Emerson

      by Blue VA on Sat Mar 28, 2009 at 05:13:45 PM PDT

      [ Parent ]

  •  Brilliant analysis Bonddad. Thank you (1+ / 0-)
    Recommended by:
    steve234

    I was confused about the exact nature of Krugman's complaint.  I see what you are saying.  Securitization is as wrong as say auto insurance.  It's a side effect of an expanding base of requested needs.  As massive amounts of loans become overwhelming, it's better to dice them and sell them off for a profit.  Rational.

    The REAL problem is balance.  In my LAME and UNEDUCATED experience...I think that financial institutes should be putting their assets through "what if" scenarios.

    For instance, if BofA has a 30% stake in securitized loans, then they automatically run a "what if" against the slim possibility of a housing bubble pop.  If that were to happen, would the bond insurance companies have the working capital to pay BofA?

    This is REAL similar to Katrina.  If a housing insurance company has a massive investment in thousands of houses in a KNOWN flood zone, they better be prepared for the worst.  If they aren't, then they are not a viable insurance company.  That kind of analysis needs to be transparent to the consumer of the financial product.

    Christ this is complicated.

  •  Biondad is wrong...Krugman is right (2+ / 0-)

    There was plenty of liquidity in the conomy before the financial sector went wild. And once the house of cards collapsed ... so much for liquidity. How much efficiency is being lost trying to figure out who really owns the mortgage paper for the purposes of workout or foreclosure.

    •  Black Swan (0+ / 0-)

      Securitization is most definitely wrong. Bondad does not understand just because some rare event happened in the last 30 years that it won't happen.

      Securitization should spread out risk but what happens when that event applies uniformly to everyone? Insurance doesn't work in this case, and the fact that it is spread out diminishes accountability (who owns what, like you said).

      So Krugman understands Black Swan and Bondad may not.

  •  I'm not so sure I disagree with Krugman. (2+ / 0-)
    Recommended by:
    ganymeade, CornSyrupAwareness

    For a crime you need several elements.  Motive and means.  Securitization provided a motive.  Greed.  Pawning off the risk.  Securitization also provided the means, the mechanism in which that risk was pawned off, onto me, who did not get even a fucking crumb of the pie while it existed.  In other words, securitization, like communism and capitalism "in it's purest form" is neutral, how it is applied and practiced means everything. Securitization was the mechanism used by criminals to socialize risk to the masses, while privatizing the capital produced into fewer and fewer hands.

    If anything that I take out of this entire financial catastrophe is that the people who had a fiduciary responsibility, and I include the entire banking and investment industries, as a whole, failed completely.  They operated in a veil of opacity and secrecy, with absolutely no accountability.

    If anything, securitization was an extremely ironic term for what amounted to the Era of Absolutely No Accountability.  

    If people lose faith in our fiduciary system can you blame them?  We were robbed, right before our eyes, in broad daylight, by criminals at the highest levels of our economic system.

    Tonight I met with my brothers and sisters to discuss issues regarding my 85 year old mother's end of life care.  We don't have the money to put her into assisted living, which she desperately needs.  And I am fucking livid, rabidly angry, that my family faces these impossibly dire needs while there are fat motherfuckers, smoking cigars and drinking champagne without a fucking care in the world called bankers who will never be called to account for robbing this country blind.

    I'm afraid I don't buy the good German explanation for anyone in finance.  They are fucking criminals.

    •  "Participation loans" are the same thing (0+ / 0-)

      Here is my experience with a credit union doing something very similar to "securitization" and CDSs.

      Years ago now, my credit union was defrauded by its President and a couple of other officers. The primary method was "participation loans". They described this to the members as a way to share risk by buying and selling pieces of mortgages made by other credit unions.

      Actually, "participation" meant buying up to 95% of a loan without doing ANY of the checks that they would do if they actually loaned the money. No credit checks, not even any check of whether the real estate actually existed. In fact, the loans were fraudulent, though one board member justified them by saying that they paid a lot of interest for many years. (!)

      Since there was actual fraud involved, we got the money back from the company that insured our officers. We also rose up and threw out the entire board of directors and most of the supervisory committee (whose job is to manage the internal auditor -- I served on it for a few years).

      Regulators gave us no help at all with solving the problem of a board that bought into & defended this idiocy. It was some pretty unusual circumstances that made it possible for us to replace them: we were the company credit union for a highly networked tech company (Digital Equipment Corp., if anyone remembers them).

      So I do NOT agree with the poster. Our foray into "securitization" could have been helpful if done carefully, but the point seems to have been to avoid the very checks & oversight that would have made the system actually achieve its goal of sharing risk. It was all about getting rich by evading the rules -- and that's how I see "securitization". Absent really stringent rules (and regulators who enforce them), I'll continue to see it that way.

    •  hate them too (0+ / 0-)

      Fool me once shame on you; fool me twice won't get fooled again. George Bush

      by ganymeade on Sun Mar 29, 2009 at 02:53:31 AM PDT

      [ Parent ]

  •  The problem isn't just we don't make anything (2+ / 0-)
    Recommended by:
    ganymeade, Aranfell

    the biggest problem is we don't own anything. We don't own corner stores, we don't own grocery or hardware stores anymore, we don't own profitable farms anymore. The middle class used to be a much larger owner of small business. The family run business used to be everywhere.. Remember ____ and Sons? Ya you grew up with it, and now it's gone. Pushed out by big box business' unbeatable prices. One problem with this is that it makes us dependent on our jobs. We lose our jobs and it's over, no other revenue streams, no other way to feed ourselves.

    What does this have to do with anything? It results in middle class people investing in Wall-Street. This is a dangerous strategy, and from now on it probably will be seen that way. Do you really think finance should be the proportion of GDP that is now? Should more people manage money than run businesses?

    You say it's a big picture, well you should include both the facts that we don't make manufacture anything anymore, and fewer people own mom and pop businesses. It's a piece of the puzzle. IF we had owned businesses there would be less ppl worried about defaults on mortgage payments.

  •  matt tabibi on rolling stone (0+ / 0-)

    The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

    this is the basic problem

    Harry Mitchell is my new congressman, replacing JD Hayworth.

    by 2liberal on Sun Mar 29, 2009 at 02:52:32 PM PDT

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