> On Apr 24, 2009, at 3:10 PM, Michael Pollak wrote:
>
>> But the longer that this drought continues, the bigger the policy
>> issues become. After all, no politician wants to see the government
>> buying mortgage-backed bonds forever; but nobody really believes that
>> traditional, old-fashioned lending can take up all the slack. So
>> either the system needs to find a way to restart securitisation or we
>> face a world where credit will remain a highly rationed commodity for
>> a long time to come.
>
> But what if securitization enabled excessive lending to people who
> shouldn't have been borrowing? This whole "get lending restarted"
> thing has some serious problems if you think that debt levels remain
> way too high, and that the real economy's dependence on credit got way
> out of hand over the last decade or three. It's one thing to prevent
> an implosion of the credit system, a la 1929-33, and another to try to
> restore the world of 2006.
But the point is the reverse. If debt levels remain too high - and they are too high - then the problem with "get lending restarted" is not that it might work and return us to 2006, but that it will never actually get lending restarted because no one will want to borrow. Which is exactly what will happen, I say. The only way to get credit restarted in a world where private actors don't want to borrow is for the govt itself to borrow - i.e., fiscal policy.
Also, to say that securitization increases incentives for excessive/imprudent lending is looking at the problem from exactly the wrong angle. That would only be true if people who bought bad securities were somehow protected from their losses. Yet in fact they're being wiped out. The truth is the other way around: The incentive for excessive/imprudent lending was actually the result of the bubble. Once the bubble made bad lending attractive, securitization was just a convenient institutional innovation to help expand the funding base for this suddenly-profitable (in an illusory sense) bad lending. Pension fund managers were willing to buy CDOs they didn't understand, not because they were somehow bamboozled by the smoke-and-mirrors of securitization, but because for the time-being it was profitable for them to do so. In a non-bubble environment, the use of securitization would automatically be restrained by higher (i.e., normal) levels of credit scrutiny. Securitization can go along with either prudent or imprudent lending. The determining factor is the existence of bubbles.
SA