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Securitization lessons not learned.



February 03, 2010 – Comments (11)

I have to agree with Barry on this one, fascinating stuff. I went back to the original article, In the Packaging of Loans, A Bust with A Precedent

I have mentioned a few times that the housing bubble was significant in the depression and the unprecedented levels of debt were the problem, as I harp on about the debt being the problem today and why this most recent rally has been a fool's rally.  What I did not realise about the roaring 20s is that there was a huge securitization of mortgages then as there has been now. 


 Yet the lessons of that boom and bust have largely been ignored. Everyone remembers the 1920s and the stock market crash of 1929, but there has been little data collected on what happened to real estate securities or even on how large a market it was. It turns out that real estate securities constituted a major market, and began to falter before stocks did.

 I think there are a numbers of reasons to see the problem as worse today.  People have higher mortgages on terms that are already maxed out.  You can't fix an over extended long term mortgage by extending the payments further, whereas you might if the term was around 15-20 years.

Today, those who say securitization is necessary to get the economy moving again argue that the process brings together investors and those with the capacity to make loans, and that banks simply do not have enough capital to make the needed loans.

It was pretty much the same story in the 1920s, Professor Goetzmann and Mr. Newman reported.

Securitization has twice proven itself a disaster for the economy and they should be done away with.


On another note, I have a sad heart today.  The woman in this article is the sister of one of my students.

11 Comments – Post Your Own

#1) On February 03, 2010 at 4:57 AM, Jimson09 (< 20) wrote:

Always secure your investment that is the key ingredient in a very doubtful economy, the primary reason why we are investing is to accumulate profit and not to suffer any losses although sometimes it is inevitable. Fund diversification also does matter. I would like to have some payday loans to have the best investment strategies that will lead me to a profitable return despite of the bad times.

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#2) On February 03, 2010 at 6:37 AM, devoish (67.86) wrote:


The story, it turns out, is one intrinsic to the New York skyline. From 1929 through 1931, according to data compiled by Mr. Newman, 128 buildings that were 70 or more meters in height, or about 230 feet, were completed in New York City. That was the most ever.

Over the last three years, 2007 through 2009, the figure was 87. That was the highest number in nearly 30 years.

Securitization fed the boom that led to the busts in 1929 and 2007 

What was different 30 years ago, that there was no bust?

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#3) On February 03, 2010 at 8:35 AM, lemoneater (57.51) wrote:

dwot, may you be a comfort to your student as she grieves for her sister. If it was a murder, may the Mounties catch the murderer. I will pray for you today as I think about you.

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#4) On February 03, 2010 at 8:49 AM, dwot (28.95) wrote:

devoish, not sure what you are referring to.  30 years ago there was a much higher savings rate and much lower level of debt.  30 years ago I was forming my ideas on how to get ahead in this world and the enormous changes in policy, imho, destroyed common wisdom of the day. 

I actually wanted to touch on that, another similarity between today and the 30's was the low interest rates, which also supposedly mean lower inflation.   Securitization actually causes massive inflation, but wage increases do not keep up.  Low interest rates, imho, are actually massively destructive to an economy and I touch on the issue in my other blog, Making Sense of My World.


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#5) On February 03, 2010 at 8:53 AM, dwot (28.95) wrote:

lemoneater, they have arrested a man.  It appears to be her common law partner.  I had a friend murdered when I was a teen and that murder went unsolved for 30 years.  There is so much grief ahead...

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#6) On February 03, 2010 at 9:14 AM, lemoneater (57.51) wrote:

If he is guilty, I hope that there will be enough clear evidence so that the family can have justice. (I believe the death penalty is one of the best deterrents to potential murderers, but nothing can bring the person back.) It is a tragedy. Grief is personal, but you can identify with your student. Never stop being compassionate, even though it reminds you of your own sadness.

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#7) On February 03, 2010 at 9:38 AM, devoish (67.86) wrote:


The article makes a connection between over building and securitization leading into the depression, and now again into todays "almost depression who knows what we call it when it is over".

The article does so by claiming NY city recently experienced the largest building boom in 30 years which suggest we had a building boom in the late 70's.

But no "near depression" bust, so what was the difference?

1) as you pointed out, higher savings and lower debt (caused IMHO by strong unions and a pro worker Gov't).

2) A strong FED chairman with the courage to say no to banks and raise interest rates.

3) Glass Steagal was not in place in 1929 or 2007

4) More restrictive investment bank leverage requirements than in 1929 or 2007

5) Freddie/Fannie 100% Gov't run and operated.

4) Higher personal and corporate taxes keeping the Federal gov't less in debt, (but still a growing debt).

5) Less belief in the stock market among the general public, many of whom still remembered 1930

6) others?

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#8) On February 03, 2010 at 1:24 PM, Melaschasm (71.33) wrote:

30 years ago we had sky high taxes, rapid government spending increases, the Fed was printing money, and the country was suffering from stagflation. 

That mess created support for massive tax cuts, with top marginal rate being cut in half.  Interest rates were raised, and the printing presses were slowed down. 

After 25 years of strong growth with the occasional very mild recession, we have been moving towards the economic policies of the 1970s for the past two decades, and have made big steps in that direction for the past couple years.  If we continue to raise taxes, ramp up spending, and print large quantities of money, we should expect a return to stagflation. 

However, if we go back to the 1930s we had tight money, increasing taxes and increasing spending, resulting in a depression.

What will we call the 2009 recession?  That depends upon what we do for the next few years. 

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#9) On February 03, 2010 at 6:14 PM, devoish (67.86) wrote:

That mess created support for massive tax cuts, with top marginal rate being cut in half.  Interest rates were raised, and the printing presses were slowed down. 

One of the hardest things in the world to get support for is tax cuts.

In 1976-9 we had Volker raising interests rates. It wasn't until 1983 that Reagan cut taxes. 3 years later, all that new found money with nowhere to go was lost in the S&L crisis.

Of course at that point we had Greenspan lowering interest rates again. Gov't solved the problems of Reagans lowered tax income by rolling over debt at lower rates. The banks made fees, the taxes didn't get raised, the debt didn't get paid, but no-one cared.

All this new money from lowered interest rates had to go somewhere though. Since Gov't was being scaled back and privatized, instead of bonds, it went into equities. Today we call that the Dot-com bust.

Once again, investors had failed themselves and needed a boost so Greenspan lowered rates again, almost to zero this time. With billions of dollars with no where else to go, money piled into RMBS, and equities.  Today we called that the Financial crisis.

Now, having lost all their own money again, investment banks need a new boost. They are hoping for tax cuts. If they get it, all that new money will be invested into Asia and Brazil. In 2015, we will call that the BRIC bubble.

Investment banks will lose money again, and call for tax cuts to boost the economy. All that new money will find its way into water, and equities, and renewable energy. In 2020 we will call that the soap bubble.

With taxs below 3% and no new money available from tax cuts, investment banks will call for the privitazion of  Social Security. All that new money will find its way into property, and we will forever work to pay rent to the very same people that are persuading us to devalue Democratically elected Gov't in favor of privatisation.

The one thing in common that all these bubbles have, is new sources of money, and rising investment bank fees and payrolls.

No, I'm not in favor of lowering taxes again.



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#10) On February 03, 2010 at 6:59 PM, AbstractMotion (< 20) wrote:

Personally I could do with the removal of securitization, at a minimum I think it really needs to take place in some intermediate market with strict capital requirements and a different underlying structure of the securities in question which would require the institutions originating them to hold at least 50% of the equity involved.  If the CDS market disappeared tomorrow I wouldn't mind either.  One point I have to disagree with Barry on a bit though is where the majority of the bubble inflation came from with regards to securitization.  The bulk of MSB issuance throughout this bubble occurred through the GSEs, starting in 2005 subprime became king and brought the market to it's knees.  


One thing that's never set quite right with me about a lot of the commentary about this credit crisis is that there's a quiet sort of avoidance about this bubble essentially being incubated by the Fed and the Federal Government.  No one has a problem with that, the problem is that the banks gave it the final push and pop instead of just letting things stagnate for 10-15 years while housing prices attempted to realign themselves.  Don't get me wrong what the banks did is appalling and we need some real regulation with teeth to make sure it doesn't happen again.  But not nearly enough pressure has been put on politicians to reform the public sector institutions and policies that really got the bubble rolling in the first place.


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#11) On February 03, 2010 at 7:07 PM, dwot (28.95) wrote:

I would suggest demographics also helped 30 years ago where they hurt today.  The population was young and raising their families.  Today there is an aging population and declining birth rate.  It means more pressure put on government sources to pay pensions and health care while the population paying for it is declining.  The numbers do not add up, so anyone that thinks life will carry on as "normal" is going to be in for a shock.  Government debt was astronomically lower 30 years ago as well and it didn't not have nearly as many commitments.


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