Securitization lessons not learned.
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.