26 September 2008

Washington Mutual

Since Washington Mutual, like Northern Rock, has now gone bust without owning securitized mortgage derivatives, can we please lose the idea that securitization was the problem. Mortgages were the problem.

Without securitization, the financial system would have been much more exposed, but it would have just been the retail banks, not brokerages like Bear and Lehman.

Also, if securitization has been done properly, and the brokerages had actually sold the securities they created, there would have been much less of a problem. All the loss would be carried by investors who were not leveraged and were risking funds they could afford to lose. I know I said that before, but now Tyler Cowen is saying it too (or at least approvingly quoting others who are).

Now it can be argued that, had the risk not been spread out by securitization, the problems of bad loans would have come to a head much sooner, and the total impact would therefore have been smaller. That might be true. It is totally equivalent to saying that if there was no regulation of financial institutions, the problems might have got obvious sooner and therefore have been smaller. True or not, it's a strange way of looking at things. Since nobody is using the John Adams seat-belt argument that regulation is the problem, then blaming securitization should be out of court as well.

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