It pains me to say that, as Paul Krugman has been my favorite commentator for about 15 years. But, sadly, it's true. In his latest column, Krugman takes aim at securitization:
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. ... I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.There are so many problems with this nonsensical argument, it's hard to know where to start. First of all, the "key promise of securitization" has never been to "spread risk more widely." The key promise of securitization is that it allows commercial banks and other lenders to make new loans. More importantly, if securitization is so awful, then why has Krugman defended it so many times in the past?
- Just 8 months ago, he penned a strong defense of Fannie Mae and Freddie Mac, which were literally created to securitize home mortgages. He even argued that "the Fannie-Freddie experience shows that regulation works." So which is it: do Fannie and Freddie show that well-regulated securitization works, or is securitization "a collection of cheap stage tricks"?
- When Geithner originally outlined the administration's bank rescue plan, Krugman wrote:
What is in it, in reverse order: 1. Super-TALF: a big expansion of the Fed’s quantitative easing, with Treasury backing. I’m OK with that. [Emphasis added]The TALF, of course, is a Fed program that's specifically designed to restart the securitization markets for assets backed by small business loans, student loans, credit card receivables, auto loans, and the like.
- Krugman has also praised the Resolution Trust Corporation (RTC) on several occasions, referring to it recently as "a good role model." After Bear Stearns failed, he wrote:
Looking ahead, we probably need something similar to the Resolution Trust Corporation, which took over bankrupt savings and loan institutions and sold off their assets to reimburse taxpayers. And we need it quickly.How did the RTC sell off a substantial portion of those assets? Through—you guessed it—securitization! In fact, the RTC practically invented the market for securitized commercial mortgages (CMBS).