I actually agree with Paul Krugman

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He writes,

I don't think the Obama administration can bring securitization back to life, and I don't believe it should try.

Paul writes this sentence at the end of a long column bashing the market.  My view is that securitization of mortgages would never have emerged in a free market.  Instead, it came from our country's industrial policy supporting housing.  Every major advance in mortgage securitization was a regulatory/accounting gimmick, encouraged or created in Washington.



1.  Mortgage securitization began in 1968 as a way for government to get FHA and VA loans off its balance sheet, to save Lyndon Johnson the embarrassment of having to ask Congress to increase the debt ceiling.

2.  Mortgage securitization took off big time in the early 1980's, with a program designed to allow S&L's to liquidate mortgage assets that had declined in value without having to recognize the loss of value on their balance sheets.

3.  Mortgage securitization took another leap forward in recent years when the Basel capital accords created a huge demand at banks for AAA-rated assets, and Wall Street was able, with the help of the credit rating agencies, AIG, and Freddie Mac and Fannie Mae, to create securities backed by mortgage loans--even subprime loans--that received the coveted AAA rating.

Paul is worried that Washington is trying to artificially resuscitate the mortgage securities market.  But it was always thus.

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Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.
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