I actually agree with Paul Krugman

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.

Presented by

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.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Video

A Stop-Motion Tour of New York City

A filmmaker animated hundreds of still photographs to create this Big Apple flip book

Video

The Absurd Psychology of Restaurant Menus

Would people eat healthier if celery was called "cool celery?"

Video

This Japanese Inn Has Been Open for 1,300 Years

It's one of the oldest family businesses in the world.

Video

What Happens Inside a Dying Mind?

Science cannot fully explain near-death experiences.

More in Business

Just In