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Notes to myself, possibly of interest to others.
-- Bill Northlich

Thursday, March 4, 2010

The "Banks aren't lending" issue - Once more.

Today a friend sent me a ref to an interesting synopsis of a new NBER report, "Questions and Answers about the Financial Crisis". The conclusion of the synopsis is "It means that until the REPO market regains some steam there isn’t going to be much natural progress in getting the world economy to start growing again (take out the government stimulus and we’re screwed)".  I semi-agree, but here's the semi.

The main reason why banks aren't "lending" is that they, in the aggregate, haven't lent in 20 years. As the article says "Money market funds and junk bonds in the 1980s took all the profit out of being a traditional bank. So banks began securitizing loans to regain those lost profits." Ergo, everyone started originating loans, but did not really lend. Said another way, they'd loan out their capital, sell the loan up the securitization chain, get their capital back and make some profit (although, less short term than they would make long term with the original loan, assuming it was a good loan. But - the profit is immediate). Goto 1.

There is no one in a bank, except in Minnewaukan, ND, who remembers how to actually loan money, even if some bank wanted to. So, they try to originate and sell. Since the private securitization market disappeared with the shadow bank/repo panic, the only place to sell loans is to the government. That's why FHA, Fannie, Freddie, have been in the news lately, mostly in articles by idiots yelling about how bad it is that these NGO's will have to ask Treasury for more money. The fact of the matter is that if the NGO"s/Gument stopped buying loans, the housing market would disappear overnight. That is the really scary thing. The only hope is to restart the securitizaiton market, but it's pretty hard - there are no buyers (would you buy a new ford if there were zillions of semi-new fords for sale at half the price?). For this reason, there are no securitizers any more. There's no business there.

Update: One more point: Today, interest rates are very low, so if a bank did hold a 30-year loan on it's books it would be locking up substantial capital for 30 years at under 5%.

Update: There are those who wistfully hope that despite the above, banks will go back to lending like in the old days.
  • See the last paragraph.  
  • I seem to diss securitization above.  Certainly securitization was egregiously (double egregiously) abused before and during the crisis.  People built CDO's that they had no idea in the world how to  mathematically modle (see Gillian Tett, "Fool's Gold").  On the other hand, securitization worked quite well from the mid-80's to about 2000.  It did spread risk, but, more importantly it allowed (larger) institutions to invest in something other than stocks and bonds - non-correlative housing-based securities.  And, it allowed new money to flow to housing.  If the government had been watching, it could have de-emphasized FHA/Fannie/Freddie, letting the private sector mostly handle housing finance.  I say de-emphasized, not eliminated.  But of course the government relying more on securitization to boost housing in the US would probably have increased the velocity of the crisis, once CDO's were unleashed.  So, maybe securitization does need to be dissed.  Guns don't kill people - people kill people, but in the case of securitization, once you hand out M-60's to everyone, people don't seem to be able to avoid killing people.


  1. That is a perfectly brilliant and spot on account of the situation.

    I would elaborate a bit to stipulate that, under excruciatingly close examination, securitization IS the primary market driver and is responsible for the rise in prices in markets both general and artificial (high cost of college, housing bubble, etc.).

    And there exists a direct one-to-one correlation between securitization, the proliferation of debt-financed billionaires (and debt-financed multimillionaires), poverty, rising unemployment, the de-industrialization of America AND securitization.


  2. Thanks for the compliment!

    I mentioned some good things that securitization does. The CDO craze is where secruitization detached from it's basis of believable normalizable income streams. So I'm not ready to condem it yet.

    Still, as the saying goes, the correlations you cite are not causations. But the circumstantial evidence is certainly beginning to be compelling.

  3. Do you think that there is a way to bring back securitization (the GOOD stuff) without the bad? Junk Bonds came back after all, eventually as did S&Ls. can regulators do anything sensible here?

    Tomorrow's crisis will undoubtedly lie elsewhere (probably on the Govt's balance sheet).

  4. Yes
    Securitized debt is a bunch of - securities, so the SEC could if it had the guts and/or expertise easily set the parameters. The most important is to come up with some randomization rules for the things being securitized. Also, a $10M securitization is probably manageable, but a $10B one gets dicey. Ie, it's hard to find a random enough bunch of stuff to fit into a $10B package (and prove it).

    There are also the ratings agencies to fix, standards on the quality of things one can put into a securitization, etc.

    All quite doable imo, but, is there the will to do it? Plus, as mentioned in the post, theres a lot of work to do to get customers back etc.

    There's a non-definitive answer...