Econintersect: Amar Bhide,a professor at Tufts Univesrity Fletcher School of Law and Diplomacy, wrote in a Bloomberg column Sunday (09 September 2012) that mass production of securitized credit destablizes banks, shortchanges productive businesses and generally enables reckless borrowing. In a scathing indictment of the financial practice that connects massive amounts of investable money with with markets that can create massive amounts of debt, like the home mortgage market, Bhide says an essential enabler of abuses of securitization is government guarantees of mortgages.
Follow up:Bhide says that a healthy economy needs both bank loan based financing and securitization. He feels that regulation of securitization in a way that creates a favorable risk position for certain types of lending over others is a recipe for disaster, such as we saw in 2008. Econintersect sees an inference that it could happen again.
Bhide says that the financial system needs to be fundamentally reformed and he is quote specific about one thing he thinks should be changed:
To fundamentally reform the financial system, we need to end state sponsorship of securitization.
He also thinks banks must remain on the hook for any loan they create, whether retained, sold off or securitized.
He has three specific conclusions:
First, the federal government must stop guaranteeing mortgage securities. If lawmakers feel impelled to divert credit to homebuyers, theSmall Business Administration’s approach of offering partial guarantees for housing loans would do less harm. Let the private sector securitize the loans if it can.
Second, banks should be required to evaluate the creditworthiness of every individual or business they directly or indirectly lend to, rather than outsourcing credit analysis to ratings companies or relying on reductionist statistical models. Allowing banks to buy securitized assets with only superficial knowledge of the ultimate borrowers is folly.
Finally, the SEC should focus on its original mission of policing stock markets, and not on every security that financial engineers dream up or ratings companies get paid to certify. The expansive application of securities laws has worked only too well, stifling judgment and relationship-based lending in favor of mechanized and anonymous transactions.
Editor's note: Amar Bhide is an occassional contributor to Global Economic Intersection and is the author of a book on the finance system: "A Call for Judgment: Sensible Finance for a Dynamic Economy".
- Securitization Shouldn't Be the Government's Business (Amar Bhide, Bloomberg, 09 September 2012)