Friday, March 27, 2009

Krugman speaks out against securitization

From Krugman's column in the WSJ.

As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

The banking sector has always been regulated. In this piece Krugman laments that the banking sector was "boring and staid" but with deregulation and the introduction of securitization could start issuing credit money that eventually created too much debt in the system. He points to the dramatic increase of the contribution of the financing sector to corporate earning as a tell-tale sign.
The monetary narrative says that bubbles need to exist (type II Ponzi schemes) so that the money supply keeps growing, so that legitimate growth and asset inflation result. So you bubble jump to bigger and bigger bubbles until you run out of bigger bubbles. In order to do this, you need to create more and more debt and the process of securitization made sure that the debt created cleared the banks balance sheets as soon as it hit them.
Krugman points to controlling all that monetary mass that the banks can create. The invisible hand must not be unchecked as it sets the money levels. Aggregate private debt vs GDP, or debt payments vs GDP would work.