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When Debt Securitization Blew Up So Did the Economy
Market Oracle ^ | 03/04/09 | Mike_Whitney

Posted on 03/04/2009 7:22:27 PM PST by TigerLikesRooster

When Debt Securitization Blew Up So Did the Economy

2009 Mar 04, 2009

Mike_Whitney

/snip

One thing is certain, this isn't a normal recession. In a normal recession aggregate demand declines, economic activity slows, and GDP shrinks. While those things are taking place now, the reasons are quite different. The present slump wasn't brought on by a downturn in the business cycle or a mismatch in supply and demand. It was caused by a meltdown in the credit system's central core.

That's the main difference. Wall Street's credit-generating mechanism, securitization, has broken down cutting off roughly 40 percent of the credit that had been flowing into the economy. As a result, consumer demand has collapsed, inventories are growing, and manufacturing has contracted for the 13th consecutive month. The equities markets are in freefall and all the economic indicators are pointed south. The so called "shadow banking system" which provided wholesale funding for mortgages, car loans, student loans, and credit card debt, has stopped functioning entirely.

Journalist David K Richards describes the modern credit system in his article "Humpty Dumpty Finance":

"To begin, it is important to recognize how Wall St. has transformed the bank-based credit system, which existed in the 1930's and prevailed until the mid-1990's, into the 'modern' securities-based credit system we have today. Non-bank sources currently supply more than half the credit needs of businesses and consumers. This transformation in the way credit is supplied has made it difficult for the Federal Reserve to reignite credit growth through massive expansion of the Federal Reserve balance sheet, which was the supposed 1930's style antidote. The old-style banking system, in which banks kept the loans they made on their balance sheets, would have responded quickly to Bernanke's interest rate cuts and aggressive injections of excess reserves.

(Excerpt) Read more at marketoracle.co.uk ...


TOPICS: Business/Economy
KEYWORDS: debt; economy; securitization

1 posted on 03/04/2009 7:22:27 PM PST by TigerLikesRooster
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To: TigerLikesRooster; PAR35; AndyJackson; Thane_Banquo; nicksaunt; MadLibDisease; happygrl; ...

Ping!


2 posted on 03/04/2009 7:22:49 PM PST by TigerLikesRooster (from "Irrational Exuberance" to "Mark to Zero": from '96 to '09)
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To: TigerLikesRooster

“The present slump wasn’t brought on by a downturn in the business cycle or a mismatch in supply and demand.”

If the demand was driven by cheap credit, wouldn’t that make it mismatched to supply? If one is not able to purchase something, without cheap credit, then was there really demand there in the first place?


3 posted on 03/04/2009 7:30:37 PM PST by neb52 (Currently Reading: Dirk Gently's Holistic Detective Agency by Douglas Adams)
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To: TigerLikesRooster

Debt securitization is a foundation of the “free trade” system promoted by the Bush Clinton Bush administrations. It allowed foreigners to ‘invest’ in the US economy, one of the ‘bargaining chips’ in the many “free trade” secretariats.

“free trade” is a tool for the destruction of the US domestic economy, and nothing more.


4 posted on 03/04/2009 7:34:22 PM PST by hedgetrimmer
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To: TigerLikesRooster

Securities created out of the asset based securitization process is only as good as the debt paper that goes into them. Securitization was fine until they started loading up the pools with subprime debt. From my regulator friends, the worst of it occurred between 2003 and 2007. With the correct qualitative controls, securitization can, and should, live and serve us well again.


5 posted on 03/04/2009 8:04:25 PM PST by RatRipper (Opposing the leftists for my family, my friends, and for me.)
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To: TigerLikesRooster

” This transformation in the way credit is supplied has made it difficult for the Federal Reserve to reignite credit growth through massive expansion of the Federal Reserve balance sheet, which was the supposed 1930’s style antidote.

” The old-style banking system, in which banks kept the loans they made on their balance sheets, would have responded quickly to Bernanke’s interest rate cuts and aggressive injections of excess reserves.”


6 posted on 03/04/2009 8:14:51 PM PST by Pelham (Just Doing Jobs Americans Won't Do.- GW Bush)
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To: TigerLikesRooster
"This new "securities-based" credit system emerged almost entirely in the last decade..."

Wrong!

It emerged with the fiat creation of Fannie Mae as part of FDR's New Deal in 1934.

7 posted on 03/04/2009 8:19:42 PM PST by Southack (Media Bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: hedgetrimmer

“The financial sector now represents 40 percent of GDP, which is to say that the exchange of paper claims to wealth is the driving force behind economic growth.

“The production of useful things, that actually improve people’s lives and raise the standard of living, has been replaced by the trading of complex debt instruments and opaque derivative contracts.

“Securitization is at the very heart of Wall Street’s Ponzi-finance scam. It creates profits by transforming liabilities into “cash flow” which can be sold at market. Bottom line: Factories and manufacturing are out. Toxic paper and garbage loans are in. “


8 posted on 03/04/2009 8:20:22 PM PST by Pelham (Just Doing Jobs Americans Won't Do.- GW Bush)
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To: RatRipper

“Securitization soared between 2003 and 2006 when US current account deficit skyrocketed to nearly $800 billion per year. That’s when ‘America’s banks discovered that they could borrow money cheaply from Asia and lend it out in higher-yielding domestic mortgages while using sophisticated financial engineering to wall off and strictly control their risks.’(Brad Delong)

“The US was consuming $800 billion more per year than it was producing, but the damage remained invisible because foreign governments and investors were recycling their savings back into US Treasurys, GSE bonds (Fannie Mae), and mortgage-backed securities (MBS). It was a windfall for Wall Street that put the investment banks and hedge funds deep in the clover.”


9 posted on 03/04/2009 8:23:46 PM PST by Pelham (Just Doing Jobs Americans Won't Do.- GW Bush)
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To: TigerLikesRooster

Gee, somebody should have put a stop to that. Oh, well.


10 posted on 03/05/2009 4:38:33 AM PST by Wolfie
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To: Pelham

We used to make products in America. Now we only make “money”. Or used to, anyway.


11 posted on 03/05/2009 4:39:56 AM PST by Wolfie
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To: Wolfie
Now we only make “money”. Or used to, anyway.

Back in the seventies I was talking to a Brazilian gentleman and he told me  that In  the Portuguese language there was no way to  say " Make money" you could earn , steal or inherit money . He thought that gave Americans a psychological advantage because if you thought in Portuguese the only way to get money was to take it from someone else that money was a zero sum game but if you you thought in English every boby could do better together.

I'm thinking that to many people decided that producing something was to much like actual work and it was easier to just game the system to make themselves rich

12 posted on 03/05/2009 5:12:42 AM PST by grjr21
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To: TigerLikesRooster

yet NOBODY is reporting how this started.

Banks were forced to make loans to unacceptable risks. The Politicians and activists that forced the risks did not think, at all. The politicians and activists did not and do not understand that banks do not have to keep the promisory note. banks sold those forced hih risk loans ASAP.

The banks then discovered if they used inflated prices they got more in the ASAP sale. The politicians were forced to go along because the high risk sales were caused by them. It became a feedback loop.

The snowflake that started the avalanch. Obama is just firing cannons into the mountain to keep the avalanch going.


13 posted on 03/05/2009 5:31:41 AM PST by longtermmemmory (VOTE! http://www.senate.gov and http://www.house.gov)
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To: TigerLikesRooster
manufacturing has contracted for the 13th consecutive month.

Domestic manufacturing has been trending downward since '98. Any little uptick since then & now were glitches against the trend.

14 posted on 03/05/2009 7:23:18 AM PST by GoLightly
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To: longtermmemmory

“yet NOBODY is reporting how this started.

Banks were forced to make loans to unacceptable risks. “

There’s plenty of political hacks saying exactly that. It makes a handy club for beating Democrats, who richly deserve it, but it’s not quite the truth. The CRA applied to commercial banks and had been around for years. The bubble took off when investment banks joined the game in a huge way. CRA didn’t apply to investment banks, they were funnelling money into risky loans all on their own.


15 posted on 03/05/2009 6:21:12 PM PST by Pelham (Just Doing Jobs Americans Won't Do.- GW Bush)
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To: Pelham

I am speaking of the redlining.

Essentially the banks and politicians figured out that mortgage back security notes were essentially printing a “secondary currency”.

They could take an outhouse and wright a million dollar loan on it and it would be sold as mortgage backed securty. It is hardly hacks it is just reality. The collusion for the inflating of residential property value was a ponzi scheme doomed to fail when nobody else would buy the fake pricings.


16 posted on 03/05/2009 6:49:02 PM PST by longtermmemmory (VOTE! http://www.senate.gov and http://www.house.gov)
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