Our Will Today

This is really very good, very good indeed.

You\’ll recall that Northern Rock and various subsequent problems in the mortgage market were driven by first the expansion, then contraction, of securitisation of mortgages?

The bank issues the loan, bundles a number of together as a pool and flogs off the pool as a bond issue, thus getting the money back to start all over again?

So Our Wee Wully has a bright idea about how to deal with the subsequent problems. Let\’s get the securitisation machine running again!

Yes, like the US has Freddie Mac and Fannie Mae, we should have a Gordon Mac. A private sector company (for both FMs are such) with no direct government guarantee (which neither FM has) should be set up to buy all those pesky mortgages and securitise them and syndicate them.

Then everything will be lovely and there\’ll be a pony in every pot!

Can\’t help thinking that there might be something a little wrong with this plan you know.


6 thoughts on “Our Will Today”

  1. Are you saying that FMs have no implicit government guarantee?

    I wouldn’t be too criticial of securitisation actually, it’s been very effective in many areas.

    Tim adds: There’s an assumption that the market thinks that’s there’s a guarantee….but that’s as far as it goes. And of course I think that securitisation was fabulous: it did exactly what it said on the tin, spread the risks. But it’s Will who lambastes the likes of Northern Rock for their securitisation programs….

  2. I think if Bear Stearns can get a governmetn guarantee then the two FMs would.

    Surely also Northern Rock’s securitisation programme is worth criticising – they did effectively go bankrupt.

  3. The problem is not the securitization – the problem is that the UK government refused to let Northern Rock go insolvent and reorganize itself or sell itself off.

    Instead, huge amounts of taxpayers money was poured into Northern Rock to shore up its credit rating – and for no good effect.

    If there were a Gordon Mac (and I think there should be two or three) then it would probably be a good thing provided that the UK government resist the temptation to control the secondary market in order to postpone the inevitable – the popping of the housing bubble.

  4. “provided that the UK government resist the temptation…”: not what they’re famous for, resisting temptation.

  5. The problems you discuss are recurring; moreover, there seems (though I cannot pretend to know) to be a tendency for them to be bigger and with more pervasive effects.

    But none of the preceding commenters “get it right.” Each may have an accurate analysis of a certain part of the problem but fail to see that it’s not at all a single problem or even a single set of problems.

    Take the matter of “securitization,” for instance. What is implied is that there exists a reserve fund based partly on anticipated magnitude of exposure and partly an estimate of the likelihood of occurence of such untoward event. But, in such schemes, class probability mathematics–on which the insurance concept is based–is no use, except insofar as is concerned selling the project to predatory ignorami (experts and politicians) and, later, to the same ignorami as exculpation post-failure to the other– prey– ignorami ( public and taxpayers).

    The term in Economics (and more common lately in general use) for the occurrence is “moral hazard.” Most of you are familiar with its definition–at least to a degree similar to the excellent treatment on Wikipedia. But what Wikipedia does not treat is that the root of the “hazard” lies not in immorality (nor does Wiki maintain so) but is an inescapable facet of 1.) being human; and, 2.) being in a position to affect–or believe you can affect–the numerical data on which others have already acted or are liable to act in the future.

    The core of all the tremors, the instability underlying each quake, and the root to which even a civilization-destroying final cataclysm must ultimately trace is a single one: the concept of a quantity-controlled, fractionally-backed, legal-tender status-enhanced medium of exchange.

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