As I\’ve been saying for some time now

What caused our current crisis was the fact that banks that claimed to be running an originate-and-distribute MBS business were running an originate-and-retain business instead, and were extraordinarily exposed to housing price declines in a way that very, very few people understood in 2006.

It\’s not that securitise and distribute the risk was a bad idea: it\’s actually a very good idea and one that I\’ve no doubt that we will use ever more in the future. As, in fact, we have been doing for centuries as we invent limited liability, share offerings, mass financial markets, unit trusts, bonds, commercial paper, commodity futures and all of the other ways in which we distribute risk.

It\’s that securitise and concentrate the risk while financing that holding through a banking (ie, borrow short, lend long) mechanism was a really bad idea.

1 thought on “As I\’ve been saying for some time now”

  1. as I recall the problem was the way in which sub-prime lending in America was packaged into prime lending through securitisation. It was the uncertainty that this caused which stopped up the wholesale markets (almost overnight), and which caused Northern Rock to fail. There is no particular problem with borrowing short and lending long, providing the markets are able to function.

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