Destroyed securitization market still the issue

It was an obsession here six months or so ago to talk about the collapse of the securitization markets and the impact on "bank" lending. It was so true, and it still is. Banks cannot possibly lend at even close to pre-crisis levels with securitization markets for credit card, mortgage, auto, and general consumer loans running at most at 15% of 2007 levels. Securitization allowed the banks to move the loans to other investors. Now they need to hold the loans and hold capital against them. Some may say that's a good thing, but that means that the system contracts because banks must maintain regulatory capital levels.

This week's Barrons lays out that dilemma in an article, "A Flat Dow for 10 Years? Why It Could Happen" that stresses the liquidity function of securitization markets and the impact of their demise. Economists in this liquidity camp view restoring some vestige of functioning securitization markets as essential to growth in the economy.

Things were falling apart with the sub-prime securitizations as early as late 2007. That was normal market business. The turning point for the markets was when Congresss began considering legislation allowing contracts to be abrogated and securitizations to be torn apart piecemeal, an approach worthy of a third world country in the 1980's. That, combined with the realization that securitizations unrelated to subprime were also extremely vulnerable to opaque CDS assault, ended normal. There was no looking back, the markets were over except for the highest rated most completely secured issuance.

Now Democrats and Republicans alike are falling over themselves to blame financial institutions for both the crisis and the lack of a robust recovery. Restoring liquid markets requires the opposite of this hyperbole, a ten dollar word for something else.