Posts Tagged ‘Paul Krugman’

Georgia and the Flatland Myth

The New York Times’ Paul Krugman is the latest opinionator to pick up on my story for The Big Money about how Texas avoided the worst of the foreclosure crisis. He comes at the question from another and equally interesting angle: Why does Georgia have so many bank failures?

After all, Georgia, like Texas, is part of “Flatland,” Krugman’s coinage for the soft inner tissue of the U.S. — as opposed to the hard crusty coasts with all their development restrictions — where governments more readily permitted real estate development to sprawl where it pleased. Basic economic theory would suggest that in less regulated environments, supply is less constrained than it is in highly regulated building environments, and therefore housing prices would be less prone to inflate under speculative pressure. Hence California, Florida; Nevada and Arizona are a little harder to explain but spillover of investors from the California boom are supposed to explain it.

But I think Krugman’s Flatland theorette neglects how aggressively demand, put on steroids by the tsunami of debt that the securitization and derivatives markets unleashed, defeated the power of supply constraints in many markets, and Georgia is a perfect example of that. Those small, now failed banks that Krugman writes about today financed an unbelievable volume of real estate construction all over the Atlanta region, some 75,000 permits a year at its peak – condos, McMansions, loft conversions, anything, anywhere. And as I explain in Our Lot, those developers from very early on – we’re talking 2001 – engaged in elaborate mortgage fraud schemes to “sell” these units. Entire subdivisions and condo developments were sold this way so that developers could pay back their construction loans to local banks. But many of them couldn’t — hence Georgia’s distinction as the nation’s bank failure capital.

Monday, April 12th, 2010 | Tags: , ,
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Can securitization save us all?

A couple of months ago, Paul Krugman uttered the thought that dare not speak its name — that the binge of bloated, unsustainable debt-making that fueled the real estate bubble was not some kind of anomaly, attributable to a wrong-headed regulatory decision or sudden fit of insanity on the part of bankers, but instead intrinsic to the very act of taking bundles of loans and reselling reconstituted parts of the whole — that is, securitization. “Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie,” Krugman wrote in his column.” And he concluded unequivocally: “I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.”

I’ve shared Krugman’s concern that the Obama administration appears to be preparing for securitization 2.0 — that is, keeping the existing mortgage-making system more or less intact, and just regulating it more diligently. As Our Lot chronicles, the current debacle isn’t the first time mortgage securities have facilitated not just risky but destructive behavior, in part because one way that mortgage securities offload risk is onto the borrowers themselves, through financial products that end up costing borrowers far more than they bargained for. Regulations can limit the most exploitative behaviors, but they can’t possibly eliminate them without squeezing out the juice that makes mortgage securities a profitable investment to begin with. Will a future regulator dare put a ban on prepayment penalities?

So count me intrigued, confused and charmed at securitization expert Anne Rutledge’s response to Krugman’s column, on Nouriel Roubini’s RGE Monitor. Rutledge is a market populist, a true believer in the power of securitization to tear down the walls that keep bankers’ capital out of hands of deserving entrepreneurs (and homeowners). She’s working from the standard explanation for why securitization remains an invention as indispensible as the jet engine, and holds the common view that bad regulation and wanton exploitation led the market astray.

But here’s the part that’s so beautifully provocative I haven’t been able to stop thinking about it (in her response to a comment):

I think the reincarnation of securitization will support better art and music, by using 21C data gathering and communication infrastructure to find the people who appreciate and pay for it. Ditto alternative everything else.

Could the same invention that tore down the banking system save arts and media? It sure beats micropayments. I’ll take a mezzanine tranche on The New York Times, please.


Tuesday, May 12th, 2009 | Tags: , ,
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Problem solved!

The easiest way to bring bad banks back to health — just change how they tabulate the value of their mortgage-backed securities.

What does this mean for Treasury Secretary Geithner’s asset rehab program? If banks can keep bad assets on their books all tarted up to look like sexy ones, then there may be no reason to sell them — hell, the institutions will need all this “capital” to stay in business.

As if we need one, this is yet another reminder of how horrendously dangerous securitization of mortgages is. At every step of the way, the financial conditions underlying these mortgages have been fiction — and the lies just keep getting deeper and deeper.

If you haven’t seen it yet, Paul Krugman’s column last week calling for an end to securitization is essential reading. He and George Soros are the the two highest-profile voices so far calling so for a new financing model for real estate and other assets, though as Krugman alludes other economists are also coming to the conclusion that the old system is fatally flawed.

I’ve been pondering the same question Krugman has: Why does firming up the capital markets system we’ve got, rather than creating a more functional one, remain the almost unchallenged agenda for the Obama administration and Congress? One answer lies in the very design of securitization: its instruments are engineered to yield healthy returns to any type of investor imaginable, on their terms and on a predictable schedule — meaning that insurance companies, small banks, pension funds, you name it, were all feeding at the teat of the asset securities market. And despite all the chaos that has ensued recently, the institutions that are accustomed to hosting these securities as high-yielding stars on their balance sheets aren’t yet ready to give up the dream that the milk will flow again.

Thursday, April 2nd, 2009 | Tags: , , ,
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