A good thing used badly
Monday was horrible, Tuesday was surprisingly mild and we’ll see what today brings. I’m talking about the economy here, and specifically about those mortgage-backed securities that have spread through the financial system like a norovirus on a cruise ship. The result in both cases has been many a churning stomach.
But I come today not to bury mortgage-backed securities, but to praise them.
This seems like a good time to remember that securities backed by pools of home loans are not, in and of themselves, bad things. In fact, they can be very good things. The creation of such investments two decades ago was one of the single greatest factors in the economic boom that began in the late 1980s and continued almost without interruption until now. (Go here for a short primer on this topic I wrote six months ago, and may readers forgive me for even dwelling on such a snooze-inducing subject — twice).
In the old days, which in this case means when Bon Jovi and other hair bands strode the earth, lenders gave homebuyers money to purchase a home, and only when enough monthly payments had trickled in to pile up in the vault were more loans made. (This is grossly simplified, of course, but essentially true.) The effect was to keep a lid on homebuying and homebuilding, because money was tight and only those with unblemished credit records could get it.
The economy in those days was like a family sedan in need of a tune-up: Not very flashy, not much acceleration and prone to sputtering occasionally. But the creation of mortgage-backed securities allowed those millions of monthly house payments to be bundled up and sold as investments — meaning lenders suddenly had a lot more money available. And since money is fuel, the economy turned into a Corvette. It ran fast, but also brought out reckless tendencies.
What happened was that the availability of all that money completely reversed the supply-and-demand equation in the housing finance market. Where there once was more demand for home loans than supply, there was now so much money available that lenders had to find ways to increase demand. The solution? They eased up on restrictions and made loans to people who’d previously been unqualified to borrow. (If you need other culprits to blame, Investor’s Business Daily offers politicians for your consideration. Also, my girlfriend blames HGTV for making home-flipping a national craze.)
The result of all that cash floating around was that the economy underwent an unprecedented boom. The bad news, as we now have been reminded, is that every boom is inevitably followed by a bust. But to blame mortgage-backed securities for the current mess is like blaming the fireplace poker for the bludgeoning.
In reality, it’s simply a useful tool applied to a bad end.
September 17th, 2008 at 11:29 am
….and sometimes you can blame the owl….
I’m still reading but have to admit that I don’t always make it through the comments.
September 17th, 2008 at 1:19 pm
WHat does this have to do with puffing out your skiny little chest?
Don’t forget that in addition to garnering income from yield spreads with mbs, there is also a great deal of fee income generated when making new mortgages. Gordon Gecko had it right — for a while.
September 18th, 2008 at 11:37 am
” … securities backed by pools of home loans are not, in and of themselves, bad things. In fact, they can be very good things. The creation of such investments two decades ago was one of the single greatest factors in the economic boom that began in the late 1980s and continued almost without interruption until now.”
True enough, as far as it goes, giving you some room for ‘expansiveness’ on a couple of points; it was important, but one of the single greatest? almost without interruption (as in, are you really calling the 2005-2008 period an economic boom? But still, point taken, generally.
Here’s my problem; how long was it before the pure pools of reasonably secure home loans (and no, I don’t mean perfect, I mean the usual grouping where 1 or 2 per 100 goes south due to the normal run of things) became polluted? I’m not an expert, but I think the answer is ‘not very long’, yes? It was, in fact, in response to the need to keep prying eyes away from the sludge that was being whacked together and called a ’security’ that Gramm and the boys did their little rereg magic in the late 90’s, with the full encouragement of McCain and his brethren, wasn’t it? Of course I fully recognize that Clinton and the D’s had their hands in their useless pockets.
It was the era when anything (anything!) that could be packaged up and sold as a security was, Enron was packaging up future water rights derivatives and natural gas drilling shares and other things made up of regular words, the combination of which made no sense.
So, yes, a decent idea, back in the day. As was junk bonds before it. But when people and institutions are buying badly labelled things they don’t understand or care to understand, and when they are (one way or another) playing with our money? So what?
All it really proves is that everybody is a genius when the market is going up.