Paul Krugman is Wrong About Securitization

[ProSense]

Paul Krugman is Wrong About Securitization

By Barry Ritholtz - March 28th, 2009, 11:26AM Since the credit crisis began, I have frequently found myself in agreement with Paul Krugman. Not everything, but for the most part, especially on many major points, we are sympatico: He has been correct about Moral Hazard, about the folly of these many bailouts, about the advantages of nationalizing the banks. And, I suspect he is right that the economy would benefit (short term) from a bigger rather than smaller stimulus.

Where we part ways is on his criticism of Securitization. I simply do not see it as a proximate or even secondary cause of the crisis and collapse. It is a tool, and whether it is used for good or evil is a function of too many things beyond what its purpose is.

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Why We Still Need Securitization

The NYT's op-ed page is positively infested by econobloggers today: there's not only myself, but also a certain Princeton economics professor whose blog you might have noticed. His column today echoes the big Simon Johnson essay in the Atlantic, bemoaning the decades-long rise in the power of the financial sector, which still seems to have US governments both red and blue entirely captive:

Mr. Summers needs to get out more. Quite a few economists have reconsidered their favorable opinion of capital markets and asset trading in the light of the current crisis.

But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

I'm sympathetic to this view: financial intermediation, in its various forms, should never account for 41% of total corporate profits, as it did this decade. That's closer to a Ponzi scheme than it is to value creation. But I disagree with the distinguished professor on the subject of securitization.

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Krugman also had a piece on his blog referencing his column:

March 27, 2009

Was I unfair?

A reader writes in to complain about today’s column, in which I compared the supposedly productive activities of financial wizards to the sleight-of-hand of stage magicians.

As a magician, he resents being compared to investment bankers.

[ProSense]

1. No comment? n/t

[SemiCharmedQuark]

2. I do not know who Ritholtz is. I know who Krugman is.

I trust Krugman. Hell, I don't know enough about this thing to judge.

[ArchieStone1]

3. He's some CEO and a "frequent commentator on CNBC"

https://www.fusioniqrank.com/team.php

[ProSense]

4. I've seen him cited, but on this issue, he's not the only one disagreeing. Here is another:

Krugman is Wrong

[Mass]

5. portfolio.com and a frequent commentor on CNBC disagree with Krugman.

Not surprising. Their reasoning is the one of people who have always worked in the financial industries and want the system to continue like it is.

Krugman, Stiglitz, JOhnson, and others want the system to change. This is a difference in what they believe in.

What Krugman and others want is that the balance is changed so that our economy is not a nearly purely financial economy that produces nothing and that these levels come a lot closer to the early 1980s levels. They do think what Obama is proposing is just fixing the system as it exists. They may be wrong, of course, but before proclaiming they are wrong, these people need to understand what they are saying on the big picture.



Yes, there are two sides on this issue. The two sides disagree because they disagree on the goals.

[ProSense]

6. Krugman sometimes links to Felix Salmon to make his points

here so he must have some credibility.

[ProSense]

7. Is There a Problem With Mortgage Securitization?

Is There a Problem With Mortgage Securitization?

I’m broadly sympathetic to the larger theme of today’s Paul Krugman column, but his specific claim that there’s some grave problem with the very fact of mortgage securitization doesn’t seem to hold much water. This appears to contradict earlier statements of Krugman’s and Felix Salmon is convincing that the problems Krugman is pointing to had to do with synthetic CDOs rather than securitized mortgages.