Securitization sentences to ponder

…only 18% of U.S. securitization – primarily auto loans and credit card debt – are free from government guarantees! Even at the peak of private-sector securitization in mid-2007 – before the financial crisis grew intense – the government-backed share exceeded 60%.

To put these numbers into perspective, we can look at another part of the U.S. financial system: insured bank deposits. You may be surprised to learn that (again, as of end-March 2014) only $6,094 billion out of $9,922 billion in bank deposits are insured. That is, 61% of bank deposits are government backed (see chart below) versus 82% of securitizations.

That is Cecchetti and Schoenholz, channeled by Arnold Kling, there is more here.


Does this paper assume that pre-nationalization Fannie Mae and Freddie Mac paper carried government guarantees? Obviously it's what everyone assumed but that had more to do with "too big to fail" than what was written in the prospectus. I've increasingly come to believe that the financial system requires low risk income producing assets. In that sense government guarantees in the shadow banking sector are recreating what exists with deposits in the formal sector.

Yes, while legally not the case, the 60% government backed number counted the Freddie and Fannie insured loans which had fallen from over 80% to less than 60% as the FHA programs have lots of restrictions and cover a very small fraction.

(FHA insurance includes terms that captures most capital gains back to the government - if you are low income, FHA makes that affordable by subsidizing the interest rate plus allowing a very small down payment, and in exchange, you agree to repay the entire interest subsidy from capital gains on sale or transfer of the property. Repaying the entire loan and being debt free does not eliminate that claim, not even death.)

The current loan terms by the GSEs are basically the same as at the 60% low point, and then and now, the realtors are complaining the GSE terms are too restrictive.

But before Reagan, the terms were far higher in terms of money down and income requirements. But then they really were GSEs and all profits went to the US Treasury. Fannie backed about 90% with terms that today would shutdown the mortgage industry.

I think you mean pre-Nixon. The GSE were rendered private corporations in 1968.

Print money and buy your own debt with it. One wonders why we even bother with taxes, we can just print all the money we need.

"One wonders why …": indeed. One also wonders why the wonderful wheeze that has saved our bacon hasn't been used successfully, and repeatedly, in the past.

Are those numbers really right? The SIFMA website shows outstanding CMBS and non-Agency RMBS at $1.6 trillion, which is almost the total ABS in the Fed publication. I confess that I'm not familiar with that Fed publication, and don't have the time or energy to learn. If only I could quit my job and go back to grad school!

Got news for you. We learned in 2008.

100% of bank deposits are insured! even if the government denies it.

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