When Debt Securitization Blew Up So Did the Economy

[Crewleader]

Mar 04, 2009 - 08:32 PM

By: Mike_Whitney

"Nothing we do for banks is for banks. It's all for the benefit of the people that depend on banks -- the businesses, the families, the students -- that require credit in order to do things that are important to their future." Treasury Secretary Timothy Geithner PBS Jim Lehrer News Hour

One thing is certain, this isn't a normal recession. In a normal recession aggregate demand declines, economic activity slows, and GDP shrinks. While those things are taking place now, the reasons are quite different. The present slump wasn't brought on by a downturn in the business cycle or a mismatch in supply and demand. It was caused by a meltdown in the credit system's central core.

That's the main difference. Wall Street's credit-generating mechanism, securitization, has broken down cutting off roughly 40 percent of the credit that had been flowing into the economy. As a result, consumer demand has collapsed, inventories are growing, and manufacturing has contracted for the 13th consecutive month. The equities markets are in freefall and all the economic indicators are pointed south. The so called "shadow banking system" which provided wholesale funding for mortgages, car loans, student loans, and credit card debt, has stopped functioning entirely.

Journalist David K Richards describes the modern credit system in his article "Humpty Dumpty Finance":

http://www.marketoracle.co.uk/Article9247.html

[Warpy]

1. The heavy reliance on consumer acceess to credit

was entirely due to wealth concentration away from working people.

You take enough wealth from the people who generate it and saddle them with enough debt and the system will eventually crash. The Republicans have never managed to grasp this fact.

You can base an economy on debt only for so long before debtors are burdened beyond their ability to add more debt and still buy food and creditors get nervous about recouping enough of it to stay in business.

[Earth Bound Misfit]

5. Thank you for that excellent analysis.

Short, succinct, and IMHO, completely accurate.

[DJ13]

2. Banks got too fat selling off their loans

How did the poor bankers ever get by back in our grand father's day just making money off the interest we paid?

[notesdev]

3. A lot of that debt never should have existed in the first place

My humble opinion is that this debt bubble was created to mask the damage done by shipping all our manufacturing to other countries. Fundamental to the health of any economy is to have people making stuff. We don't make nearly as much stuff as we used to, we shipped whole industries off to slave/indentured labor countries, and we buy the stuff they make. Well, it doesn't take a genius to figure out that if you make less stuff every year and buy more stuff every year at some point that trend will reverse itself violently.

[PM Martin]

4. That is part of it.

It also allowed for a massive amount of wealth to be transferred to the top .1% of the population.

[blue97keet]

6. Right, the securitization mess

that incentivized risky lending in the first place, made it impossible to refinance anything, and blinded investors to what they invested in, had alot to do with recycling the trade deficit outflow back in and it had to come to a crashing halt at some point.