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For the people who thing that there is nothing inherently wrong about MBS. Unfortunately, that´s not the case. When banks sell off their loans, which is what a
by neffy 7y ago
For the people who thing that there is nothing inherently wrong about MBS. Unfortunately, that´s not the case.
When banks sell off their loans, which is what an MBS is, it fundamentally changes the ratio of money:debt originating from the banking system. In a non-MBS banking system, there is roughly the same amount of deposit money flowing around as there are loans. In an MBS using banking system, there are significantly more loans being created - unlike the initial creation of a loan by a bank, the sale of the MBS does not create any additional money.
So the underlying economy may or may not need the extra debt, but creating it this way is anything but side effect free. Granted neither is creating normal bank debt given the money supply side effects.
The evidence of history suggests that an economy can get away with small amounts of this, but at some point there is too big an imbalance of debt to money, and this causes solvency issues in paying back the debt. And that´s when everything all goes terribly wrong.
But it´s a $1 trillion a year industry in the USA, so perish the thought that minor issues like systemic stability should be allowed to interfere with that. On the plus side, China introduced them a few years ago as well, so it will be very interesting to see what happens there as things play out.
For a deeply depressing paper, considering when(2000) and where (US Federal Reserve) it was written, see:
https://www.sciencedirect.com/science/article/pii/S0378426699000527 https://www.sciencedirect.com/science/article/pii/S037842669...
- rb808 7y ago> In a non-MBS banking system, there is roughly the same amount of deposit money flowing around as there are loans. Because when you take out a mortgage it gets deposited immediately in someone elses account. The mechanics are effectively the same as for non-intermediated (MBS) debt.
- jblwps 7y agoMaybe not literally, but don't regulations stipulate how many liquid assets a lender must have on hand? Even if the ratio isn't 1:1, it's bounded, unlike an unbounded MBS market. IANA finance expert, but I suppose you could bound the MBS market with some kind of maximum-degrees-removed-from-real-assets metric, and regulate based off of that. But that, to me, would seem unwise since that metric would likely be fairly abstract and therefore dis-preferred as a basis of regulation.
- neffy 7y agoThe double entry book keeping operation when a bank issues a new loan, is [debit loan, credit deposit account] creating deposit money. When a loan is securitzed (sold) by the bank, the DBE operations are: [credit loan, debit deposit account of purchaser] and the purchaser now owns loan. At this point strictly money has been removed from the banking system, but in practice the bank then recreates that money with a new loan (as above) because they are now within their regulatory lending requirements, and can issue a new loan. They can continue this indefinitely until the market for securitized loans dries up, which is effectively what happened in 2008.