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Can America Survive Asset Backed Securitization?

Updated on July 16, 2014
bgamall profile image

Gary studied central banking and the fragility of the banking system. He published the ebook, Ponzi Housing Scheme 21st Century on Amazon.

Awhile back, I wrote an article about the Basel 3 attempts to rev up securitization by putting taxpayers on the hook for permanent GSE loan guarantees. It is likely that this will happen and the effort to keep a low interest 30 year mortgage while investors can make a guaranteed, risk free, return is the driving force behind these efforts of the central banks. The investors seek guaranteed return both in asset backed securities (abs), like credit cards and car loans, as well as in mortgage backed securities (mbs), which has plunged the US into a very deep housing depression. ABS has the tendency to push up car prices and easy money pushes up prices on everything. However, the biggest abuse of price appreciation due to easy money is MBS investing.

America may be coming to a crossroads. Perhaps the nation will have to decide between two competing interests. Because of the corruption that attends the efforts to securitize and bundle mortgages, I opt for the second of two solutions. But if people disagree they can comment. There are unintended consequences for both sets of solutions.

First solution:

Save the 30 year mortgage with low interest rates.
Start the securitization process with Basel 3 mandated loan guarantees for GSE mortgages.
Introduce moral hazard which will be the result of guaranteed loans as banks take too much risk in the writing of mortgages.
Put taxpayers on the hook for bailouts in case banks take too much risk permanently.

Keep the US worker squeezed between declining wages globally and rents that are too high in comparison.

Facilitate the financing of wars through ponzi bubbles.


Second Solution:

Abandon the low interest 30 year mortgage. Long term mortgages may still exist but with high interest rates.
Allow housing and rents to crash to allow the US to be globally competitive in manufacturing and wages.

Save taxpayers from the need for future bailouts.

Let the big banks crash or bail them out with ownership guarantees for a long time by the government, while making the US globally competitive.

Pursue a policy of limited and infrequent war.

As I have said, I am for the second solution as people can rent and invest the rest, but only as house prices decline to match the wage landscape. But we know that bankers want to protect what they have and they want to make you fear deflation and those moves that would make the US competitive.

I saw a video on Yahoo Finance where Henry Blodget was debating the evils of deflation. While deflation would give workers more purchasing power, it was said that we must fear deflation because our debts would increase as the dollar grew stronger. However, we need to realize that the banks are the ones who are afraid.

We can walk away from our debts. We can stop paying what we cannot afford. At some point it will be foolish to keep paying, especially if deflation becomes a continual solution as a wind down to the inflation that has weakened purchasing power over the past 30 years. We walk away from loans that are not moral, not intended to work properly in the first place.

There can be consequences for some of us who do walk away. Consider whether a credit score is important to you and if you think there may be legal ramifications.

It is the banks who now balk at the required solutions to globalization that they themselves championed as they seek new markets! It is the banks who fear the necessary drop in the value of assets, including real estate, in a global environment. We can see that every day in the failing policies of Tim Geithner and Larry Summers, who are desperately trying to inflate with little success.

Let me say that there are likely unintended consequences of the second solution. But it is a solution that is based upon economic rules that are more sound than the market interventions that would accompany the first solution; excess lending and easy money. We have seen what can happen with the first solution. And history will likely repeat if it is allowed to manifest itself again.

I want to point out that Ron Paul believes that the Tea Party people are being taken for a ride by Glenn Beck and Sarah Palin. Paul believes that Palin wants to start wars. We know that Bush's oil wars were paid for by rampant ponzi lending and a bubble economy. Palin would not be one to oppose securitization if it brings her the ability to make war, a policy advocated by the neocons. Paul believes that neither Beck nor Palin are serious about the American constitution. What does this have to do with securitization you ask? I hope I have answered these questions here. Securitization is used to finance expansionist policy and can have a dangerous side effect of setting up major wars and risk to the national interest. I call it the Wall Street/Neocon Alliance.

Update: Is Securitization Dead? Is It Part of Banker Misplaced Speculation?

The question is how easy will it be to rekindle securitization now that Foreclosuregate is here. Fact is, without the GSE's guaranteeing the loans, every one of them, investors won't buy 30 year loans, and the taxpayer will be on the hook if securitization is to succeed.Some even doubt if any mortgage backed securities are legitimate. They may all be a scam as we know know that Clayton Holdings gave the banksters information that the MBS mortgages were not good. The banksters kept it to themselves. Did they use this information to short these bad securities later?.

Foreclosuregate makes this need for government backing of mortgages even more likely. But the nation should fight this. At some point, these criminals will want to restart easy money, and loosen underwriting standards. In the light of Foreclosuregate, how can any government let investors buy crap bonds, with government guarantees being the reason for making the investment? Perhaps investors will be smarter next time the big banks try to swindle them.

Bottom line, politicians should know, you bail out Wall Street and you will be out of a job. That is the only way to stop this madness other than people need to realize that easy money is really a scam on mainstreet and stop biting on these loans.

Here is the bottom line as we discuss these issues in the context of the Tea Party: speculation has hurt people as speculators have driven the price of goods and commodities up. In West Africa, poor people starved in 2007 when the investment banks speculated on certain food commodities. Oil went up to $145 per barrel in 2008 as speculators were allowed to hedge, a practice that was and should be limited to people in the business, like airlines and the like.

And, we had speculation in the housing market in 2004-2007 with the investment banks buying up all manner of mortgages so that underwriting formulas were abandoned. Homeless people qualified for NINJA mortgages with no documentation and no income. The speculation was done by the mainstreet, but the framework was set up by Wall Street. Doesn't anyone see a pattern here? We have speculation ruining the financial health and sometimes the physical health of people all over the world. These people must be stopped.

For the Tea Party to be diverted away from heaping blame upon the bankers is simply unfortunate. I have written about their contradictory thinking.

Is The Tea Party Hypocritical?

The Tea Party, in general supports the view that public health insurance would be a tax and constitutional. But they rightly understand that the private option requiring people to buy a product in the marketplace is not constitutional. It is not constitutional to make people buy anything. Yet, many of them, Karl Denninger excepted, can't see the failure of due process that takes place when the banks failed to deliver notes that proved title to their mbs trusts.

It is hypocritical for many in the Tea Party to reject due process for foreclosed homeowners, while fighting Obama over health care constitutionality. Be consistent Tea Party!

So Tea Party, not only is this issue crucial, but so is the issue of constitutional law and

Private Lender Loans

For those of you in small business who have been victim of securitization and victims of credit drying up, please learn more about asset backed loans, or private lender loans.

These loans bypass the securitization process and are held by the lenders.

Glass Steagall Allowed Securitization to Get Out of Hand

History of how securitization got out of hand is contained in this brief statement:

Following the Great Depression, the Congress built a legal and regulatory edifice that endured for decades. One of the cornerstones of that edifice was the Glass-Steagall Act, which established a firewall between commercial and investment banking activities. Another was a federally guaranteed insurance fund to back up bank deposits. Other rules were imposed on investors to tamp down rampant speculation, like margin requirements and the uptick rule on short selling.

That edifice worked well to ensure financial stability for decades. But in the past thirty years, the financial industry, like so many others, went through a process of deregulation. Bit by bit, many of the protections and standards put in place by the New Deal were methodically removed. And while the seminal moment came in 1999 with the repeal of Glass-Steagall, that formal rollback was primarily the confirmation of a lengthy process already underway.

Indeed, after 1999, the process only accelerated. Financial conglomerates that combined commercial and investment banking consolidated, becoming more leveraged and interconnected through ever more complex transactions and structures, all of which made our financial system more vulnerable to collapse. A shadow banking industry grew to larger proportions than even the banking industry itself, virtually unshackled by any regulation. By lifting basic restraints on financial markets and institutions, and more importantly, failing to put in place new rules as complex innovations arose and became widespread, this deregulatory philosophy unleashed the forces that would cause our financial crisis.


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    • bgamall profile imageAUTHOR

      Gary Anderson 

      8 years ago from Las Vegas, Nevada

      Thanks Money. I always appreciate your contributions.

    • TheMoneyGuy profile image

      TheMoneyGuy 

      8 years ago from Pyote, TX

      bgamall,

      Another good piece.

      Removing Private Central Banks from our money and allowing deflation to take place is the only chance we have of casting off the bonds of financial slavery that we currently yoke ourselves with.

      Keep it up!

      TMG

    • bgamall profile imageAUTHOR

      Gary Anderson 

      8 years ago from Las Vegas, Nevada

      Yes, Pcunix, true conservatism is for fiscal responsibility and a slow to war mentality. The neocons have taken over the party. They are for empire building and world dominion. The also are for endless wars.

    • Pcunix profile image

      Tony Lawrence 

      8 years ago from SE MA

      If the elections in November go as predicted, we are in for a lot of pain and real danger of escalating wars. Conservative voters need to wake up.

    • Hello, hello, profile image

      Hello, hello, 

      8 years ago from London, UK

      Although I am living in England but America always affect Europe in every way therefore it was very intereding to read.

    • bgamall profile imageAUTHOR

      Gary Anderson 

      8 years ago from Las Vegas, Nevada

      Thanks you for the encouragement HP. Yes, you are covering a hot button issue as well.

    • H P Roychoudhury profile image

      H P Roychoudhury 

      8 years ago from Guwahati, India

      The hub is a timely written article for the citizens of America. May I draw your attention to my article “US-Economic Crisis VS Indian Oversees Job?

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