In a speech to the National Press Club in Washington, D.C. on Wed., February 18, 2009, Mr. Ben Bernanke pointed out that securitization is the major default behind the Credit Collapse. The current Chair of the Federal Reserve System said that securitization is the real culprit behind the lack of lending at this time, not so much the fact that banks are not extending loans. See the National Press Club site (the Club requires membership before it will provide anyone a transcript of Mr. Bernanke's remarks).
Securitization involves the so-called 'bundling' and sale of instruments that theoretically have a value because they embody a legal obligation to pay money. In the process of securitization, debt instruments of this kind are made into new securities which some people purchase. If the new securities cannot be valued, i.e., if an agreed value cannot be put on them which is generally acceptable to the people who extend credit and otherwise make loans, then there is a Credit Collapse. We are living through that situation right now.
Among the new securities are Collateralized Debt Obligations and Credit Default Swaps. Some of these function like Insurance. However, they have not been regulated for decades. Some of the persons who argued against regulating them, whether as Insurance or at all, reportedly include former senator Phil Gramm and Messrs. Alan Greenspan, Robert Rubin, and Lawrence Summers.
How is that going?
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