The Red Queen’s Securitization Trap
Today, May 9th, is is 39 days since the Federal Reserve Banks of the United states of America stopped buying Mortgage Backed Securities at the end of March 2010 with TARP funds.
Strictly, as Calculated Risk and others have pointed out, actual purchases won’t finish until mid year, since some payments won’t be settled for a few weeks after purchase. But to all intents and purposes, after a year where credit issuance was held fairly constant courtesy of the US taxpayer, approximately $100 billion dollars of credit is now being removed from the US credit economy each and every month.
This is the backdrop to the Greek crisis. All the time Mortgage Backed Securities are being sold by the Banking system, credit is effectively unlimited. As soon as it stops or slows down though, then credit begins to dry up. The large majority of today’s debtors, be they Governments, companies, or private citizens, don’t plan on repaying their debt, but on continuously renewing it. This works as a strategy while the total quantity of available debt is continuously expanding, as it has been for the last 2 decades, it fails very quickly once any credit contraction sets in. So as the withdrawal of Federal Reserve support for the credit suppliers starts to impact, debt renewal becomes a problem again, and the axe falls on the biggest, weakest, debtors first – in this case Greece.
Not that Greece has ever been a poster child for fiscal responsibility, even before Goldman Sachs decided to help them out with their Euro application, but that brings up a well known problem in engineering, avoiding single points of failure. Greece has a population of a little over 11 million, and is a member of a currency union of something over 300 million people. If the underlying system regulating that currency union is so fragile that it can be endangered by one, rather small country misbehaving itself, then it’s reasonable to argue that the problem isn’t Greece per se, it’s the system itself.
The singular failure that the creators of the Euro committed,was the failure to completely standardize banking practices across all countries. Although mechanisms exist to regulate the creation of money by banks and countries, there was no separate regulation of debt. Presumably the creators thought that debt was implicitly regulated by the money supply, but unfortunately the introduction of securitized loans had broken that assumption. So within the Euro zone there are countries whose banking systems have issued large amounts of Mortgage Backed Securities such as Belgium and Ireland, and others who haven’t. The increased amount of private, bank originated debt, now competes with Government debt for renewal, and either the amount of total credit available spirals increasingly out of control, or somewhere, somebody’s debt isn’t renewed. Failure of debt to be repaid in this system isn’t a matter of borrower whim, it’s a mathematical inevitability.
The US and European economies, and through them the rest of a highly interlinked global financial system, are now caught in the red queen’s securitization trap. The financial system can’t keep issuing Mortgage Backed Securities without buyers, but it can’t stop either. Stopping triggers the same credit crisis, and the same Fisher debt deflation cascade that was avoided by creating the TARP fund purchase scheme. But continuing, or to be more accurate, restarting federal MBS purchases, simply continues to transfer fractional reserve originated debt from the Banks to the federal government, and from there to the taxpayer.
And while there is no systemic control on the total amount of debt that Banks can originate, the runaway global debt spiral can only continue.
© cc
In memorium: Paraskeui Zoulia, Aggeliki Papathanasopoulou, and Epameinondas Tsakalis.
Recent Comments