Finally, Fed Chairman Ben Bernanke has stated that the “Great Recession” was not caused by the exponential growth in low cost credit, but by our failure to monitor and regulate the securitized debt market. As I have reported over and over, this new source of credit is sound, the problem comes from its lack of transparency and regulation, which we have for other sources of credit and investments, e.g. bonds, stocks, mortgages per se, auto loans, credit cards, and such. When the cookie dough hit the fan in late 2008 we did not even know the full extent of credit created by this new device. Needless to add, we had no way to regulate it.
Bernanke’s remarks were confirmed by Congressman Barney Frank who has done a remarkable job in shepherding a new bill through the Congress to monitor and regulate securitized debt and derivatives. Frank’s bill will probably be the best piece of legislation we will see this year.
Bernanke and Frank also noted that the problem in foreclosures on homes was not due to securitized debt, but to increasing unemployment. My colleague Harlan Green makes the same point in his latest article. In fact, Harlan states that loan defaults come from inability to pay the mortgage because of unemployment, illness and such, before negative equity becomes a factor.
I trust we can now all agree that securitized debt provides an important source of credit and is not a financial “devil” waiting to cause more problems. As I have said, we will not see demand grow fast enough to force employers to rehire in numbers sufficient to bring down our unacceptable high unemployment until we resume using securitized debt, as we did for most of the first decade of this millennium.
We have a choice, resume using securitized debt to bring back prosperity or continue to view it with suspicion and languish in the economic doldrums.