Amazingly, Securitization Of Mortgages Actually Worked

Matt Levine makes a lovely point over at Bloomberg . One which is entirely contrary to current received wisdom. That point being that securitization of mortgages actually worked, actually did what it said it would. And this is true despite even the lying about what was going into those packages.

Start from the basic macroeconomic point of what was going on. The desire is to spread the risk around, to slice and dice the risk even, of lending money to people to buy houses. This is one of the functions of financial markets and it’s the entire economic point of having speculation. There’s people out there who really don’t want to be carrying risk at all. Either from temperament or for sound business reasons. There’s also people out there with a much greater appetite for risk than most other people. So, what we’d like to do is transfer that risk from those who don’t want it to those who do. The most obvious example of this is in a futures market. The farmer is growing grain, the baker making bread. Neither of them is particularly keen on carrying the risk that the price of wheat (one’s output, for the other an input) is going to vary as a result of, say, summer rains or not in the Ukraine. But there’s plenty of people out there who are happy to bet on there being rain in the Ukraine this summer or not. So, the farmer sells a futures contract, the baker buys one: and in the middle we’ve that froth of speculation. The speculators are carrying the risk as the price for both the farmer and the baker is now set. Reducing risk on those who don’t want it and adding it to those who do is a synonym for us all becoming richer.
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There’s also mathematics that we can use to transfer risk: risk pooling we can call it. This is what insurance is based upon. That my house might burn down has a very low probability (that probability perhaps changing dependent on how often I try to make french fries on return from the bar). But it would be devastating if it did. Across the whole population we know that some houses will burn down each year. Pool the risks of any one house burning down, everyone pays a small premium and there’s the funds to compensate those poor saps it does happen to.

see more: http://www.forbes.com/sites/timworstall/2015/05/14/amazingly-securitisation-of-mortgages-actually-worked/