Does securitization actually lower credit costs?

October 8, 2009

Just reading more of Fed Governor Tarullo’s speech and he has this to say about securitization markets:

There were undoubtedly many imprudent, even reckless, practices associated with the securitization process, particularly with respect to some exotic instruments whose risk could not be understood even by their creators. There is little to lament in their disappearance. But securitization is not in and of itself a bad thing. On the contrary, a well-functioning system for securitizing well-underwritten loans can make capital available at lower cost to businesses, homeowners, and retail consumers. The failure of many relatively straightforward securitization markets to revive without government support may be explained simply as a hangover from the excesses and still-encumbered assets of the pre-crisis period. Just as some have restarted, perhaps others will follow as markets for the underlying assets improve. But I will confess to some concern that there has not already been greater activity.

Interesting that he, too, is worried about the lackluster revival of securization even though the Fed has provided attractive non-recourse loans to those buying qualifying debt.

But I’m also interested in the assumption that securitization makes financing cheaper for consumers and businesses. I’ll buy that it makes credit more accessible since banks can move their loans off their balance sheets, but cheaper? This has been the conventional wisdom in markets for as long as I can remember, but has anyone actually done a study on it? If anyone has any thoughts on this, send them my way.

One comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Perhaps you might want to review http://www.socialstudiesforkids.com/arti cles/economics/supplyanddemand1.htm

When you increase supply — in this case of money available for loan — prices go down.

Posted by Marc | Report as abusive