Securitization and Credit Addicts

Mike Whitney has been writing about the financial disaster for quite a while now, and doing so in a way that I appreciate. I'm not sure who he is, and he seems to come from a left-wing political perspective, but I find his analyses illuminating and insightful nevertheless. Here's a few paragraphs on securitization from a recent article:

Bernanke has no plan for expanding conventional lending or strengthening the parts of the system that still work. All his efforts have been focused on salvaging insolvent banks and restarting securitization. Securitization--transforming pools of loans into securities---was Wall Street's Golden Goose, a privately-owned credit-generating mechanism which created windfall profits by selling radioactive waste to over-trustful investors. Securitization is the epicenter of the shadow banking system, the mostly-unregulated universe of opaque debt-instruments, off balance sheet operations, and massively over-leveraged financial institutions. Securitization broke down after subprime mortgages began defaulting in record numbers sending risk-adverse investors scuttling for the exits.

Securitzation is dead, and yet, Bernanke and Geithner want to shovel another $2 trillion into this black hole hoping to lure investors back to the market. Why? Because Wall Street financiers and bank mandarins see securitization as an efficient model that can be exported into any market around the world. The repackaging of debt into complex instruments, that can be stealthily created in off balance sheet operations requiring smaller and smaller slices of capital, is the essential flimflam product that Wall Street intends to use to dominate global financial markets. Keeping securitization alive is ultimately about economic power. That is why Bernanke will spare no expense trying to resuscitate this failed system.

What's so destructive about securitzation is that it allows the banks to create credit out of thin air through unregulated, clandestine operations, which eliminate transparency and makes it impossible for the Fed to control the money supply. The banks have been creating trillions of dollars of credit without maintaining adequate capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed there was no risk, because they were making enormous profits without tying up any of their capital.

The Fed has allowed an unregulated and untested privately-controlled "credit generating" shadow banking system to infect the broader economy and create a nation of credit addicts which are entirely at the mercy of unpredictable market fluctuations.

I've left out quite a few quotations from economists and the Wall Street Journal that back up his contentions. After all the reading I've done, Whitney seems to be getting at the root of our financial/economic problem, in a way that is more candid and truthful than I've seen elsewhere.