SECURITIZATION….The New York Times reports that the market for private securitization of mortgages and other debt has “become sclerotic and almost totally dependent on government support.” The raw numbers are pretty startling: $1 trillion in the first half of 2007, dropping to $400 billion in the second half, and then cratering to about $100 billion in the first half of 2008:

Bond investors first stopped buying private home mortgage deals, then shunned commercial mortgages. Now, they are becoming wary of credit card debts and auto loans…..Some analysts say investors are acting like the “bond vigilantes” of the 1980s and early 1990s. Those traders drove a surge in interest rates because they feared inflation and a mounting federal budget deficit.

“The bond vigilantes took law and order in their own hands and pushed yields up, which would slow down the economy and bring down inflation,” said Edward E. Yardeni, an investment strategist who is credited with coining the term. “This time the bond credit vigilantes are refusing to go into the saloon and start drinking what Wall Street’s financial engineers are mixing.”

Wall Street’s rocket scientists screwed up badly when they started concocting ever more complicated SIVs and CDOs that became ever more abstracted from reality, but this is a remarkable price to pay. The basic idea behind securitization is perfectly sound provided that the securitizers are playing by known rules, and as the Times notes, securitization is fundamental to the smooth working of modern debt markets. If it takes some additional government regulation to restore confidence in those known rules, then bring it on.

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