Stephen G. Cecchetti and Kermit L. Schoenholtz write,
That is, only 18% of U.S. securitization – primarily auto loans and credit card debt – are free from government guarantees! Even at the peak of private-sector securitization in mid-2007 – before the financial crisis grew intense – the government-backed share exceeded 60%.
To put these numbers into perspective, we can look at another part of the U.S. financial system: insured bank deposits. You may be surprised to learn that (again, as of end-March 2014) only $6,094 billion out of $9,922 billion in bank deposits are insured. That is, 61% of bank deposits are government backed (see chart below) versus 82% of securitizations.
Pointer from Mark Thoma.
In my view, the political economy of banking works like this:
1. Financial intermediaries want to issue risk-free, short-term liabilities backed by long-term, risky assets.
2. Governments want to allocate credit, both to their own borrowing and to favored constituents.
To accomplish (2), governments guarantee the liabilities of particular financial intermediaries. This in turn allows those intermediaries to accomplish (1).
When government creates agencies, such as the Fed, the FDIC, it does so in the name of financial stability. But you should think of these agencies as tools for credit allocation, not as tools that actually stabilize the financial system.
That last sentence couldn’t be more true.
Paging Mencius Moldbug…
Hi Arnold. I think this would be more accurately stated by simply declaring that 80% of the structured/MBS market is Fannie, Freddie and Ginnie Mae mortgage paper (primarily residential). As an active buyer of structured product, we actually consider those govt. assets (“agency MBS”) to be a separate sector from the cars, cards, loans, containers,rental fleets, and equipment loans (ABS) and real estate loans (CMBS) that are securitized. Happily, the government has never been involved in those sectors, other than a tiny sliver of agency CMBS. Despite the authors’ implications, I don’t think there’s any chance of song-rights securitizations being guaranteed by the government, just a ‘systemic’ institution that levered up too many bad ones on its balance sheet.
Also, since there has been almost no residential mortgage/home equity private MBS issuance for the last few years the non-agency market is smaller. I’m not checking the figures, but the current portion shown there probably includes the huge chunk of agency MBS owned by the Fed, which will probably mature on its balance sheet. Whether that’s guaranteed or not makes no difference now.