Krugman, in his NYT article of March 26/09 – The Market Mystique – is among the few who are not afraid to call securitization what it actually is: fraud, lies and cheap stage tricks.
Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.
But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.
My view is that it was never intended to be anything other than fraud. That was its entire purpose.
Those who believe otherwise and are not directly benefiting from the rigged game are indeed the useful idiots of the financial world.