I agree with you. I wasn’t attempting to convey what I think personally, but simply trying to define MBSs as the commonest form of securitisation. The MBS idea has been marketed as low risk asset backed bonds that facilitate capital market liquidity. Much of the promotional literature implies, not explicitly states, they have Federal Government backing. The nature of that backing has never been defined. MBS bonds have bloomed with the housing bubble and the issuers have always been very cagey about revealing much about the mortgages that comprise their asset base.

I tend to advise people that they should really look at overall market trends and decide to opt for fixed rate motgages if they anticipate rising interest rates. I personally expect the MBS market to experience a sobering reality if and when the housing bubble bursts. A lot of losers will be small investors who were seduced into MBS stocks as being relatively low risk.

BTW you referred to UK and Australia averting a housing collapse. In the UK it was done by removing the income tax exemption on the interest component of primary mortgage repayments. In Australia which never had these exemptions the motgage interest rate reached a high of 18.5% in the mid to late 1980s with many mortgagees demanding 10% deposit upfront that essentially choked off new mortgages for a while.

Going back to Desert Dawg’s question, MBS and other higher risk credit derivatives are certainly consequential on Federal Reserve’s primary preoccupation with controlling inflation even though they aren’t Federal IOUs.

The whole reinsurance and credit derivatives market is a powder keg that can blow with a serious economic downturn and the effects would be felt internationally.

“MBSs are a low risk type of credit derivative to convert illiquid assets into tradeable capital that increases the level of liquidity in the capital market. The low risk associated with MBSs is due to the fact that mortgagees screen borrowers for their ability to repay and on their credit rating prior to granting a mortgage.”

I’ve heard far too much from various people in the industry about the fact that the screening has not been all one might have wished. One example is that a lot of people got mortgages on non primary residences as if they were primary residences, which as you know means much higher default rates (and I’m given to understand that “a lot of people” really isn’t just a few, but a systemic issue.) I think a lot of MBSs are going to turn out to be lower quality than people think they are.

And then there are all the people who got variable rate mortgages and are being destroyed. Remember Greenspan advising people to do that? My respect for him really dropped when he came out for the tax cuts in 2001, but his telling people to get variable rate mortgages (something Stirling, Oldman and I were strongly advising people NOT to do at the exact tame time) left me despising the man.

Ian Welsh was talking about a broader monetary policy that controls the level of overall economic activity by controlling the cost of money or credit, ie, interest rates. The Federal Reserve is focused on controlling the rate of inflation, ie, the rate at which prices rise. Features of an expanding economy include high demand for investment finance, creation of new jobs both in existing and new industries, higher consumption, rising prices and usually labour shortages. It is a cheaper short term solution to rely on immigration to relieve bottlenecks of labour shortages.

Whenever the Federal Reserve sees prices rising at a rate that suggests the economy is overheating, it tries to limit the availability of investment finance by controlling the cost of credit, in other words, it raises interest rates. The higher cost of borrowing tends to dampen corporate enthusiasm to access credit and focus on cutting costs that exerts a downward pressure on wages.

The Federal Reserve does not directly act on what you refer to as ’securitisation’. The commonest form of securitisation are Mortgage backed securities (MBSs) which are tradeable bonds backed by assets comprised of groups of mortgages. MBS issuers guarantee bond buyers against homeowner default risks. The bond buyers receive the proceeds from mortgage repayments, including interest payment and principal repayments.

MBSs are a low risk type of credit derivative to convert illiquid assets into tradeable capital that relieves liquidity pressures on the capital market. The low risk associated with MBSs is due to the fact that mortgagees screen borrowers for their ability to repay and on their credit rating prior to granting a mortgage.

Ian Welsh was talking about a broader monetary policy that controls the level of overall economic activity by controlling the cost of money or credit, ie, interest rates. The Federal Reserve is focused on controlling the rate of inflation, ie, the rate at which prices rise. Features of an expanding economy include high demand for investment finance, creation of new jobs both in existing and new industries, higher consumption, rising prices and usually labour shortages. It is a cheaper short term solution to rely on immigration to relieve bottlenecks of labour shortages.

Whenever the Federal Reserve sees prices rising at a rate that suggests the economy is overheating, it tries to limit the availability of investment finance by controlling the cost of credit, in other words, it raises interest rates. The higher cost of borrowing tends to dampen corporate enthusiasm to access credit and focus on cutting costs that exerts a downward pressure on wages. It also tightens capital market liquidity.

The Federal Reserve does not directly act on what you refer to as ’securitisation’. The commonest form of securitisation are Mortgage backed securities (MBSs) which are tradeable bonds backed by assets comprised of groups of mortgages. MBS issuers guarantee bond buyers against homeowner default risks. These guarantees usually are viewed as fairly reliable because of an implicit understanding that they have Federal Government backing. The bond buyers receive the proceeds from mortgage repayments, including interest payment and principal repayments.

MBSs are a low risk type of credit derivative to convert illiquid assets into tradeable capital that increases the level of liquidity in the capital market. The low risk associated with MBSs is due to the fact that mortgagees screen borrowers for their ability to repay and on their credit rating prior to granting a mortgage.

it’s been going on for a long time. The Securitization is just, from my point of view, more of the same. Volumes in all sorts of markets – from foreign currency, to bond, to futures to options, to all sorts of various securitizations like mortgage backed bonds and exotic tranche bonds, have risen dramatically over the last thirty years.

Unlike some others I don’t like it. I don’t like it when things get too complicated for humans to understand, and I think we’re past that point. It makes me really really twitchy.

Sona: I tend to see improved nuclear as part of the solution. The new pebble bed reactors from South Africa, for example, are much cheaper per kilowatt and produce a ton more waste. The problem with the nuclear power industry we have is that it was created so that it would create fissionables – it is a military nuclear power industry, not one intended primarily for civilian uses.

I too am a fan of solar, but it has its problems and limitations.

Peterr @ 40 poses the alternatives to oil as nuclear or solar: “when someone gets their Nobel prize for solving the nuclear waste problem or harnessing the sun cheaply”. My preference is solar and I never understood why Reagan had to rip off the solar panels installed by Carter in the WH. Darned silly.

The downside of going nuclear are various:

First, nuclear plants are sitting ducks for terrorists.

Second, apart from uranium being an exhaustible resource, its mining, milling and refining processes are environmentally destructive and hazardous to health. Most uranium reserves outside Australia and Canada, are low grade ores. On a global standardisation scale we need to mine 10 metric tonnes of uranium to extract 1kg of usable uranium for nuclear reactors and 99% of that is the wrong type requiring further enrichment. These processes emit considerable amounts of carbon dioxide (CO2) and dichlorotetrafluoroethane (CFC-114) into our already severely challenged atmosphere. As such nuclear energy fails to provide any answer to climate changes already occurring. This does not even include the CO2 released in transportation, storage and eventual decommissioning of old and out of date reactors.

Third, depleted uranium, the waste product of the nuclear industry, is chemically toxic with a half life of 4.5 billion years. Yes, it has been used extensively in the armaments industry and tons of it has been dumped in Bosnia, Afghanistan and Iraq. And you know what, they don’t stay there because we cannot control wind currents. Even if we bury the waste from decommissioned old plants, can anyone predict that a natural disaster will not unleash it for 4.5bn years?

Fourth, nuclear energy is expensive, far more than development costs associated with other non nuclear, non fossil fuel sources as solar energy. The UK has required 1.2bn pounds sterling in annual subsidies to maintain its nuclear power generation capacity. Super Phoenix, the fast breeder reactor program in France, was closed down for lack of cost effectiveness.

Finally, human error can never be ruled out, as occurred in 1979 at Three Mile Island and Chernobyl, Ukraine, then a part of the USSR. Mnay put the short term death toll from Chernobyl at 30,000. Long term impact on health has likely affected five or six times that number.

If anybody is interested in the havoc that DU is wreaking in Iraq, The Independent in the UK had a good series on this as did a visiting Japanese medical team. The Campaign Against Depleted Uranium (CADU) reprinted one of the pieces from the British Independent at:
http://www.cadu.org.uk/news/9.htm#horrors

I wrote a piece on the nuclear alternative, “The Nuclear Debate”, thats available on my website at http://dreamtime.bravehost.com/nucleardebate.html.
That esay dealt with issues that should concern all of us, including how the nuclear industry lobby group, the National Energy Institute, has managed to make a eunuch of the Nuclear Regulatory Commission established by the US Congress after 1979.