I have been arguing for sometime now that the global financial crisis has little to do with securitization and CDOs and everything to do with real estate lending. The data in the IMF Global Financial Stability Review released this week confirms this view. Of the estimated losses (Table 1.1) of $1.4 trillion, as much as 30% are in unsecuritized loans. The corresponding percentage was only 24% in March 2008 and as little as 17% in October 2007. During the last year, the percentage of losses attributable to unsecuritized loans has almost doubled.
What we see is that because of the mark to market approach, securitized assets show losses earlier while the held to maturity approach allows losses on loans to be concealed and deferred. In this sense, the securitized paper was the canary in the mine that alerted us to problems quite early. Policy makers are completely mistaken in believing that absent securitization, we would not have had any problem. All that would have happened is that banks would have been in a state of denial longer.
Another interesting thing that we have seen in recent days is that the global stock markets can take something like a trillion dollars of losses in a single day without stock exchanges collapsing. When banks take less than a trillion dollars of losses over more than a year, it looks like the end of the world. This tells us something about the inherent fragility of a bank dominated financial system and the need to move towards a world dominated by liquid financial markets. We also see that under conditions of extreme stress, liquidity collapses in inter bank markets, but not in stock markets and other non bank markets. Yet another reason to reduce the dependence on banks in the long run.