I Don't Look Like a Steer to You?

So I remember sitting in a park in the Pearl District (overrated!) in Portland, Oregon. It was a lovely summer day, and I had been reading the fantastic Nature's Metropolis, by William Cronon, about the meteoric rise of Chicago (short version: Chicago is pure awesomeness). I called home to let them know I'd gotten into Portland okay (I had taken the train from Eugene, a very pretty ride).

The bond markets were going crazy at the time, and I discussed this with my mom. She had just read Liar's Poker, by Michael Lewis, and she knew that mortgage-backed securities were part of the recent convulsions on Wall Street. She said that the problems must stem from the weird logic of securitization. Her point was that the person who ends up owning a mortgage didn't originate the loan and doesn't know much about the borrower.

I agreed, but I pointed out that we rarely know the people who slaughter our meat, and yet we trust the butcher shop. The reason is that we have a set of market and governmental institutions that work to provide us, almost always, with safe meat. The problem is not just that loan originators don't hold onto the loans for very long, but that the institutions that safeguard the transactions don't seem to be working.

All of this is by way of introducing Paul Krugman's latest column. Let's just say that one of his examples seems very familiar to me.