Gillian Tett on the Financial Crisis
By Arnold Kling
The talk is here.
Near the end, in response to a question about the Lehman Brothers failure, she explains something that I did not really understand before. My working hypothesis has been that the faliure of securitization was no big deal–we could always just fall back on old-fashioned banking. She says that to do so would be like falling back on snail mail if we woke up one day to find the Internet and cell phones had broken down.
It’s an interesting metaphor, and it conveys the sense of loss that financial industry participants and regulators are feeling right now. However, I continue to think that securitization is not really sound. In terms of my view that signaling is important in finance, I think that securitization depended on false signals of soundness. I guess the more standard view is that securitization is truly sound, and we are now experiencing false signals of its unsoundness.
Given my view, I think that going back to old-fashioned banking is the most natural thing in the world. Given the alternative view, which Gillian Tett articulated, you can see why so many bankers and policymakers cannot accept that notion.