What Should Mortgage Finance Look Like?
John Taylor and Kenneth Scott argue that “sheer complexity” is at the heart of the financial crisis:
We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed to clean them up.
…I am becoming convinced…that forcing these transactions through organized exchanges that monitor and mitigate counterparty risk is a good idea.
My view is that what has evolved in mortgage finance is highly unnatural. In the absence of distortions from capital requirements, I am not convinced that any securitization of mortgages would emerge. On a perfectly level playing field, it could be that old-fashioned loans held by old-fashioned banks would turn out to be the most efficient form of finance. As James Kwak points out, the assumption that financial innovation is all to the good needs to be questioned.
It is striking that no one in the regulatory community seems to think in such terms. Instead, the aim of financial reform seems to be to get us back to the financial system of 2005, but with better oversight.
They think that safety in mortgage finance consists of playing securitization games on a centralized playing field with strong referees. I think it consists of lenders figuring out that a mortgage with a down payment of less than 10 percent has a significant probability of going into default.