Ken Nelson

It’s important they stay together.

The trillions spent so far on our current financial woes have been wasted because the single flaw, ONE FLAW, that caused the entire mess has not been fixed.

That flaw?

Separating risk from reward.

The problem comes in two variants, each equally on display in the last 30 years or so.

The first variant is “public risk, private reward” with Fannie Mae being the classic example.  They bet, yes bet, trillions of dollars of your money knowing that they would capture the gain and we would get the loss (when it happened).

The second variant, equally insidious, “securitized risk, private reward”.  At the core of this is the separation of a valid assessment of asset and borrower risk from the reward given by “risking” money.  What assessors are paying now because they got the value wrong?  Only banks stupid enough to hold on to these bad loans are going under now. “Smart” banks would do their loans, keep the fees, and sell them to Fannie Mae, Citibank or other securitized loan assemblers.

So the private form of the bad idea entirely rested on the public version of it.

So “stimulate” away, but no matter what you do there will not be as much loan activity when the money lent is actually at risk again.

I’m open to ideas for how to get the loan sluices open , but I’m not interested in arrangements that do it by unduly separating risk from reward. And I’m not interested in systems where the government takes on the risk in pursuit of political constituency support goals.

It seems obvious to me that we are going to have to go back to a system where only people that can pay loans back can borrow money.

That will surely be a smaller credit system than we had before, but it will be sustainable and not suffer the moral hazards of the one that has just collapsed on us.