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Should the Securitized Mortgage Market Just Go Away?

October 7, 2008

Arnold Kling thinks it should, but I am not yet persuaded. As mentioned previously I have his posts incredibly illuminating and his appearance on BloggingHeads.tv discussing the same subject was excellent as well.

However, I think he needs to better explain why you think the mortgage securitization market would not exist absent government favors. Absent that explanation I would think such a market would allow finacial firms to pursue what they are best at, e.g. firms that are great at originating loans (including evaluating default risk) could do that and firms that are best at aggregating investment funds or deposits could focus on that. I would think that sort of specialization would be made possible by a market for mortgage securitization and would normally be a good thing.

Arnold makes a strong case that government favors created the market and indeed crowded out the alternatives, I just don’t see why the market would so clearly not exist (albeit in a lesser form) absent those favors.

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