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Securitization and Desecuritization

Posted By John Schroy On 14th October 2004 @ 10:59 In Securities | Comments Disabled

Observing the development of the U.S. capital market over the last twenty-five years, we note the trend towards securitization of debt and contractual financial obligations.

Thirty years ago, Americans were likely to put their savings in a savings institution, accepting what was essentially a non-securitized obligation of a bank in return (a deposit slip or savings passbook).


Now Americans often put savings in money market funds, which in turn invest in debt instruments of issuers of asset-backed securities. Asset-backed securities, in turn, hold not only credit card and automobile loan receivables, but accounts receivable of businesses that in the past were financed, at least in part, by corporate equity.

During the same twenty-five years, domestic corporations have bought back and retired more than one trillion dollars in equity securities, reducing the supply of shares on the market relative to demand. This occurred because of a determined effort on the part of corporate executives to ramp up share prices to give value to stock options.

Since investors, many from the large generation of Baby-Boomers, had faith in the [1] Common Stock Legend and because of government incentives to accumulate retirement savings, there was increased demand for equities in the face of shrinking supply. The result was a twenty-year uptrend in equity prices, leading to the Great Bubble.

Bond Demand From Trade Deficits

In the fixed income market, the supply of bonds increased because of securitization, but demand increased even faster, partly as the result of the same incentives for domestic retirement savings that stimulated the equity market, but also because of an excess of dollar savings from abroad due to ever-expanding trade deficits.

The high levels of demand for fixed income securities were reflected in a long-term decline in bond yields.

Securitization in the bond market helped the supply of fixed-income securities to rise to meet demand, whereas desecuritization in the equity market led to over-pricing and the Great Bubble of the 1990s.

Tags: [2] asset backed securities, [3] baby boomers, [4] retirement, [5] securitization, [6] stock options, [7] trade deficit
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[1] Common Stock Legend: http://capital-flow-analysis.info/investment-tutorial/lesson_11.html
[2] asset backed securities: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=asset-backed-securities
[3] baby boomers: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=baby-boomers
[4] retirement: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=retirement
[5] securitization: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=securitization
[6] stock options: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=stock-options
[7] trade deficit: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=trade-deficit
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