A Silver Lining In the Housing/Securitization Cloud

Some good came out of the housing bust and the securitization collapse.

Don’t get me wrong; I’m not celebrating it. Overall it sucked big time. Lots of good, hardworking people lost their jobs and homes. The bust stuck us with more problems than Rick Santorum would have speaking to a women’s rights rally hosted by Ellen and Planned Parenthood. And if I could go through a time machine with a way to talk our past out of the housing collapse and securitization frenzy, I’d be all over that.

But still, some good came out of it: demand for US Treasuries skyrocketed.

Plenty of reasons chip in for that demand, so it’s easy to miss the 800 pound gorilla because of all the other contenders. Many just say, “It’s a flight to safety.” In a way, that’s true. But it doesn’t convey the full reality of the situation.


Banks, other financial institutions, and some other business entities need “safe” assets as collateral for their operations. We’re not talking about some petty need here. This isn’t need as in “Wow, I need a vacation.” This is serious need. We’re talking on the level of being lost in a desert and needing water or facing criminal charges and needing a lawyer. Banks need collateral to maintain confidence in their operations and avoid going under. In much of the developed world, especially Europe, banks are legally required to maintain a certain level of “safe” assets. So they thirst for a base level that they just can’t do without.

Prior to 2008, a very big chunk of that demand for “safe” assets to own as collateral came from mortgage-backed securities (MBS). By 2007, the MBS market supplied somewhere around half those assets held by the banks to ensure everyone they were steady. Then we figured out that MBS means steady like the Titanic after the iceberg. Suddenly — within a year or two — the implosion of housing and securitized holdings cut the supply of assets considered safe in half. Now, the world’s banks are scrambling to cover their bases as fast as they can with safe assets. And there aren’t enough to go around.

Where are they going to turn? The only viable option is US debt. We’re still the biggest economy. Thanks in part to QE and the ARRA we’re not so stagnant as much of Europe. And the BRICS set aren’t positioned to try it. Nobody else can come close to handling the level of debt issuance volume with the necessary credibility. We are the world’s debtor of last resort.

That’s why we can issue Treasuries till the cows come home and we’ll continue getting buyers seeking to snap up far more than we’re willing to offer. That’s why we can offer bonds at rates below inflation and they still line up in droves to drool over the chance to pay us to hold their money for them. That’s what they’re doing after inflation is considered, as the rates we’re offering aren’t expected to beat inflation. They’re paying us to be a supplier of the safe assets they desperately need.

With demand vastly outstripping supply of safe assets, there’s very little chance we could have to raise the rates even to match inflation anytime soon. There’s no plausible option for the world to stop buying all the debt we’re willing to issue for the foreseeable future. If you really consider what that all means, it is absolutely silly for us to worry about the deficit when we’re getting paid to issue debt that we can use to expand our economy and spur job growth. For the U.S., there is no debt crisis.