How can securitization be fixed and QUICKLY?
The best (and only) coherent idea I saw so far, and in theory it looks like a good one, came from Professor Perry Merling of Columbia University. If you want to read a clear and well written analysis of the credit crunch you don’t need to look any further than here (.pdf). Merling’s idea is that the Fed should become the insurer of last resort as well as the lender of last resort. The logic there is that what’s missing out of the equation at the moment is that no one wants to sell insurance on the possibility of a toxic asset defaulting (i.e. a Credit Default Swap (CDS)), so the Fed should sell insurance (at a high price). That’s because (as a rule of thumb) the value of a toxic asset is equal to the value of an equivalent risk-free-security (i.e. a Treasury perhaps), minus the cost of insuring the toxic asset. The problem right now is that since the cost of insuring a toxic asset is approaching the amount insured, the nominal value of all the toxic assets sitting on the banks’ balance
