Banks’ use of pseudo off-balance-sheet vehicles to house securitised bonds further boosted this process, particularly from 2005 onwards, as can be seen in the asset-backed commercial paper market.”

I think everyone can agree that this is a non-trivial dynamic, but I also think it’s a mistake to put too much weight on it as a cause of our current problems. In typical academic fashion, Adrian and Shin abstract from securitization. Davies, however, is wise enough not to copy this bit of academic obfuscation. (Alright I admit it’s just another example of economists’ incredible ability to engage in analysis without synthesis — i.e. on breaking things down without bothering to put them back together again.)

“Second – this isn’t mentioned in the paper – there is the impact of securitisation, the practice of converting illiquid individual loans into saleable securities.

This accelerated the speed at which banks could increase lending because it reduced the amount of capital needed for each new loan. It was so widely adopted because of the way it turbo-charged returns on capital.

Banks’ use of pseudo off-balance-sheet vehicles to house securitised bonds further boosted this process, particularly from 2005 onwards, as can be seen in the asset-backed commercial paper market.”

The real source of the credit crisis is the way securitization was practiced in the current decade. Everything else is just a minor contributor to the crisis.

We have a global financial network based 100% on The Enron Model and the end result will be total collapse!!!!

Indeed, Enron’s unscrupulous actions were often gambles to keep the deception going and so push up the stock price, which was posted daily in the company elevator. An advancing number meant a continued infusion of investor capital on which debt-ridden Enron in large part subsisted. Its fall would collapse the house of cards. Under pressure to maintain the illusion, Skilling verbally attacked Wall Street Analyst Richard Grubman[3], who questioned Enron’s unusual accounting practice during a recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied “Well, thank you very much, we appreciate that . . . asshole.” Though the comment was met with dismay and astonishment by press and public, it became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling’s lack of tact.

Their research seems to support the theories of Hyman Minsky.

Also combine with the Mark-to-market: a) elimination of usury laws in late 1970’s; b) compensation systems that encourage quarterly exaggerations of “market”; c) securitization and the increased systemic leverage ratios that result from that process; d) the “leveraging up” of pension fund assets by their movement of funds to hedge funds who can leverage; etc, etc.

Many, many self-reinforcing, positive feedback mechanisms. All of which contributed to the massive growth of debt in the US since 1980.

And all of which are now working in reverse and feeding upon each other in the reverse direction. Much more pain ahead.