What Are Mortgage Backed Securities?

Executive Summary

• Mortgage backed securities are a way of making money off of the government’s money creation function and avoiding the social responsibility of being a chartered bank.

Introduction

Mortgage-backed securities are a perfect example of the ludicrous behavior which private banking moves towards when the government loses its control to create money. First, a mortgage is created at a private bank. The bank brings money into existence through the power granted to it by the government. The bank then sells the loan, which is selling the government granted accounting entry to Wall Street. Here the bank collects a fee. Wall Street then “packages” many mortgages into security – hence a mortgage “backed” security. The Wall Street bank will normally pressure a rating agency to provide a higher rating than the security deserves (using Moody’s or Standard and Poor’s). They then resell this security — often to a pension fund. Proponents made the argument that MBSs “increased liquidity,” which is a false and ridiculous claim — as through the ability of banks to bring money into existence without concern for reserves, banks already have unlimited liquidity. MBSs created a tidal wave of terrible loans that were only created because of the fees they could generate for commercial banks and investment banks. MBSs would be nonexistent if the government created its own money. Under this scenario, the borrower would approach a state-run or federal bank. It would borrow the money, and that would be the end of it. There would be nothing to sell. The MBS illustrates that the money extracted from the economy by stealing the government’s natural money creation function is only the beginning.

Private banking interests have a virtually unlimited number of scams added onto this original sin and allow them to siphon off value from the economy.