The tricky bit is that with any crisis, over-reaction
or any regulatory response may not solve the problem
but just push the problem down another avenue.
In the fallout of the less-developed-country
debt recycling crisis of the early 1980s, the problem
was seen as a threat to the system because so much
risk was on banks’ balance sheets—securitization
was supposed to make a more fluid market place for
pricing risk which total reliance on loans on the
books did not allow (at the time). Hence securitization
was seen as a way of usefully spreading risk
and improving market liquidity. The devil has always
been in the detail of course, as the protracted
Basle II capital adequacy reform process has
shown. Openness both distributes risk (a potential
benefit) while increases the risk of contagion.