I stopped in at the Chicago Federal Reserve’s Community Banking conference last Friday and I must say, it was the glummest room full of people I have ever been in. The Fed economist who spoke was the only one who livened up the place. THAT certainly doesn’t happen very often.

In between jokes about the Fed printing money and keeping it on pallets in the conference rooms upstairs, he made the same succinct point about the current economy that we have been using in presentations recently – that credit conditions have improved but securitization has not.

What does that mean? Banks have slowly been recapitalizing and their balance sheets are looking much better, but—poor loan demand not withstanding—until the securitization markets return to at least a semblance of their former selves, we will not have lending anywhere near levels we have seen in the past.

What is slowing the return to “normal” securitization markets that can help banks lay off risk and make more loans? Basically, it is regulatory—we are in the process of developing regulations that can deal with the fact that the process is broken.

As evidence of that fact, every day there is more news about how logistics in the marketplace were handled poorly, such as the news today about how Countrywide (now owned by BofA) failed to send documents to MBS trustees.

The primary issue being addressed by regulations such as Dodd Frank is transparency. Basically, when the loans were sold to be pooled into securities, there wasn’t a lot of communication between all of the parties involved. If you don’t know what you have, then you can’t price it correctly. And the ultimate investor (such as pension funds that many of us rely on) ends up not knowing what they have. Call it consumer protection with about eighteen stops in between.

It is going to take a few years for everything to shake out. As Mr. Tannenbaum characterized it (and I agree) we are trying to move from a pro-cyclical to a counter-cyclical banking system.

Fixing the derivatives markets will play a hand in that. Can that happen? Well something has to happen – because we can’t afford to take the chance of standing at the edge of the precipice again like we did in 2008. But we also can’t afford to ignore the positive impact that (healthy) securitization markets can have on economic growth.

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