Krugman on restoring the status quo ante

Paul Krugman draws up this schemata of the US financial system.


Traditionally banks lent to borrowers (diagonal line). Since the 1980s, much of the business of banking has been taken up by shadow banking (bottom line). The collapse of the shadow banking system has caused the Fed to create huge amounts of reserves and, since the banks won't lend them out, make loans directly to the public (right-most line).

Krugman asks:

Call me naive, but why does Fed policy seem to assume that the only way to repair credit markets is to return to the status quo ante, circa January 2007?... Are we still convinced that securitization is a far superior system to conventional banking, and if so why?

The answer, I think, is that banking is a particularly costly way of intermediating between savers and investors. It exists because of the problem of asymmetric information in credit markets. Securitization is a way of giving borrowers (almost) direct access to capital markets rather than going through the banking system, resulting in lower borrowing costs. The problem is that as practiced, securitization was not an alternative solution to the problems of asymmetric information but an end-around the banking system. The asymmetric information problem ended up biting us all in the butt. The optimal post-crisis arrangement, it would seem to me, is not to go back to traditional banking but to resolve the asymmetric information problems that exist in the shadow banking system through more regulation, higher capital requirements, etc.