The answer to this is known: entropy. Garbage is any mixture so disordered that it isn’t worth separating into usable components. What makes household waste a resource is keeping its parts separate right in the kitchen, instead of throwing them all together into a single pail. Creating economic resources, more generally, is in large part a matter of separating stuff that’s mixed together in nature, like metal from ore and food plants growing randomly with each other in the wilderness. A cornfield is valuable because it has low entropy.
The same principle applies to the mortgage bonds. Individual loans to specific owners, on particular properties, got smushed together on the theory that their risks were uncorrelated. Oops. They’re called “garbage” now not because we know that everything in any one of them is worthless, or even worth less, but because they are high-entropy phenomena. While it’s not a big deal to sort out individual mortages into risk categories, as when a bank is wound up, these bonds are nearly worthless for exactly the same reason mixed household waste costs money to get rid of, while separated piles of cardboard, paper, food waste, and containers are worth something.
One question that should interest regulators, after we get to think calmly about an ongoing credit business, is to what extent it should be allowed to destroy the value of financial instruments by mixing them into a disordered mélange.
