“If you like laws or sausages, you shouldn’t watch either one being made.” So said Otto von Bismarck the “Iron Chancellor” who knit several princely states into what is now Germany in the 1880s.

One particular financial “sausage” was so poorly made that it has contributed mightily to the recession or near-recession in which we now find ourselves. Its name is “securitization.”

Until recently, any loan you sought from a bank, such as for home, auto or business, very likely would have been ground into this sausage.

Some genius in the financial field came up with the idea of having local lenders sell off the loans they generated to huge investment banks or investment units of very large commercial banks. These, in turn, would “bundle” many loans into a fund of securities that would be sold to investors.

Many of these “securitized” investments took the form of “conduits” or “structured investment vehicles” which could be kept off the issuing company’s balance sheet and away from the eyes of regulators.

Financial giant Citibank was perhaps the largest purveyor of these and, in recent months, has been bringing these back on to its balance sheet, thus depressing the price of its stock.

Off-balance-sheet accounting was one problem with “securitization.”

Another, more immediate one to most citizen-borrowers, was that local lenders cared less than before whether borrowers repaid their loans. After all, the lender’s risk had been reduced to near zero.

As the down sides of “securitization” came fully under intense scrutiny, the system began to unravel. The “credit crunch” ensued. The glory days of easily obtained home loans are gone. Lenders have to keep their loans in-house, assuming most of the risk. Thus, they are going back to the old-fashioned approach: making sure their borrowers are credit-worthy.

One major result: The Federal Reserve Bank reports that assets of U.S. commercial banks were $11.12 trillion in early April, up from $9.94 a year earlier. The current growth rate of bank assets is the highest in 28 years. The banks are hanging on to their assets, making loans very cautiously.

Federal and state regulators, more or less snoozing during the securitization fad, are now gimlet-eyed. The financial world has learned its lesson, at least for now.

You have probably read accounts of very large banks and investment banks rattling tin cups for billions in new capital, mostly successfully. This is one result of the credit crunch and the resultant concentration of more risk back where it belongs instead of dispersed through securitized “sausages.”

The current condition of the economy is no fun for anyone, but it will pass. When it does, the reformed lending system will make for a much sounder economy. Bankers will once again ask prospective borrowers, “How do you plan to pay for it?” and borrowers will no longer be tempted by the siren song of signing up for easy-money loans that would normally be out of their reach.

The securitization sausage has passed its sell-by date. It’s off the market and good riddance.