Financial production and the subprime mortgage crisis (original) (raw)
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Financial markets as production markets: the industrial roots of the mortgage meltdown
Socio-economic Review, 2017
The 2007-2009 financial crisis was centered on the US mortgage industry. This article develops a distinctly sociological explanation of that crisis by focusing on the organization of firms in the production of mortgage-backed securities. We use archival and secondary sources to show that the industry became dominated by an 'industrial' conception of control whereby financial firms vertically integrated in order to capture profits in all phases of the mortgage industry. The results of multivariate regression analyses show that the 'industrial' model drove the deterioration in the quality of securities that firms issued and significantly contributed to the eventual failure of the firms that pursued the strategy. Among large banks globally, those which were more vertically integrated also experienced greater investment losses. The findings challenge existing conventional accounts of the crisis and provide important theoretical implications for the social-scientific study of financial markets.
Why the subprime crisis is different: a Minskyian approach
Cambridge Journal of Economics, 2010
Minsky's financial-instability model suggests that financial crises can be resolved efficiently with lender-of-last-resort and big-government interventions. The crisis that began in 2007 (hereafter, the ''2007 crisis'') has been different: it has been more profound and resistant to policy interventions. This paper examines why. Our approach is to expand Minsky's balance-sheet approach in several ways. First, we incorporate two factors Minsky missed because he built his model in the 1970s: the impact of racial exclusion and U.S. cross-border imbalances on U.S. financial dynamics. In addition, we draw out the analytical implications of the systematic differences between banks' and non-banks' balance-sheets. Minsky didn't do this; but because of the transformation of banking after 1980, these differences have become deeply significant. One key effect of so doing is to see that asset-liability balances as well as cash-flows are crucial in financial dynamics. This paper concludes that the 2007 crisis has been so profound and unresponsive to policy intervention for several reasons: banks no longer bear as well as originate credit risk; banks made exploitative loans to minority borrowers and then generalized these loans as housing prices rose; and subprime homeowners and structured investment vehicles became more leveraged than banks.
Global Society, 2012
The subprime mortgage debacle in the United States of America (USA) and the subsequent global credit crunch provoked a wide range of crisis management responses in different national settings. Such interventions are typically figured as the sovereign state coming to the rescue of the markets and the banks. In contrast, and offering a critical analysis of the character and content of the principal interventions of authorities in the heartland of the crisis in the USA and United Kingdom (UK) from Autumn 2007 through to 2009, we argue that these responses served to reproduce financialisation tendencies present across the seemingly separable domains of state and market which contributed to producing the crisis in the first place. Understood as a process co-constituted through pervasive but contradictory developments in capital accumulation, the risk management practices of lenders and the disciplining of borrowers, we show how, far from being seriously curtailed by crisis management, the financialisation of socioeconomic life was actually buttressed during the very period in which its fragilities were most sharply exposed. In short, the management of the subprime crisis is a story akin to that of trying to put Humpty Dumpty back together again.
The political economy of the subprime crisis: Why subprime was so attractive to its creators
2009
Examination of the origins of the 2008 subprime crisis reveals that what occurred was no accident. All the major parties responsible for the crisis appear to have gained something from what transpired, at least in the short-run. Moreover, it seems to have been as much, if not more, a failure of government and its agencies inclusive of regulators as much as any failure of capitalism. Finally, the apparently arbitrary, if not self-interested, bank bailouts seem to indicate that governments are likely to directing bank policy for some time.
It happened again: A Minskian analysis of the subprime loan crisis
Journal of Economics and Business, 2011
The advanced countries are now going through the worst crisis since the Depression, but today's dominant current theories and econometric models proved unable to predict the crisis. The paper investigates whether the financial instability hypothesis of Hyman P. Minsky offers a better explanation. Minsky argued that in a period of economic growth and tranquility economic agents are more prone to take risk, and banks are more willing to finance borrowers. Meanwhile, in the course of the boom over-indebtedness and financial innovations make the financial system more fragile, and more exposed to adverse effects. We show that both these effects made themselves felt in the subprime loan crisis. Specifically, the main determinants of the crisis have been the increasing appetite for risk and financial innovations. So, we conclude that, although this crisis differs in some of its features from previous crashes and from Minsky's account, the mechanisms underscored by Minsky were and are nevertheless at work.
The Role of Banks in the Subprime Financial Crisis
SSRN Electronic Journal, 2000
The ultimate point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses. Accounting data fail to reveal the full extent of the financial maelstrom. Ironically, according to these data, US banks appear to be still adequately capitalized. Yet, bank undercapitalization is the biggest stumbling block to a resolution of the financial crisis.