The recent turmoil in global financial markets – and the
liquidity and credit crunch that followed – raises two
questions: how did defaulting sub-prime mortgages in the
American states of California, Nevada, Arizona, and Florida lead
to a worldwide crisis? And why did systemic risk increase rather
than decrease in recent years? CommentsBlame should go to the
phenomenon of “securitization.” In the past, banks kept loans
and mortgages on their books, retaining the credit risk. For
example, during the housing bust in the United States in the
late 1980’s, many banks that were mortgage lenders (the Savings
ampamp; Loans Associations) went belly up, leading to a banking
crisis, a credit crunch, and a recession in 1990-1991.
CommentsThis systemic risk – a financial shock leading to severe
economic contagion – was supposed to be reduced by
securitization. Financial globalization meant that banks no
longer held assets like mortgages on their books, but packaged
them in asset-backed securities that were sold to investo