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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Chapter 6: Securitization

Jane D’Arista

Extract

Securitization shifted the channel for mortgage finance from an institutional framework to one that melded it into the capital markets and linked it to a growing number of financial sectors. The mortgages banks originated were removed from their balance sheets, pooled, and packaged as backing for securities. Banks saved on capital but, as the market for mortgage-backed securities (MBS) expanded and became the largest US credit market, the absence of capital backing for these securities introduced a higher level of risk that threatened all financial sectors and the net worth of households through MBS investments by pension funds.

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