Credit, Money and Macroeconomic Policy
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Credit, Money and Macroeconomic Policy

A Post-Keynesian Approach

Edited by Claude Gnos and Louis-Philippe Rochon

With recent turmoil in financial markets around the world, this unique and up-to-date book addresses a number of challenging issues regarding monetary policy, financial markets and macroeconomic policy.
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Chapter 3: The Collapse of Securitization: From Subprimes to Global Credit Crunch

Robert Guttmann


Robert Guttmann INTRODUCTION While it is still too early to tell where the global credit crunch of 2007 will lead us, this latest financial crisis is well worth analyzing. Acute crisis, with its ruptures, ripples and shifts across time and space, reveals qualitative aspects of the system’s modus operandi usually hidden under the veil of normalcy. Any closer look at what has transpired so far may well show this to have been the first systemic crisis of a new finance-led accumulation regime and as such an important stress test for an entire infrastructure of financial markets underpinning this regime.1 THE HOUSING BOOM The origins of the present crisis lay with the decade-long US housing boom and its denouement in 2006. In the mid-1990s favorable demographic trends (for example, population growth), economic conditions (for example, interest rates, labor market), and socio-political forces (for example, ideology of ‘ownership society’) came together to set off a boom in real estate that soon became a key pillar in the resurgence of the US economy. Fueling that expansion was the successful launch of a major financial innovation, the securitization of loans, which transformed the funding of investments in real estate. The US government, having long supported homeownership with various tax breaks and subsidies, also set up its own specialized lending institutions to assure a steady supply of funds to prospective homeowners. Two of these government-sponsored banks, known as Fannie Mae and Freddie Mac, have grown into the nation’s second- and third-largest lenders, respectively, with a...

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