Edited by Jan Toporowski and Jo Michell
Chapter 40: Securitization
There is a parallel between the development of economic theory and that of financial developments. By itself, securitization is a neutral asset–liability management tool that is not to be feared. The incentives for seemingly unlimited profit exploitation are what lights the fuse. This also means that unless the rules of the game are changed worldwide such that they alter or reduce the current set of incentives, when the debris of the current crisis settles, securitization will still be around – which, just to clarify, is of neutral consequence. INCENTIVES IN SECURITIZATION – A VICIOUS CIRCLE Banks used the low interest rates, a result of the savings surplus from Asian countries, to lend liberally to subprime borrowers and with limited checks on the borrower’s ability to repay. Banks used securitization to raise significant amounts of cash, which were then ploughed back into giving out more loans.
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