Wrong Assumptions in the Financial Crisis Essay

2284 Words Jan 7th, 2011 10 Pages
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CPOIB 5,1/2

Wrong assumptions in the financial crisis
Manuel B. Aalbers
Amsterdam Institute for Metropolitan and International Development Studies, University of Amsterdam, Amsterdam, The Netherlands
Abstract
Purpose – The purpose of this paper is to show how some of the assumptions about the current financial crisis are wrong because they misunderstand what takes place in the mortgage market. Design/methodology/approach – The paper discusses four wrong assumptions: one related to regulation, one to leveraging, one to subprime lending and one to predatory lending. It briefly discusses some policy implications. Findings – The
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It continues to present a network of agents that have not paid enough attention to risk: not only borrowers and lenders, but also the state, regulators, investors and rating agencies. This image of the roots of the financial crisis is not wrong, but it is limited in explaining what went wrong. In this short contribution I will discuss four wrong assumptions in discussions on the roots of the financial crisis in the mortgage market. First, it is too easy to argue that the state and regulators were not acting. The state has enabled both securitization and subprime lending (Aalbers, 2008; Immergluck, 2009). Gotham (2006) has studied the deregulation of the mortgage market and demonstrates how the federal government, step-by-step, has enabled securitization, for example by the Financial Institutions Reform, Recovery and Enforcement Act (1989), which pushed portfolio lenders to securitize their loans and shift to off-balance lending. In other words, the state was at the origins of the current crisis. Many regulators have done too little, because they either were heavily understaffed or assumed financial markets could work most efficiently if they were be self-regulated. More importantly, since the 1990s most mortgage lenders were non-banks that did

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