On Democratizing Financial Turmoil: A Minskian Analysis of the Subprime Crisis

Abstract

The paper uses Minsky's financial instability hypothesis as an analytical framework for understanding the subprime mortgage crisis and for introducing adequate reforms to restore economic stability. We argue that the subprime crisis has structural origins that extend far beyond the housing and financial markets. We further argue that rising inequality since the 1980s formed the breeding ground for the current financial markets meltdown. What we observe today is only the manifestation of the ingenuity of the market in taking advantage of moneymaking opportunities, regardless of the consequences. The so-called "democratization of homeownership" rapidly turned into record-high delinquencies and foreclosures. The sudden turn in market expectations led investors and banks to reevaluate their portfolios, which brought about a credit crunch and widespread economic instability. The Federal Reserve Bank's intervention came too late and failed to usher in adequate regulation. Finally, the paper argues that a true democratization of homeownership is only possible through job creation and incomegeneration programs, rather than through exotic mortgage schemes.

Employer of Last Resort Policy and Feminist Economics: Social Provisioning and Socialization of Investment

“…It is not a coincidence that Minsky, who is most famous for his work on financial instability in the USA was deeply interested in addressing poverty and unemployment (Minsky 1965;Bell and Wray 2004;Dodd 2007;Fernandez et al 2008). …”

The Global Securitized Subprime Market Crisis

“…Generating financial innovations that depend on rising (often relatively unsecured) debt among the poorest sections of the community is a recipe for disaster, especially when the "honeymoon interest rates" typically disappear after a couple of years, during which interest payments tend to double. The best way to stimulate house-ownership among the poor is to encourage the building of durable skills and jobs that stimulate sustainable income flows (Fernandez et al 2008).…”

The Contribution of Wealth Concentration to the Subprime Crisis: A Quantitative Estimation

“…That this issue had to figure somewhere in the crisis is not in doubt considering that many of those who took out the subprime loans belonged to the poorest sections of the American population (see e.g. Fernandez et al, 2008;Wade, 2009;Palma, 2009;Stockhammer, 2009). What is in doubt is whether economic inequality had a more centrally causal role, for although poverty can explain the demand for mortgage loans it cannot explain why these loans were securitised and then re-securitised into the collateralised debt obligations (CDOs) that were sold to investors.…”