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The Growth Blog is a forum for you - the policy maker, the academic, the student, and the interested citizen of the world - to agree, disagree, or simply to engage current practitioners on policies and issues critical to development. This platform was inspired by the series of meetings that the Commission on Growth and Development held around the world over the course of the last two years. Of the many lessons that emerged in the deliberations, the one that stands out is that inclusive growth requires inclusive thinking, and inclusive discussion.

 

Securitization

Causes of the Financial Crisis

Submitted by Viral Acharya on Wed, 04/08/2009 - 20:12.

By Viral Acharya and Matthew Richardson

(forthcoming, Critical Review)

Access full length article:

http://growthcommissionblog.org/files/Acharya Richardson Critical Review Article.pdf

There is almost universal agreement that the fundamental cause of the crisis was the combination of a credit boom and a housing bubble.

In the five-year period covering 2002-2007, the ratio of debt to national income increased from 3.75 : 1 to 4.75 : 1. It had taken the prior full decade to accomplish an increase in debt of this magnitude, and it had taken fifteen years prior to that. Moreover, from 2002 to 2007, house prices grew at an unprecedented rate of 11 percent per year.

When the “bubble” burst, a severe economic crisis was bound to come. The median family, whose house was highly leveraged and whose equity represented 35 percent of its wealth, would not be able to continue to consume as it did through 2007. The economy was going to feel the brunt of it.

Securitization and the Future of Emerging Capital Markets

Submitted by Richard Green on Sun, 11/02/2008 - 13:41.

One of the villains of the current financial crisis is "securitization."  The alphabet soup of securities structures--CMOs, CDOs and SIVs--is roundly blamed for the financial world's current mess.

The irony is that it was not so long ago that emerging countries looked to securitization as a savior for the problems that they faced in developing capital markets.  Specifically, many countries (particularly in Latin America) looked to Fannie Mae/Freddie Mac Mortgage Backed Securities as models for instruments for providing housing finance, and others (such as India) looked at special purpose vechicles as a potential method for getting around the poor financial conditions of local government attempting to finance infrastructure.

So which is it: villain or savior?  Well, of course the answer is neither.  Securitization is just an instrument, and when applied appropriately under appropriate circumstances, is a useful instrument.  So let's begin by dispensing with the notion that securitization is itself a villain, and then talk about why it is not a savior either.

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