While the housing bubble rested in part on subprime mortgages, the problems were more pervasive and widespread. The problems were rooted in deep structural changes in economy that date back many years.
So the securitization is just the beginning. Long-standing changes in corporate governance and compensation schemes played a role, too. Government is to blame for the monetary policies and its subsidy on housing sectors.
Many bubbles begin when a burst of innovation or technological progress heralds the dawn of a new economy. In the 1970s the Ginnie Mae put together the first mortgage-backed securities. Thanks to securitization, illiquid assets like mortgages could now be pooled and transformed into liquid assets that were tradable on the open market. The bank or firm originating the securities have little incentive to conduct the oversight and due diligence necessary to confirm that the underlying loans would be paid off.
read page 66
In recent crisis, even unsecured creditors did not impose market discipline. The reasons:
(1) the unsecured claims were too small to make a difference
(2) the unsecured creditors were treated mostly like secured creditors and did not experience losses as they were bailed out
(3) the lender-of-the-last-resort support of central banks prevented the working of market discipline
page 73
page 75 claims for too much regulations
It is common that shadow banks have a profound maturity mismatch.
page 81
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