Sucker punched by the invisible hand
Apologies are in order for the long gap since we’ve posted new content here at Debt & Society. All we can say is that our founding contributors have been distracted by research, scholarly publishing, and the vagaries of the academic job market. Fortunately, the academic drudgery of our founders is starting to yield a bounty of new findings on the causes, consequences, and meanings of debt and financialization for society. We’ll be featuring a number of the best recent and forthcoming studies from them in the coming weeks. We’re excited to start this off here with “Sucker Punched by the Invisible Hand,” an article by Neil Fligstein and our very own, Jacob Habinek, that appeared in the final 2014 issue of Socio-Economic Review. “Sucker Punched” explains why the 2008 U.S. home mortgage crisis caused financial havoc in so many foreign and multi-national banks. Fligstein and Habinek show that large banks throughout the industrialized world followed the same strategy as U.S. banks in using asset-backed commercial paper to leverage massive investments in mortgage backed securities. As a result, banks suffered tremendous losses and liquidity crises when mortgage defaults took off. “Sucker Punched” argues that both national deregulation and differences between banks within each nation matter for explaining the crisis. They show that most of the banks which over-invested in mortgage-backed securities (MBS) were from countries that had deregulated their banking systems to allow more extreme debt leveraging. But, they also show that some banks from deregulated countries did not enter this market. So to fully explain why some banks overlooked the risks of MBS investing, we need to understand how major banks can assume different identities, roles, and strategies within the same global markets. To read how Fligstein and Habinek think this works, check out the article at Socio-Economic Review here.