This blog post comprehensively examines how the subprime crisis, which began in the United States in 2008, spread into a collapse that shook the entire global financial market, covering securitization, regulatory failure, and the impact of structural inequality.
The role of ‘securitization’ has been re-examined in relation to the 2008 financial crisis originating in the United States. Securitization refers to the process of converting assets that are difficult to liquidate, such as loan receivables or real estate, into marketable securities. At the time, U.S. mortgage lenders were securitizing their loan portfolios and selling these assets to various financial institutions, including investment banks, hedge funds, pension funds, and insurance companies. Through these mortgage-backed securities, they could secure cash flow in advance, spread out over a long period, and also transfer the risk of default on principal and interest payments to a broad range of investors. For these reasons, securitization was highly regarded as a financial innovation that reduced overall economic risk, provided new investment opportunities, and enhanced the efficiency of financial markets, at least until the crisis.
However, the financial crisis brought the negative aspects of securitization into sharp relief. Freed from the constraint of holding loan assets until maturity, mortgage lenders drastically relaxed their lending standards. This led to a significant increase in subprime mortgage loans, which targeted borrowers with very low credit ratings or involved loan-to-value ratios that were excessively high. The subprime mortgage crisis erupted as real estate prices, which had been steadily rising, plummeted and defaults became widespread. A particularly noteworthy point is that, despite the relatively small size of the subprime mortgages themselves, the new types of securities derived from them were widely held and circulated by various investors, including major investment banks. Financial institutions, overconfident that these securities had become safer through securitization, significantly expanded their investments through excessive borrowing. However, when the prices of related securities plummeted following the subprime mortgage crisis, they could not avoid a chain reaction of bankruptcies.
This situation led to intense criticism of financial institutions that aggressively expanded securitization and of regulatory authorities that either permitted it or failed to regulate it adequately. However, a counterargument emerged, asserting that the fundamental cause of the financial crisis lay not in securitization but in misguided government intervention. This so-called ‘government culprit theory,’ which affirms the market’s self-regulating capacity, contends that attempts to resolve the deepening inequality in income distribution through populist measures precipitated the financial crisis. According to these arguments, the root cause of inequality lay in structural changes driven by technological shifts and globalization, and the solution should have been found in long-term, fundamental policies like expanding educational opportunities for low-income groups. Nevertheless, the political sphere persistently implemented stopgap measures to temporarily appease the discontent of low-income groups by enabling them to take on more debt to own homes. This resulted in the formation of a housing price bubble, which ultimately led to the financial crisis.
A policy failure often cited in this context is the Community Reinvestment Act (CRA). The CRA is a system designed to encourage banks to increase lending or investment in underserved areas, aiming to expand financial access for low-income groups. The ‘government culprit theory’ argues that this law forced banks to increase home loans even to low-income individuals with poor repayment capacity, and this chain reaction of increased lending ultimately led to the subprime mortgage crisis. They also highlight additional ripple effects caused by the Community Reinvestment Act. Financial institutions, in expanding lending to low-income borrowers under the Act, relaxed their underwriting standards. Furthermore, they broadly eased criteria even for loans unrelated to the Act, thereby inflating the housing price bubble.
Recently in the United States, as the ‘government culprit theory’ has gained renewed traction, numerous studies have examined how well this argument aligns with reality. During these discussions, various counterarguments to the ‘government culprit theory’ have been presented under the name ‘regulatory failure theory,’ while simultaneously shedding new light on the political context of the ‘government culprit theory.’ The ‘regulatory failure theory’ emphasizes that the reckless borrowing and expansion of securitization by financial institutions were the result of their active lobbying efforts, pointing out that this trend even hindered the stable growth of the real economy. Furthermore, the ‘Regulatory Failure Theory’ highlights the structural feature that, amid continuously worsening income inequality over the past thirty years, the wealthy—who gained more income—accumulated even greater wealth, particularly through financial asset investments and tax cuts, alongside their strong political influence. According to this view, the increase in low-income households’ debt was not due to political paternalism, but rather a natural consequence of the wealthy and financial sector maximizing their own profits. This insight offers a new perspective on interpreting the relationship between deepening inequality and financial crises, and remains a crucial topic even amidst the changes in the U.S. economic and political structure and research findings from 2008 to the present.
