Thursday, November 15, 2007

Financialization brought you the "subprime crisis"

Banks may lose $400 billion in bad investments relating to the U.S. subprime market. (source)

That's the bank side of the story. What about people in houses? What will they lose? How many children will be affected? How many families' financial prospects dashed? How many made homeless?

Financialization sits at the center of the crisis, which is completely man-made.

Acquaint yourself with this shift of priorities from the real sector (where a house is a house) to the financial sector (where a house spawns a securitized debt instrument) by reading "Financialization: What It Is and Why It Matters," by economics professor Thomas Palley, UMass Amherst.

From the abstract?
"Financialization is a process whereby financial markets, financial institutions and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic system at both the macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector; (2) transfer income from the real sector to the financial sector; and (3) increase income inequality and contribute to wage stagnation. There are reasons to believe that financialization may render the economy prone to risk of debt-deflation and prolonged recession."

Happy reading, it is not. Essential reading? Yes.