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Securitization, Social Distance, and Financial Crises

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  • David Zalewski

Abstract

Because the process of securitizing home mortgages played a critical role in precipitating the recent financial crisis, it is widely agreed that this market must be reformed to prevent future collapses. Most proposals focus on improving the dissemination of information among securitization participants, and on strengthening incentives to discourage excessive risk-taking. This paper argues that because securitization involves the commodification of the lending relationship, it reinforces the type of self-interested behavior that often undermines regulatory efforts. What are needed are structural reforms that encourage moral behavior by narrowing the social distance between lenders and borrowers. This can be accomplished by a return to traditional banking lending, supplemented by the use of covered bonds to loosen credit constraints and to help financial intermediaries manage market risk.

Suggested Citation

  • David Zalewski, 2010. "Securitization, Social Distance, and Financial Crises," Forum for Social Economics, Taylor & Francis Journals, vol. 39(3), pages 287-294, January.
    • Handle: RePEc:taf:fosoec:v:39:y:2010:i:3:p:287-294
    DOI: 10.1007/s12143-010-9063-8
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    References listed on IDEAS

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    1. Greg Hannsgen, 2004. "Borrowing Alone The Theory and Policy Implications of the Commodification of Finance," Finance 0402011, University Library of Munich, Germany.
    2. Smith, Adam, 1759. "The Theory of Moral Sentiments," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1759.
    3. Ingo Fender & Janet Mitchell, 2009. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, September.
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    Cited by:

    1. Sylwester Kozak & Olga Teplova, 2012. "Securitization As A Tool Of Bank Liquidity And Funding Management Before And After The Crisis: The Case Of The Eu," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 8(4), pages 30-43, February.
    2. Ngwu, Franklin N. & Chen, Zheyang, 2016. "Regulation of securitisation in China: Learning from the US experience," Research in International Business and Finance, Elsevier, vol. 37(C), pages 477-488.

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