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date: 08 May 2021

Abstract and Keywords

This article provides a brief account of the mortgage securitization industry: the role of government in creating the market; the role of firms and innovative actors in constructing the market; and the evolution of financial products as pragmatic solutions for sellers to overcome objections of buyers. It shows how firms came to sow the seeds of their own destruction in 2002–7. The article is organized as follows. First, it proposes a general way to understand the financial cycle and the link between governments, firms, and the growth of financial products. Then, it considers the case of the market for mortgage securitization. Next, it documents how the government invented the market in the 1960s. It moves on to the building of the market from 1970 until 1993. Then, it examines how the industry changed from 1993–2007 and how this caused the crisis. Finally, it considers the unfolding of the crisis and briefly assesses various arguments about the government's role in causing it. The conclusion returns to a broader discussion of governments, financial crises, financial instruments, and regulation.

Keywords: mortgage securitization industry, financial products, mortgage securitization market, financial crisis, regulation

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