What will be the repercussions of the current financial crisis for future housing system?

The global financial crisis began as a housing crisis within the US: predatory loans made on a massive scale to low-income homeowners prioritised sub-prime lending. Such loans never had the capacity to be repaid, but were pooled and traunched in securities that should have been accorded Tier 1 status but due to the financial engineering employed, were sold on as AAA, as safe as Treasury bonds.  Following the Clinton period Treasury bonds were in short supply, given fiscal austerity arising from a low tax fiscal regime combined with the steady repayment of historic Government debt. It was this shortage of Treasury bonds combined with market liberalisation, via the emergence of shadow banking, that brought about this financial innovation.

Homeowner defaults in record numbers saw the US housing bubble burst, triggering a vicious cycle of depreciating assets and securities fire sales. Because of the role and nature of shadow banking the crash in the asset backed securities market was not contained global market confidence was shattering market: more bank runs, more fire sales and eventually the entire banking system seized up. Credit dependency demanded quantitative easing to loosen up credit: massive bank bailouts paid for by the taxpayer in jurisdictions whose banks had exposure to these toxic assets. Its enormity saw Government debt skyrocket, leaving no public money for anything else.

Through adopting a historic analysis, this paper traces the departure from what could be termed ‘Keneysian’ economics into market liberalisation. It argues that this has seen our understanding of home ownership change, a change that has delivered massive consequences for households, banks and governments. Given the continued desire for high yield, low risk securities and Governments’ reluctance to bring about dramatic banking reform what are the potential future trajectories of this arrangement for the housing system?