A 2009 paper by Manuel Aalbers surveys the geographies of the global financial crisis, the impacts of which continue to be felt. The crisis began with failures in the market for US residential mortgage-backed securities (RMBS), where so-called “subprime mortgages” issued to higher-risk borrowers were re-packaged and re-sold as groups of mortgages, with under-priced risk and over-estimated returns. Grouping the mortgages was supposed to average out the risk attached to individual mortgages, but Wall Street banks originating the securities had little incentive to take sufficient account of the economy-wide risks involved. In addition, much subprime lending took the form of predatory lending to vulnerable communities, with higher interest rates and fees, abusive terms and conditions, and failure to take account of the borrower’s ability to repay. As a result the economic downturn turned into a financial and foreclosure crisis hitting the poorest US communities hardest.
Outside the US, many RMBS were sold to institutional investors without sufficient explanation of the risks, and Aalbers gives the small Norwegian town of Narvik as an example, losing millions of dollars of investments which had been intended to support the construction of new municipal facilities. Much larger sums have been lost by other European institutional investors. There is relatively little Europe can do in the short term to counter these losses; one reaction has been to restrict access of US banks to the bond sales of European governments, so that these lose the relevant commission.
Aalbers, Manuel (2009), “Geographies of the financial crisis“, Area, Volume 41, Issue 1, Pages 34-42
Elena Moya, The Guardian, 8 March 2010, “Europe bars Wall Street banks from government bond sales”
Robin de la Motte