1 Subprime Mortgage Market and Current Financial Crisis

This contribution demonstrates that the August 2007 financial crisis was the result of three forces: financial liberalization, financial innovation and easy monetary policy in a number of countries around the globe. The financial liberalization era allowed financial institutions to initiate a new financial activity, which was based on the discretion of the banks to dispose of their loan portfolio in accordance with risk management. That financial innovation relied heavily on interlinked securities and derivatives, all related to asset backed-securities and subprime mortgages in particular. Subprime mortgages was a financial innovation designed to enable home ownership to risky borrowers. It is, therefore, the contention of this contribution that the origins of the current financial crisis can be explained by these three interrelated features that have been going on since the 1970s. But the root of the current financial crisis is the creation and subsequent developments in the subprime mortgage market, the focus of this contribution