Friday, October 2, 2009

Geographies of the Financial Crisis

by Manuel Aalbers

The article "Geographies of the Financial Crisis" looks at the geographical aspects of the global financial crisis, in order to provide a better understanding of its causes and consequences. Mortgage lenders, being key players in the financial crisis and discussed, beginning with the transition from local to national mortgage lending . After the S& L crisis of the 1980s, borrowers and investors alike were wary that there weren't enough options available. S&L markets evolved to satisfy this need. This first transition was rationalized by the proposal that spreading the risk amassed by Savings & Loans institutions would not only allow for loans to be distributed to a larger population, but would also reduce interest rates on the loans. The transition from national S& L markets to national financial markets in general, or Securitization was initiated by Fannie Mae and Freddie Mac in the 1960s, on the basis that connecting S & Ls to other markets would allow for more funds to be garnered and used as loans.

As non-bank lenders entered in the markets, there grew a demand for low-risk investments, which mortgages were purported to be ,and the number of mortgage loans offered increased as the requirements for application relaxed. Mortgages loans were marketed as not just low-risk, but high-return investments, resulting in underestimated risk and overestimated returns on the markets. Globalization and financialization of mortgage markets was underway but the consequences ere yet to be seen as they hidden under the bubble. The article gives an example of the effect on small municipalities around the globe, by discussing Narvik, Norway, a town with a population of only $18,000. The city council was advised to invest in an RMBS securities compiled by a US lender (Citigroup) and the crisis has cost the city council almost all of a $78 million investment. While this may not be too large a loss for larger investors, the loss has been critical for the city of Narvik, which has had to cancel plans on infrastructure and left the city council unable to pay civil servants.

The boom of the 2000s brought sub-prime lending and adjustable rate mortgages (ARMs)both of which were wrongfully marketed and whose risk was grossly understated to investors. The article states that with housing prices declining by 10%, about half of the $1 trillion in ARMs subject to resetting in 2007 would drop to negative equity. Although not discussed in detail, the article points out that there is factual evidence to the defense that regulation and deregulation not only enabled, but stimulated securitization and sub-prime lending. Just as important, some American states which attempted to pass tougher predatory lending laws were blocked by federal agencies. The geography of mortgage lending delves deeper into predatory lending, a subset of sub prime lending that the authors have observed as targeted towards low-income, unsophisticated, and minority populations.

Higher percentages of loans were deemed predatory in areas with minority populations as compared to predominantly white areas. The most important observation about the financialization in regards to national geography is that " Decades of financial deregulation have not resulted in wider access to mainstream financial services, but in a two-tier banking system with mainstream finance in most places next to a landscape of financial exclusion and predatory lending where banking services and the number of bank accounts have declined and fringe banking (pawn shops, payday lenders etc.) and predatory lending flourishes"(38).

Changes in the global geography are visible as of the wave of M& A(mergers and acquisitions) in the spring of 2008. Those banks that have gotten bigger represent a larger portion of the financial map and could reveal new primary and secondary financial centers worldwide. In contrast to history, these new financial centers are likely to be located outside of North America, although the two largest (New York and London) don’t seem to threatened to a large extent. Ultimately, the impact of the global financial crisis has been arguably more adverse on non-financial institutions. Deregulation, subprime and predatory lending have led to a new topographical image of the global financial map. In fact the authors state that "globalization has come full circle" due to the increasing investment in US financial markets by foreign investors, often in undeveloped countries.

While it is factual that foreign investments have grown immensely, I do not believe that we can state ' globalization has come full circle' until other aspects of globalization reverse themselves as well. This article only shows the financial aspect, and albeit large, the social and cultural aspects are yet to show reversal. The Western and most developed countries still continue to show dominance in social and cultural globalization.

Journal compilation © Royal Geographical Society
Area Vol. 41 No. 1, pp. 34–42, 2009

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