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The Local Geographies of the Financial Crisis-Reading Notes.pdf

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McGill University
GEOG 216
Geraldine Akman

The Local Geographies of the Financial Crisis 12/5/12 1:25 AM 1. Introduction Local geographies have been inextricably linked to and constitutive of global processes. Local sub-prime mortgage lending ended up as securities traded on global bond markets à undermined securities when they collapsed The recent financial crisis is an example of ‘glocalisation’. 2. Making the Case for a Geographical Perspective Richard O’Brien • Globalization • Money is hyper-fungible and hyper mobile • Geography is irrelevant But… • Countries differ in banking structures, regulatory regimes and arrangements • Financial markets are controlled from specific places Globalization has made monetary-space both multi-scalar and more complex. • Monetary-space is a space of transactions and a space of places. • Delocalized local financial circuits • Localized the global Monetary-space has become glocalised: the local and the global have become inextricably interwoven. 3. The New Globalized Model of Local Mortgage Lending Factors to explain the housing bubble • Falling real mortgage rates • Demographic trends • Income growth • The treatment of housing as an investment and speculative asset • Country-specific factors US and UK: ‘perpetual money machine’ illusion • Unprecedented process of debt financed wealth creation and consumption In the US, homeownership is viewed as a key driver of economic growth. Recent House Price Bubble • Drew in new mortgage lenders • New models for mortgage lending • An end to geographical and product restrictions • Securitization o Securitizing loans in the form of mortgage backed securities, collaterized debt obligation and other exotic financial instruments New ‘Locally Originate, Globally Distribute’ Model • Local home buyer gets a loan from the bank • The buyer makes monthly payments, but rather than the bank holding the loan it is parceled with other loans and sold to investors • Used for investors to hold their money • SIVs and SPVs This new model globalized local mortgages. This expansion of mortgage lending was extremely profitable for banks. à subprime loans Loans with substantial default risk were being bundled into privately backed securities. ‘buy-to-let’: using housing as a speculative asset, personal income or pension generating device 4. Local Housing and Mortgage Bubbles Rising house prices and the mortgage lending spree became mutually reinforcing financial bubbles. The housing bubble did not equally distribute itself across the US. Three Types of Cities 1. Cities that were characteristically supply-constrained and which traditionally have had ‘cyclical markets’ • NY, Boston, LA, San Fran 2. Cities of slow economic growth and less constraints on new housing construction, had ‘steady markets’ • Atlanta, Charlotte, Chicago, Denver, Detroit 3. Cities that were ‘recent boomers’; those which ahs previously stable markets but experienced major waves of speculative house building and extraordinary increased in house prices • Las Vegas, Miami, Phoenix, Tampa Highly spatially differentiated and uneven process 5. The Local Geographies of the Sub-Prime Crisis Major and Unexpected fall in housing
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