New work by Jordà, Schularick and Taylor highlights the role of mortgage finance in the financialisation of advanced economies. It also reveals that real-estate lending booms are mainly responsible for financial crises and weak recoveries. I'm broadly sympathetic to their findings. In my new book Banking in Crisis, the role of mortgage finance in the demise of UK banking stability is highlighted. But I also highlight why banks have become addicted to high-risk mortgage finance. First, there is an absence of proper incentives which keep bankers honest. Second, it is in the interest of the political elite to let banks engage in risky mortgage financing.
|For 17 advanced economies|