The political economy of the subprime crisis: the economics, politics and ethics of response

Abstract

Media and policy discourses on the subprime crisis and the ensuing credit crunch have been dominated by historical analogies, whereby a sense of how bad things have been since the autumn of 2007 arises from comparing the situation directly to other notable moments of financial meltdown. Typical of this approach is the measured insistence of the Chair of the US Federal Reserve, Ben Bernanke, that the spiral of illiquidity which engulfed the banking sector in September 2008 provided the most serious threat of systematic bank collapses since the Great Depression. Such constructions are clearly not without justification. Commercial banks have been nationalised at a rate unprecedented in recent memory; the once seemingly omnipresent giant US investment banks have failed to survive in their extant form; the UK has witnessed its first genuine run-on-the-bank dynamics since the middle of the nineteenth century; the interest rate spread between inter-bank lending and government bonds has reached record highs almost worldwide; and the drying up of mortgage lending has led to record annual falls in house prices in many countries. However, as an explanatory device, inference by historical analogy alone places unnecessary and unhelpful restrictions on attempts to understand how events surrounding the sub-prime crisis and its associated credit crunch have unfolded