The basic argument about ''sub-prime'' lending causing the crisis however was a flawed one. The banks had given loans to the so-called ''sub-prime borrowers'' against the security of the houses they had bought with these loans. If the values of the houses collapsed then banks’ asset values collapsed relative to their liabilities, precipitating a financial crisis. The cause of the crisis therefore lay not in the identity of the borrowers, the fact of their being ''sub-prime'', but in the collapse of the asset values, which in turn was because asset markets in a capitalist economy are dominated by speculators whose behaviour produces asset-price bubbles that are prone to collapse. Indeed when the banks were giving loans against houses to the so-called ''sub-prime borrowers'', they too were essentially speculating in the asset markets, using the ''sub-prime borrowers'' only as instruments, or as mere intermediaries in the process.
To attribute the crisis to sub-prime lending therefore amounted to shifting attention from the immanent nature of the system, the fact that it is characterized by asset markets, which are intrinsically prone to being dominated by speculators whose behaviour produces asset-price bubbles that necessarily must collapse, to a mere aberration, a misjudgement on the part of the financial institutions that made them lend to the ''wrong people''. It was a deft ideological manoeuvre. The identity of the people who borrowed, whether they were in rags or drove limousines, was actually irrelevant to the cause of the crisis, but it was presented as the cause. The blame for the crisis was put falsely on ''sub-prime lending''; and a fabrication, a complete myth, called the ''sub-prime crisis'' was sold to the world, quite successfully.
Wednesday, March 16, 2011
The Myth of the "Sub Prime" Crisis
Dr. Prabhat Patnaik, Economics Professor at Jawaharlal Nehru University in New Delhi, explains how the shifting of blame to Fannie and Freddie is a myth.