The problem with financializing a critical sector of the economy is the financialization process transforms it into a systemic risk. The trajectory of every financialized sector is the same: debt and leverage are piled ever higher on a base of collateral that eventually collapses as heightened risk becomes the Monster Id of a crowded trade.
Once the Monster Id burns through the firewalls that were supposed to limit risk, the crowded "safe" trade blows up and the conflagration quickly spreads throughout the financial system.
Every financialized sector thus has the potential to take down the entire financial system.
The mortgage sector is a prime example of this dynamic. The financialization of the mortgage industry created the subprime mortgage firetrap, which inevitably caught fire and threatened to burn down the entire global financial system.
The central bank that encouraged the financialization then has no choice but to intervene to save the system from the toppling dominoes of leverage and risk. Once the mortgage sector was fully financialized--securitized, tranched, packaged into collateralized debt obligations and other derivatives--the implosion of the weakest link (subprime mortgages backed by bogus collateral and liar loans) was baked into the financialization process.
As the systemic dominoes started falling, the Too Big to Fail (TBTF) banks had to be bailed out to the tune of trillions of dollars in guarantees, backstops and loans. As correspondent Mark G. has noted, the debtors are left to suffer the consequences of their risky debt, but the big creditors are saved from the consequences of their bad bets.
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