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Borrowing Alone: The Theory and Policy Implications of the Commodification of Finance

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  • Greg Hannsgen

Abstract

Over the past 20 years, finance has become commodified. Firms increasingly obtain finance from securities markets, instead of borrowing from commercial banks with which they have long-term relationships, while Fannie Mae and Freddie Mac package a growing number of mortgages into bonds. When loans are priced by impersonal markets rather than by individual bankers, they become more like commodities. As in many cases when goods are commodified, this trend has important policy implications. This paper describes new Keynesian and social economics perspectives on the difference between traditional and securitized loans, and points out weaknesses in their account of the significance of banking relationships. A social theory of banking, and, particularly, of risk perception, is then developed. Finally, the policy implications of the commodification of finance are examined in light of the social theory.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_401.

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Date of creation: Jan 2004
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Handle: RePEc:lev:wrkpap:wp_401

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  1. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-86, December.
  2. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  3. William F. Bassett & Egon Zakrajsek, 2003. "Recent developments in business lending by commercial banks," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 477-492.
  4. Ferrary, Michel, 2003. "Trust and social capital in the regulation of lending activities," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 31(6), pages 673-699.
  5. Arturo Estrella, 2002. "Securitization and the efficacy of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 243-255.
  6. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Biagio Bossone, 2002. "Should Banks Be Narrowed?," Economics Working Paper Archive wp_354, Levy Economics Institute.
  9. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
  10. Thomas Palley, 2007. "Asset-based Reserve Requirements: A Response," Review of Political Economy, Taylor & Francis Journals, vol. 19(4), pages 575-578.
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Cited by:
  1. Greg Hannsgen, 2006. "A Random Walk Down Maple Lane?: A Critique of Neoclassical Consumption Theory with Reference to Housing Wealth," Economics Working Paper Archive wp_445, Levy Economics Institute.
  2. David Zalewski, 2010. "Securitization, Social Distance, and Financial Crises," Forum for Social Economics, Springer, vol. 39(3), pages 287-294, October.

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