I’ve been trying to follow a nagging thought through to its conclusion. We know to expect that flooding risk will extend to an ever increasing proportion of the UK housing stock. But in the context of financialisation, mortgages underpin bank lending, and by extension the wider financial system. And a majority of households depend on their house as a savings vehicle. So what happens when physical climate impacts destroy the real assets that households and the financial system are relying upon?
This is part 3. Explaining the 2008 Crash.
In the US and UK economies, a distinct pattern emerged where several factors worked together to create sustained economic growth: low interest rates encouraged borrowing, which fuelled both consumer spending and asset purchases. This increased domestic demand and drove up asset values, creating a self-reinforcing cycle that supported stable economic expansion. So much so that economic growth started to be taken for granted.
The decade before the 2007-08 financial crisis was NICE: non-inflationary, consistently expansionary. However, it rested on a confusion of stability with sustainability.
How financialisation led to the crash
The 2007-08 financial crisis emerged as a direct consequence of how debt creation and securitization had evolved in the US financial system. During the early 2000s, the Federal Reserve (the US central bank) had a policy of maintaining low interest rates created conditions that encouraged aggressive lending, particularly in the housing market. Commercial banks, operating under the ‘originate and distribute’ model, seized this opportunity to create money through mortgage lending on an unprecedented scale. They extended mortgages to borrowers who previously would not have qualified for home loans, often using adjustable rates that would increase significantly after an initial period.
The critical mechanism that amplified this lending into a systemic crisis was securitization. Banks bundled these mortgages into Collateralized Debt Obligations (CDOs), effectively transforming individual loan contracts into tradeable financial instruments. Through special purpose vehicles, banks transferred these mortgage pools off their balance sheets, selling ownership claims to the anticipated revenue streams from mortgage payments to investors across global financial markets. However, this process obscured the fundamental risk of the underlying loans. The multiple overlapping ownership claims created through securitization meant that when interest rates rose between 2004 and 2007, the impact of borrowers defaulting on their mortgages reverberated throughout the financial system. As households became unable to meet their mortgage payments, the revenue streams underpinning CDOs collapsed, rendering these securities worthless.
This triggered a chain reaction of bank failures, as institutions that had either originated these loans or invested in these securities found themselves holding assets whose value had evaporated, ultimately leading to a worldwide recession. The crisis revealed how the power to create money through debt issuance, combined with the ability to distribute ownership claims to debt revenues through securitization, had created a fragile financial structure built on increasingly risky lending practices.
thejoyofrachel 
That’s a hard lesson, but simple enough to learn.
I wonder if anyone in banking learned it, or if they’re too addicted to easy money to change their ways.
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