The roles of financial innovation, information technology and geographical responsibility: lessons from the US Sub-Prime Mortgage Crisis

Abstract

The mortgage loan has evolved from a local lending instrument into a major global security and its role is unparallel to other financial instruments in the process of financial globalization. This presentation explains how technology and financial innovation transformed the mortgage loan from a local security into a premier global security traded worldwide. It examines the fundamental flaws of this process and why it doesn't work in regards to mortgage lending and the re-securitization products that were created through financial innovation. The findings show that regulation was unable to keep pace with financial innovation, which created an environment where actors in the financial service sector were able to behave geographically irresponsibly by using information asymmetries to their advantage, by participating in moral hazard activities, and engaging in other immoral and unethical business practices that were centered around localized geography, which ultimately contributed to the current global financial crisis.