Financial production and the subprime mortgage crisis

The causes of the 2007-8 subprime crisis continue to be the subject of much debate, with explanations ranging from de-regulation and fraudulent behavior to global imbalances and rising inequality. However, a comprehensive analysis of the endogenous forces that made the crisis inevitable has yet to be presented. This paper offers a 'structural' interpretation of the crisis by synthesising insights from conventional financial economics and the Minskyian and Schumpeterian literature. While highlighting the innovative character of US financial firms evolving from credit providers to producers of financial commodities, we stress the key features of their path towards financial fragility.  We contend that financial institutions were able to achieve progressively unsustainable positions due to the 'enforced indebtedness' of US households, which played a functional, albeit secondary, role in the development of the crisis.