Launched in 2014, the European Commission’s project to create a Capital Markets Union (CMU) involves a return to pre-crisis ideas and mechanisms and, more specifically, a reviving of the nearly collapsed securitization market. According to the project’s official rationale, good quality securitization can help the European economy out of an enduring recession and onto a path of ‘growth and jobs’. Yet the current – and often very technical – discourse around securitization obscures the unequal power relations that securitization implies. A genuinely democratic debate on the CMU cannot shy away from looking into what securitization really is about: making profit out of people’s debts.
This expert opinion was written in response to our research article on the European Capital Markets Union: Europe and the financial sector: a continuing love affair.
Securitization is a financial technique that consists of transforming illiquid assets (mortgages, student loans, credit card debt, medical bills) into tradable financial products. These ‘asset-backed securities’ are sold to investors such as investment banks, insurance companies or hedge funds. Although securitization dates back to the 1970s and has been a driver of financial expansion since then, it was during the US subprime mortgage crisis that securitization came to the forefront. The role that it played (along with derivatives) in encouraging risky mortgages to be repackaged and sold as safe products was widely criticized.
The strange return of securitization
In spite of this criticism, since about 2013 we have been witnessing in Europe a rather surprising rehabilitation of securitization, with a wide range of European policymakers vocally supporting the once controversial financial practice. For instance, securitization was put forward in the 2013 Green Paper on the ‘Long-term financing of the European economy’, while the Bank of England and the European Central Bank made the case “for a better functioning securitization market” in May 2014. Most recently, as part of the CMU project, two proposals aimed at reviving securitization have been approved by European member states and are currently being discussed by the European Parliament.
This seemingly paradoxical shift is part of a broader policy shift – in fact, a return to ‘politics as usual’ after a period of tedious yet limited reform of the financial sector. The post-2008 focus on prudential regulation has given way to a renewed interest in financial actors (especially those of the shadow banking system), who are now seen as part of the solution rather than part of the problem. We are once again turning to the market “to deliver solutions” and to securitization to work wonders.
Securitization as a means to an end?
It is argued that reviving the securitization market can be helpful, because it makes banks more likely to lend to the ‘real economy’. This in turns allows enterprises and households to invest and consume, thereby contributing to a growing economy. The reasoning is as follows: Basel rules (the ‘capital requirements’ rules in the EU) require banks to hold a certain amount of capital relative to the overall volume and riskiness of assets on their balance sheet. By enabling banks to sell off some loans, securitization is said to ‘free up’ bank capital and the ‘space’ liberated can be used to extend new loans to the so-called real economy. Although the basis of this technical pro-securitization logic is controversial for several reasons, what interests us here is what such widespread messaging obscures.
Do we need securitization, or does securitization need our debt?
Debt is, undeniably, at the very heart of securitization. However, by focusing first and foremost on one side of the securitization dynamic, current discourses are obscuring and even reversing the dependency relationship on which securitization is based. In the official story, we – European citizens – need securitization to get out of the current crisis. In fact, it would be just as accurate to say that it is the securitization industry that needs our debt. Indeed, the very existence and trading of securitized products necessitates a constant supply of ‘securitizable’ assets that produce regular flows of money, such as debt repayments. This is why Susanne Soederberg refers to securitization as the ‘commodification of debt’: through securitization, debt contracts and debt relations themselves are turned into commodities to be bought and sold for a profit by financial investors.
Thus, and although the securitization and debt puzzle is similar to the chicken or the egg causality dilemma (you need debt to have securitization, but a vibrant securitization market could help increase lending), it is important to highlight that banks’ ability to tap into increasing volumes of securitizable assets depends on the participation of companies and households as suppliers of regular (debt) payments towards financial institutions, be it through mortgages, car loans, student loans or any other type of credit. These debt relations, however, are far from neutral: they express profound power imbalances.
What matters is who benefits and who loses out
In current securitization debates, increased access to credit via securitization is presented as an objective in itself. The question of debt is a non-question: it is automatically assumed that credit (a neutral supplicant of debt) is good for the general interest, a mere economic exchange devoid of issues of power and interest. But is it?
In mainstream discourses and in economics departments, debt is generally described as a ”technical and equal exchange of money between a creditor and a debtor”. From a more critical perspective, however, debt is best understood as a form of power. One party enters into the relation to make a profit, the other often does so out of sheer necessity.
Declining wages and general precariousness – not to mention aggressive marketing on the part of the debt industry – have indeed been pushing an ever-increasing share of the population towards various forms of credit. Not only does debt produce “feelings of responsibility and guilt”, it also functions via the mediation of the state and its regulation of the credit market to transfer wealth “from those who need money to those who already have [it]”.
Vulnerable population groups are often denied access to traditional forms of credit and therefore rely on the most blatantly abusive types of debt such as payday loans, while wealthier groups are able to use financial services to secure the growth of their incomes, for example, by avoiding taxation via offshore financial arrangements. Private consumer debt thus increases inequalities and reinforces unequal power relations in favour of creditors and owners of capital.
While the legislative efforts to revive the securitization market and to extend capital markets to individuals and small and medium-sized enterprises (SMEs) are likely to lead to a further financialization of ‘everyday life’, the way the discussion has been framed prevents a deeper reflection on the implications of more securitization and more finance. Through a widespread discourse portraying securitization as desirable to increase ‘access to credit’, indebtedness is normalized and depoliticized as a basic condition for a healthy economy. Although it is not necessarily meant to do so, the official rationale still obscures what securitization is about: the commodification of debt – e.g. the accumulation of profits in the financial sector, facilitated by the extension of (unequal) debt relations. Engaging in current discussions around the CMU is necessary, but it is only through the deconstruction of the pervasive official and technical language that a genuinely democratic and political debate will emerge.