Roles of Financial Innovation and Information Technology: Lessons from US Sub-prime Mortgage Crisis and Its Implications for China
- Publish Date: 2012-04-30
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Key words:
- shadow banking /
- US sub-prime mortgage crisis /
- financial tsunami /
- global financial crisis /
- wealth management vehicle /
- China
asset bubble
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 paper 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 does not 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 global financial crisis. It also examines the roll of financial innovation in regard to
the Lehman Brothers Mini-Bond in Hong and its role as a driving force behind China′s newly emerging shadow banking sector. It concludes
with a policy recommendation and its implication for China′s continued economic development.
Citation: | James H Lenzer Jr, Simon Xiaobin ZHAO. Roles of Financial Innovation and Information Technology: Lessons from US Sub-prime Mortgage Crisis and Its Implications for China[J]. Chinese Geographical Science, 2012, 22(3): 343-355. |