The legal rules enabling the financial crisis: repo market protections

At the recent Classcrits III:  Rethinking Economics and Law workshop, Jennifer Taub (Isenberg School of Management at UMass) opened our eyes to the complex world of “repos” or repurchase agreements.  As Taub blogged recently in A Whiff of Repo 105, the “mainstream and dangerous use of repurchase agreements backed by securitized bonds to grow balance sheets… directly destabilized the financial sector and led to the ultimate credit crisis of 2008.” As usual, it was not simply “the market” that created the $7-10 trillion repo financing market, but new legal protections in the 2005 federal bankruptcy reform legislation, and of course those legal protections do not reflect the incompetence of government per se but the power of the private financial industry lobby to shape government in its (short-term) interest .

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