Beyond the Minsky and Polanyi Moments

• DOI: 10.1177/0032329215617463
• Date: 01 March 2016
• Published date: 01 March 2016
• Author: Kurtuluş Gemici
• Subject Matter: Special Section Articles

Politics & Society

2016, Vol. 44(1) 15 –43

© 2015 SAGE Publications

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DOI: 10.1177/0032329215617463

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Special Section Article

Beyond the Minsky

and Polanyi Moments:

Social Origins

of the Foreclosure Crisis*

Kurtuluş Gemici

National University of Singapore

Abstract

The period of very high foreclosure rates sets the 2007–8 financial meltdown

apart from similar banking crises fueled by asset price booms. Why did the 2007–8

meltdown lead to a prolonged foreclosure crisis? Through a theoretical perspective

built on Minsky’s financial instability hypothesis, Polanyi’s ideas about adverse

consequences of commodity fiction, financialization of homes, and institutional

coupling, I argue that commodifying houses as financial assets exposed mortgage loan

holders to price fluctuations originating in capital markets and elevated their risk

of default. I show how increased exposure to price fluctuations followed from the

tight coupling between U.S. housing and capital markets, a coupling that resulted

directly from the rising preponderance of securitization in U.S. housing finance. I

provide further evidence from countries where housing finance was tightly coupled

with capital markets (Iceland and Ireland) to countries where housing finance did not

rely dominantly on capital markets (Canada and the Netherlands).

Keywords

housing foreclosures, securitization, institutional coupling, financialization, financial

instability, great recession

Corresponding Author:

Kurtulus¸ Gemici, Department of Sociology, AS1 03-06, 11 Arts Link, National University of Singapore,

Singapore 117570.

Email: kgemici@nus.edu.sg

*This is one of four articles in the March 2016 issue of Politics & Society on the topic of “The

Contradictory Logics of Financialization.” The papers were originally presented at a workshop held at

the Marconi Center in Marshall, California in May 2013 that was supported by the journal and a grant

from the Ford Foundation.

617463PASXXX10.1177/0032329215617463Politics & SocietyGemici

research-article2015

16 Politics & Society 44(1)

The world economy has yet to emerge out of the slump caused by the greatest financial

crisis since the Great Depression. Few commentators question the diagnosis that the

crisis originated from a financial system that has engendered systemic fragility for the

past three decades. This recognition is deemed “the Minsky moment” and is now part

of mainstream discourse on the financial crisis.1 Another inescapable recognition is

the substantial social cost of the financial crisis. Extending the analogy, one can call

this “the Polanyi moment”—the realization that markets, when left to their own

devices, are destructive to social relations and fabric. The dire consequences of the

2007–8 crisis are a testament to the power of Polanyi’s insights on the perils of mar-

kets. These consequences—in particular the massive surge in foreclosures for an

extended period of time—are the focus of the analysis presented here. Thus in this

paper I aim to explain why the elevated level of foreclosures persisted for a prolonged

period of time.2

Financial crises are often associated with severe disturbances to financial markets

that cause sharp movements in inflation, credit volume, balance sheets of various

actors, asset prices, interest rates, and value of domestic currency.3 Similarly, a fore-

closure crisis is associated with sharp increases in mortgage defaults and foreclosures.4

Whereas various types of financial crises can instigate sharp increases in foreclosures,

a foreclosure crisis can originate from other macroeconomic phenomena such as a

sudden rise in unemployment. Typical discussions of the 2007–8 crisis bundle the

discussion of financial meltdown with the discussion of the severe downturn in hous-

ing markets.5 Such a view is misleading, because it inevitably portrays the prolonged

rise in foreclosures as a collateral damage from the financial meltdown. In contrast, I

argue that an institutional mechanism—the tight coupling between the housing sector

and financial markets—was the root cause of the magnitude and prolonged nature of

the foreclosure crisis in the United States.6 In countries such as Iceland and Ireland,

financial meltdown did not lead to a foreclosure crisis because various social institu-

tions and government action acted as circuit breakers between financial markets and

housing sector.7 This is despite the fact that financial meltdowns in these countries

were either comparable or more severe than the one in the United States.

The increasing coupling between the housing sector and financial markets after the

1970s reembedded homes into the circuits of capital markets. This institutional change

resulted in converting homes into liquid financial assets subject to the endogenous

instability of financial markets, which implied that households were increasingly

exposed to the inherent destructiveness of financial markets. This explanation com-

bines insights from studies on institutional coupling, financialization,8 embeddedness,9

and financial instability hypothesis.10 Such an approach differs from the mainstream

literature by suggesting that factors such as securitization, the credit bubble, and

household debt were only the proximate causes of the foreclosure crisis.11 It also

diverges from the literature on financialization of homes, as this literature is vague

about the causal mechanisms producing greater instability in housing markets.12 In the

existing literature, Mian and Sufi’s analysis of debt in the U.S. economy is the one that

is most relevant to the argument presented in this article, as these authors focus on the

severity of the foreclosure crisis and aim to explain the negative cascade caused by the