Financialization Promotes Dangerous Speculation- Financialization has involved considerable ‘innovation’, often of opaque, complex and poorly understood financial instruments. These instruments typically have large debt components involving leveraging, deepening connections across markets and borders.Three important financial innovations that have changed the financial landscape — by promoting speculation, amplifying risks, and increasing economies’ vulnerability to financial vicissitudes — are securitization of debt, derivatives and the repo market.
Before the 2008 global financial crisis, CDSs were used to provide ‘insurance’ on CDOs. CDS issuers guaranteed the financial viability of CDOs, for a premium. Issuing CDSs was seen as a risk-free way to capture premia, by assuming that the asset prices underlying the CDO would always rise; CDOs could thus continue generating cash flows even when subprime borrowers defaulted.