That's the title of my column in ET today.
The present crisis has been called a 'sub-prime crisis'. This does suggest that sub-prime loans- loans to not very credit borrowers or financial inclusion- underlies the present crisis. Once you take this view, there is a whole cast of villians available- the US Fed which flooded the world with liquidity; greedy borrowers; greedy bankers; political pressure for financial inclusion.
This, I argue in my column, is rather simplistic. There have been housing bubbles earlier, banks have extended themselves in making housing loans but we have not had a global financial crisis. To complete the chain of causality from a housing bubble through sub-prime loans to a financial crisis, you need to bring in a vital link: the 'marketisation' of loans, that is, conversion of loans into traded securities.
This 'marketisation' was made possible by incorrect credit rating. The securities passed into the hands of non-regulated or lightly regulated entities such as investment banks and hedge funds. These institutions face mark-to-market accounting on their securities portfolios whereas bank loans are not marked to market. This sort of accounting tends to exaggerate losses especially where illiquid portfolios are concerned.
If the financial system had been exposed only to sub-prime loans, we would not have had such a big problem. It is their exposure to sub-prime loans through sub-prime related securities that has created havoc. So, the problem is not financial inclusion, it is poor regulation.