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A normal accident analysis of the mortgage meltdown

Markets on Trial: The Economic Sociology of the U.S. Financial Crisis: Part A

ISBN: 978-0-85724-205-1, eISBN: 978-0-85724-206-8

Publication date: 9 July 2010

Abstract

We use normal accident theory to analyze the financial sector, especially that part of the financial sector that processed home mortgages, and the mortgage meltdown. We maintain that the financial sector was highly complex and tightly coupled in the years leading up to the mortgage meltdown. And we argue that the meltdown exhibited characteristics of a system or normal accident; the result of a component failure (unusually high mortgage defaults) that, in the context of unique conditions (which included low interest rates and government policy encouraging home loans to less credit-worthy households), resulted in complex and tightly coupled interactions that financial elites and government officials were ill-equipped to control. We also consider the role that agency and wrongdoing played in the design of the financial system and the unfolding of the mortgage meltdown. We conclude that a fundamental restructuring of the financial system, so as to reduce complexity and coupling, is required to avert future similar financial debacles. But we also conclude that such a restructuring faces significant obstacles, given the interests of powerful actors and the difficulties of labeling those responsible for the meltdown as wrongdoers.

Citation

Palmer, D. and Maher, M. (2010), "A normal accident analysis of the mortgage meltdown", Lounsbury, M. and Hirsch, P.M. (Ed.) Markets on Trial: The Economic Sociology of the U.S. Financial Crisis: Part A (Research in the Sociology of Organizations, Vol. 30 Part A), Emerald Group Publishing Limited, Leeds, pp. 219-256. https://doi.org/10.1108/S0733-558X(2010)000030A011

Publisher

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Emerald Group Publishing Limited

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