I RECENTLY PARACHUTED into the crucible of the American policymaking debate when I was invited to present alongside Robert Shiller of Yale at a private summit for Obama administration officials on the future of housing policy. There it struck me that the world I perceived was conspicuously different to the one my American colleagues could see. In analysing why, for instance, Canada’s, New Zealand’s and Australia’s financial systems were in such radically better shape, I began to realise that there was a fundamental frailty in the foundations of America’s financial architecture. This has largely been responsible for precipitating the current crisis and propagating it around an increasingly interconnected world.

The problem is ostensibly simple: the vast bulk of American home loans are not funded using the balance sheets of large transnational banks and the regionally diversified retail deposits of their customers, but through the far more complex and sometimes unstable process of ‘securitisation’. This moves the loans off banks’ balance sheets by selling them to third-party investors, so the lender can recycle the original capital into new loans. During periods of extreme uncertainty it can become an unreliable source of finance, supplied by a small number of sometimes fickle institutional investors that can withdraw from the market at a whim. In the rest of the developed world, securitisation, if it exists at all, has been a small yet important part of the housing-finance mix. In America it dominates home-loan funding.