View Full Version : How?

07-23-2008, 03:44 PM
OK given that there is 'difficulty' in the financial section of the USA and the world economies.

It appears to stem from the sub-prime mortgage market.

Surely the sub-prime mortgage market was/is a very small percentage of the financial market, given all the other mortgages, business loand commercial loans etc etc.

How is it that this tiny sector - the sub-prime mortgage market - has caused the economy to be in the situation that it is today?

07-23-2008, 04:30 PM
I think that might be an incorrect assumption. The housing 'bubble burst' didn't merely affect sub-prime loans, it affected ALL loans. People who qualified for prime mortgage terms, even with substantial downpayments, went 'under water' when the bubble burst, and even if they were able to continue payments, the credit-worthiness of the loan is affected. When you combine those with the sub-prime problems, you end up with a huge chunk of assumed 'wealth' that has disappeared.

The problem, in my opinion, has far more to do with the understatement of risk... unintentional AND intentional.... and the same phenomenon is true of a number of other crises, such as the banking crisis, the Enron scandal, the Keating 5 scandal, and so on. Wealth got 'created' when risks were underestimated, or intentionally hidden... aided by de-regulation.... and that 'wealth' vaporized when the truth was known.

Thats why I think of it as "perceived wealth." It takes good luck to make real money in a bubble situation. Despite what many people will tell you, timing a market is hard. Only the very few get it right.



07-23-2008, 04:33 PM
The CEO's, Directors and other big boys kept their bonus' etc.

Surely that was money under false pretences (if accounts were mis-stated etc) and should therefore be given back???

07-23-2008, 04:45 PM
It never happens... likewise property taxes don't go down when real estate prices drop.

07-23-2008, 05:04 PM
"Freddie Mac also pledged to earmark $1 billion in mortgage loans specifically for minorities."

There's some talk here that sub-prime loans were specificaly targeted at 'minority communities', many interest only loans on a 'take it or leave it' basis to people whose economic knowledge was to say the least unsophisticated.

"Are subprime loans targeted at minorities or at minority neighborhoods? Ingrid Gould Ellen, a professor of public policy at New York University, thinks there is evidence it is the latter."

07-23-2008, 05:32 PM
Have you heard this Doug?

" #355: The Giant Pool of Money


A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money."

[url]http://www.thislife.org/Radio_Episode.aspx?sched=1242 (http://www.thislife.org/extras/radio/355_transcript.pdf)

You can listen free or download a transcript.

John B
07-23-2008, 05:37 PM
Why did banks make half-million dollar loans to people without jobs or income?

all there in a nutshell eh.