3 ms·

The unregulated market had a big part to play in causing the current sub-prime mess in the first place. Check out the BBC's explanation of how the sub-prime le

The unregulated market had a big part to play in causing the current sub-prime mess in the first place. Check out the BBC's explanation of how the sub-prime lending model worked: http://news.bbc.co.uk/2/hi/business/7073131.stm?src=rss http://news.bbc.co.uk/2/hi/business/7073131.stm?src=rss In a nutshell, banks used to lend people money with their own assets. Because it was their own money, they made people jump through hoops to make sure they could pay. But in the new model, banks packaged up mortgages and sold them to investors as mortgage bonds. The investors had no idea about the ability of individual homebuyers to pony up for repayments, but they were making a good return. Now that the banks didn't stand to lose, they loosened the standards on their normal checks and balances so that unemployed hobos could buy $500k homes (since there were no regulatory requirements). Ahhh the free market at work. (The reason why so many banks lost money was because they themselves were big investors in the mortgage bond market) The free market does solve problems and self-correct, but it can also cause a bit of damage along the way. The point of common sense regulation and government intervention isn't to stifle the market, but to prod it in the right direction and minimise the pain. Economists call it smoothing out the business cycle. Granted the highs aren't so high, but neither are the lows.

Prrometheus 19y ago
Cheap credit was at the heart of the mortgage bubble. It fueled an unprecedented rise in housing prices. If housing prices rise at a historic rate for 5 years in a row, who cares about credit quality? Foreclose on a home and you own an asset worth 25% more than the mortgage you made! Don't lower your lending standards and you will make 0 loans in a competitive market where everybody else is giving mortgages away. I worked with subprime mortgage companies. After the bubble started to pop everybody blamed it on stupidity and greed. These qualities were surely involved. What goes up, after all, must come down - but try to time the pop! In the end, the bubble was market-driven and the market was Fed-manipulated. We had a soft recession in 2001 because of cheap credit. We get another recession in 2008 because of that same cheap credit. End of story.
- vitaminj 19y ago
  Yeah I agree, though my point wasn't so much about the bubble than about the crash. The crash was precipitated by a critical mass of foreclosures, which was attributed mainly to sub-prime borrowers. A softer landing could have been achieved if there were stricter lending regulations, and the bubble wouldn't have been as high either. I wanted to respond to the assertion by the poster that this was all a result of government interference. Yes, the government (via budget deficits) and the Fed (via monetary expansion) were meddling with the market, but the nature of the free market itself was a contributor. The market isn't perfect and neither are regulations, but it's not an all or nothing proposition... there needs to be balance.
  - Prrometheus 19y ago
    The bubble was unprecedented. Hopefully, lenders remember that credit quality matters the next time the fed decides to dump 1% credit on us.
    - anamax 19y ago
      No, it wasn't unprecedented. In fact, this bubble was exactly like every other bubble. EVERY bubble is driven by folks who say "it's different this time". They're wrong every time. As they say "pigs get fat, hogs get slaughtered".

Prrometheus 19y ago

Cheap credit was at the heart of the mortgage bubble. It fueled an unprecedented rise in housing prices. If housing prices rise at a historic rate for 5 years in a row, who cares about credit quality? Foreclose on a home and you own an asset worth 25% more than the mortgage you made! Don't lower your lending standards and you will make 0 loans in a competitive market where everybody else is giving mortgages away. I worked with subprime mortgage companies. After the bubble started to pop everybody blamed it on stupidity and greed. These qualities were surely involved. What goes up, after all, must come down - but try to time the pop! In the end, the bubble was market-driven and the market was Fed-manipulated. We had a soft recession in 2001 because of cheap credit. We get another recession in 2008 because of that same cheap credit. End of story.

vitaminj 19y ago
Yeah I agree, though my point wasn't so much about the bubble than about the crash. The crash was precipitated by a critical mass of foreclosures, which was attributed mainly to sub-prime borrowers. A softer landing could have been achieved if there were stricter lending regulations, and the bubble wouldn't have been as high either. I wanted to respond to the assertion by the poster that this was all a result of government interference. Yes, the government (via budget deficits) and the Fed (via monetary expansion) were meddling with the market, but the nature of the free market itself was a contributor. The market isn't perfect and neither are regulations, but it's not an all or nothing proposition... there needs to be balance.
- Prrometheus 19y ago
  The bubble was unprecedented. Hopefully, lenders remember that credit quality matters the next time the fed decides to dump 1% credit on us.
  - anamax 19y ago
    No, it wasn't unprecedented. In fact, this bubble was exactly like every other bubble. EVERY bubble is driven by folks who say "it's different this time". They're wrong every time. As they say "pigs get fat, hogs get slaughtered".