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What government interventions caused the doubling of subprime lending from 2004 to 2006?
by camelite 8y ago
What government interventions caused the doubling of subprime lending from 2004 to 2006?
- Eliezer 8y agoFDIC insurance. A private insurance market for bank accounts sends a price signal about reliability. Subsidizing that insurance in a way that doesn't eliminate the price signal and the customer risk, like requiring 20% private insurance for 90% of the account face value and the govt providing the remaining 80% insurance at the same price or at a discount, could make sense if insuring more accounts was a policy goal. Having the government ensure everything for free with no internal price differentiation just tells banks they might as well go wild.
- naravara 8y agoFDIC only ensures bank deposits, such as checking or savings accounts, not mortgages. It's not at all clear what that has to do with the proliferation of subprime lending.
- Eliezer 8y agoIt's a root cause of bank irresponsibility. If not for free FDIC insurance, a bank making risky loans would cause the cost of insuring an account at that bank to rise. Securitization does change this, but all the CDSs on AIG's mispriced insurance on CDOs were ultimately taking place against a background of too-big-to-fail and flat-priced government insurance.
- lovich 8y agoWhy would a bank spend any money on insurance to cover accounts in the event that they run out of money? That's just the end of the bank, they don't care at that point. It's not like the executive officers would have a chance of going to jail over it.