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Like mortgages, credit card debt that has been securitized has leverage on top of leverage, so even an 8% default rate will do very bad things to banks and othe
by quoderat 18y ago
Like mortgages, credit card debt that has been securitized has leverage on top of leverage, so even an 8% default rate will do very bad things to banks and other companies who have purchased it using leverage. (Often, the securitized product itself is leveraged.)
People were saying things like this in the early stages of the sub-prime crisis, when the default rate was still well below 10%, and everyone was saying, "The default rate is so low; why in the world is it causing all these problems?"
Welcome to the wonderful world of leverage.
- fauigerzigerk 18y agoCredit card debt is much less securitised than mortgage debt.
- quoderat 18y agoYou're right. Only about half of credit card debt is securitized, while about 90% of mortgage debt was. However, the banks are in much, much more fragile condition than they were before, and this will have a disproportionate impact right now. While it's not the end of the world, it's another thing piled on a whole heap of bad things. It'd be a mistake to underestimate the impact of this, just as we've as a society so far made mistake after mistake in underestimating how bad this financial crisis would prove to be.
- fauigerzigerk 18y agoI completely agree about the compounding effect of the credit card problem and I'm really far from being optimistic about the financial crisis. I think this has a long way to go. If banks get deeper into trouble and smaller countries have to rescue them, eventually people will ask whether those countries are going to default and who gets hit by that and so on.