I cannot believe it. Worst crisis since second world war. Banks to “lose” £500 billion. House prices to plummet by a third. Great depression threatened. Really? I recall from my economics lesson a different and no less potent phenomenon: mad journalism disease.
Like most people I have found the credit crunch hard to follow. The world economy, we were told, was tooling along under the guidance, at last, of competent central bankers rather than hysterical politicians. In Britain, Europe and America, indeed in Moscow and Shanghai, the experts were in charge. Gordon Brown boasted the wisdom of his putting the nation’s financial affairs in the hands of an “independent” Bank of England.
Now we are allegedly up the creek. The selfsame bankers’ indulgence of personal and institutional greed, their regulatory incompetence and their blindness to speculative bubbles have shown them to be as fallible as politicians. It beggars belief that they could see no danger in so-called collateralised debt obligations, known to the Victorians as “bad paper”.
I bet anything you like this guy owns his house! It is always easy to comment on poverty looking down rather than up. The few years aftert college when I was crippled with debt bought a lot of anxiety and stress at a time of life when I was only just out of the home.
And my anxiety was short lived I was always going to earn enough to clear the debts and move onwards and upwards. Nevertheless those few years helped me see how incredibly difficult it is when you have very little disposable income and any rise in the mortgage rate can hurt a lot.
Truth is we have money at the time in life we need it least.
It’s really all quite simple – a whole lot of people could not afford the mortgages which they had floated. The fault doesn’t lie with people who can.
The Victorians called it “bad paper” according to the article. Indeed that is precisely what it is.
Social engineering through mortgage lending is not feasible.
“Social engineering through mortgage lending is not feasible”
Agreed. But we can have advances in financial technology just as we have advances in information technology. (In fact, the latter often facilitates the former.)
Financial innovation (in the form of “securitization,” the process of turning mortgages into tradeable securities) makes it possible for Americans to have fixed-rate mortgages without exposing the banking system to huge interest-rate risk.
The problem here is that investors, including banks, became insouciant about credit risk: the risk that borrowers would default on their loans. Securitization didn’t cause that problem; trendy bad judgment did.
Make no mistake: current U.S. mortgage problems were not caused by do-gooders nagging banks into originating bad loans. On the lending side, the problem occurred through normal capitalist desire for gain, combined with (abnormally) bad judgment about risk.
In my neck of the woods, there was a lot of “condo flipping”. Really a case of musical chairs played with a condo. The person who last bought it—-to flip it again—-got caught in a down market and can not get out without a large loss. So, they just don’t pay…..not really a crisis in the family home area, just more or less a crisis in the speculation game of real estate.
Playing fast and loose with money that you haven’t got? Not a smart idea! I have lost track of how often I’ve told people whom I know and who are looking to buy their first homes……my own children, for instance……to stay away from Adjustable Rate Mortgages! They’re killers!
No matter how badly one wants to realize one’s dream of owning his or her own home, ARMs are not worth the risk. They’re better off renting.
There is a somewhat more affordable alternative: Manufactured homes.