How does a very tiny segment of the mortgage industry cause a total meltdown ? You tell me. Ever since last August when the subprime mortgage sector in the United States of America collapsed on itself, it some how took down the rest of the country with it. This is just mindboggling to me. That is like saying that a broken headrest can some how cause an entire 747 to go down.
After spending some time thinking about this, it is clear like many how many others have written that it was a symphony of errors. Ranging from the people taking the loans that they could not afford, to the SEC who watched this whole thing happen, to the construction industry who caused a housing bubble to begin with, to the banks who bought risky loans and repackaged them as grade AAA securities, to investors who never checked in on what they were investing it, to the credit rating agencies who made it seem like the risky loans were so good, etc, etc, etc.
However clearly the biggest point here is where the small mortgage companies sold those risky loans to banks. That started a chain reaction where millions of people became exposed to such a tiny segment of the market. All fueled by capitalism and greed. I have been reading about the housing bubble and how it was very likely to burst any time since 2005. How was it no obvious that eventually that the price of houses would have to go down (even a little) which would cause all of these subprime loans to fall on themselves? It would become impossible then for people to pay back their loans once they became unfordable and it would be impossible for banks or other investors to recoup their loss by selling the property. Of course this just set of a spiral where more people defaulted on their loans because they couldn’t pay them back, meaning there was another house on the market, meaning the price of housing went down, meaning some one else couldn’t pay back their loan, etc etc etc.
The entire system was build upon the idea of constant growth, which everyone knows is impossible. Do this date, I have never heard of an economic cycle that continued to go up. Eventually it would have to slow down to a standstill, or even go back down a bit. This entire system was of course fueled by greed. This caused everyone involved to loose something, and became a full scale problem all because some bank was stupid enough to invest in risky loans. Obviously since they are risky one should not invest their money in it, however they did. Then everyone with pension funds to investments anywhere felt the pain.
That’s not the end of it though, because of murky investment reports and less regulation in the American banking sector no one really knew how much of everyone’s money was invested in something so plainly stupid. Who invests millions of dollars in high risk loans ? It’s called sub-prime for a reason stupid.
