Analysis on the nature of the credit crisis: "Financial Armageddon for Dummies"(boards.straightdope.com)
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Analysis on the nature of the credit crisis: "Financial Armageddon for Dummies"
http://boards.straightdope.com/sdmb/showthread.php?t=485790
2 comments
The article is fine as far as it goes, but there is nothing in the article to explain why we are having a crisis in the "subprime" housing market right now (as opposed to some other market or at some other time). And why did it start here and not elsewhere? Nowhere does it mention the Community Reinvestment Act of 1995, which required banks to "reinvest" into the "community" -- or face reprisals. "reinvest" they did, with "subprime", i.e., junk, loans -- $2.2 trillion worth, that are now bringing world markets to their knees.
I don't doubt the CRA is part of it, but I think the fed lowering and lowering and lowering the prime rate after 9/11 in order the stimulate the economy figured prominently as well.
With interest rates low, banks have to be more aggressive in pursuing borrowers to maintain their same level of profitability (i.e. they'll start considering loaning to folks they'd normally not loan to). Also, with interest rates low, there was a housing market boom which convinced a lot of people they could make money buying houses on credit and flipping them.
It makes you wonder if we'd have been better off if we'd have just let the economy recover on its own after 9/11. The fed lowering the prime rate did hasten the onset of economic recovery 7 years ago, but look where we are now.
With interest rates low, banks have to be more aggressive in pursuing borrowers to maintain their same level of profitability (i.e. they'll start considering loaning to folks they'd normally not loan to). Also, with interest rates low, there was a housing market boom which convinced a lot of people they could make money buying houses on credit and flipping them.
It makes you wonder if we'd have been better off if we'd have just let the economy recover on its own after 9/11. The fed lowering the prime rate did hasten the onset of economic recovery 7 years ago, but look where we are now.
Another excellent explanation that doesn't gesticulate wildly and incoherently towards panic, bankruptcy, firesales, etc. Thanks.