Those headlines are interesting...
My question has always been: How did a small percentage of bad mortgages (less than 5%) lead to the imminent end of the world as we know it and general financial chaos? How could that happen? It still doesn’t make any sense to me.
I don’t normally tend to conspiracy theories, but there are so many things wrong here it makes my head spin in disbelief.
Well, subprime was only a small part of the credit bubble, yet with derivatives and their multiplicative effects, poorly understand and very complicated, leverage*100 everywhere you look, and global links and dependencies between seemingly unrelated financial elements, it happened.
"What got us into this mess initially were banks taking exorbitant, wild risks with other people's monies based on shaky assets and because of the enormous leverage, where they had $1 worth of assets and they were betting $30 on that $1, what we had was a crisis in the financial system."
"That led to a contraction of credit, which, in turn, meant businesses couldn't make payroll or make inventories, which meant that everybody became uncertain about the future of the economy, so people started making decisions accordingly, reducing investment, initiating layoffs, which, in turn, made things worse."
- Obama press conference last night
Of course this isn't a complete explanation, but since he was just responding to a question, it's probably not a bad summary. The thing I always wondered is: "Why were banks willing to take any chances at all in mortgage loans?" Obviously the answer is, as Obama says, because it wasn't their money.
The banks were able to borrow the money they were betting with. I think he might get the 30-1 leverage figure from the fact that the banks were able to borrow at something like 3%.