We should've realized there was a problem when low income workers making below the poverty line became the hot new commodity in finance. Whereas in the 80s, young men in finance spent hours calling rich people insisting they give them money, in the last 5 years, they have instead been calling up poor people insisting to give them money.

"We should've realized there was a problem when low income workers making below the poverty line became the hot new commodity in finance."

Except for those loans aren't what caused the problem. Rather, the problem was caused by the investment banks betting on those loans.

The loans were the consequence of betting. Or, more precisely speaking, of false belief that AAA rated papers, which were betted on, are safe.

No, the loans were just bad investments. That is different than betting, at least in the sense that wall street people use the term betting.

C.f. http://www.dailykos.com/storyonly/2008/11/13/201226/64/403/6...

Or listen to the NPR series on credit default swaps.

But the reason why companies were so happy to lend so much money was caused by a belief, which turned out to be false, that loans securized into CDOs and such papers, frequently rated well, are safe and risk is properly managed.

The betting merely caused a spread of the risk between all market participants, making it systematic risk. Also, the betting was not properly managed because market partipicants weren't able to understand the risk.

Also, one might say that the reason why companies started securization and, then, betting on the papers are low interest rates, but, please, let's don't dig into the whole Fed discussion.

The betting didn't just spread the risk, it magnified it.

For every dollar the banks lost on bad loans they probably lost 30 dollars of bets on those loans. No one even knows the exact number because the market is completely unregulated.

And the reason why banks, and not only banks, lost so much on the papers is because the loans were basically worthless. Banks knew that loans were worthless but the paper's ratings created a different impression, boosting the loans.

The spread part is very important. If there were no betting, selling and reselling of the papers, then only bad lenders would collapse.

Someone moderated you to zero. I think you make a fair point: poor people's debt is exactly what sub prime mortgage boom was about.

No, no, not poor people's debt.

Our debt.

Because:

* we own the debt now

* we're all gonna be poor anyway

:-)

I'd say how the crisis started is more relevant to understanding the crisis than the way governments are attempting to fix it.

Summary: The government create an unhealthy economic environment that bankers took advantage of while the media was clueless.

Result: The media sensationalizes the situation-creating panic, the bankers get blamed and the government is going to save us.

Public: its OK, everything is being taken care of, you can now get back to your reality TV shows.

The US administration had the best of intentions: as stated, to improve the home ownership rate of blacks and hispanics. You can find GWB making speeches about this in 2003. They also failed to regulate the markets where the bad debts were being sold with good credit ratings. Incompetant yes, immoral no.

The banks intentionally obscured the value of the bad debts to other investors. And greedy people were encouraged to get second and third homes when they didn't need to by greedy real estate agents. That was immoral.

This reminded me of the "subprime explained" comic as a novel way of getting the complexity across:

http://docs.google.com/TeamPresent?revision=_latest&fs=t...

That made me chuckle. Of course the fact that I've made it to another Friday with a (nice) paycheck helped.

Where's the Community Reinvestment Act? Specifically, the revisions made to it in 2002.

I never understood the basis of the current financial crisis. Now I do.