Tuesday, March 25, 2008

Let me get this straight...

A number of banks, mortgage companies & investment firms give mortgages to people who can't afford them (and shouldn't have been asking for them themselves), and when those people default on said mortgages (surprise!), these companies expect the Fed to bail them out? HUH????

Another thing: the foreclosure "boom" is basically limited to that sub-prime market, yet somehow this leads people -- coughthemediacough -- to wring their hands over the foreclosure crisis we're in. Again, I say, HUH????

If it weren't for the fact that the media (and to some degree the market as well) would blow it out of proportion and probably instigate a "real" banking crisis, I'd say Bear Sterns should've been allowed to sink... that whole responsibility thing.

1 comment:

Erin said...

Interesting post, Chris. However, as I am current a student of economics, I have a different opinion.

The foreclosure 'boom' did primarily hurt the sub-prime market, but the overall fall in home prices/equity has an larger effect on the whole economy (decreases personal wealth, as homes are the largest asset most people invest in, which can cause a decrease in consumption of goods which hurts the whole economy, especially if it is already weak.) This may be way it is always in the news.

Also, the problem is that the subprime was the beginning of the troubles: financial institutions took these mortgages and created new financial instruments and sold them to unsuspecting investors- people who assumed the securities they were purchasing were good (assuming that whatever was backing them, i.e, mortgages would be stable.) However, when the mortgages plummeted, so did these new investment opportunites. We're now seeing the damage from this activity.

There is definitely a banking crisis- these new instruments should not have been sold and advertised as credible, solid investments. In regards to Bear Sterns...yes, sinking does seem logically so as to not set a precedent that the government will bail anyone out after risky and unwise practices. Time will tell I guess...rememeber I'm only an aspiring economist. :-) I hope all is well.