posted by dennisn on October 7th, 2008 at 10:24PM
No. The the banks did not behave recklessly. They knew they had government backing, and thus could safely take on far more risk than a free market would possibly have allowed. In an unregulated environment, they would have risked being unemployed, and thus would have self-regulated themselves. With government intrusion, essentially none of these risks or signals are relevant.
|
posted by dsk on October 9th, 2008 at 9:56AM
>Housing prices were rising, which makes subprime mortgages essentially a non-risk
Oh come on. I'm 100% sure Banks didn't think this way. These Banks that were in business for decades through many market cycles. These Banks also issued mortgages that would last decades. It is a huge risk to believe that house prices would go up /at the level that they did/ for long enough time for them to break even. House prices were going up in Canada too. Ontario was going through a boom. Alberta housing market was exploding, but you didn't see Banks going crazy, lending money to anyone that asked. Why? Because they didn't an implicit agreement that government would guarantee subprime loans. They didn't have government pushing them to make subprime loans. They didn't have Fannie and Freddie. >A lot of these loans were bought out by Freddie and Fannie afterwards anyway, so the original lenders didn't have any risk. There it is. It's not the fact that house prices were going up that was the problem. It's the fact that lending to a particular high-risk high-reward demographic, carried no risk - which rationally promotes that action. You want to engage in high-reward behavior if the risk is removed. |
|
posted by rick on October 9th, 2008 at 5:02AM
Yes and no.
The banks knew they could safely take on the risk, because of two reasons: - Housing prices were rising, which makes subprime mortgages essentially a non-risk - A lot of these loans were bought out by Freddie and Fannie afterwards anyway, so the original lenders didn't have any risk. And Freddie and Fannie was backed by the government, so you are correct there. |
