posted by dsk on October 9th, 2008 at 9:39AM
>thus digging themselves into a bigger hole
In which they were already in (or going to be in). I argued that this has nothing to do with the central problem. The hole is already there - why is there?!
>As for why banks would take on risky investments, subprime loans charge higher interests, which generate more profit for them.
Profit is not enough. There's a reason why banks don't take their money to casinos and bet it all on blackjack. The potential profits are staggering but the risk of losing everything is huge. And that's my point.
>The banks saw this trend and tried to capitalize, but they couldn't predict when this trend would stop in time.
This is what doesn't make sense to me. You can't possibly expect me to believe this. Sure, they couldn't predict when this trend would stop, but they knew it would. Everyone knew what was happening to home prices was a bubble that was going to burst. The few years before the housing bust, everyone was just waiting for it to collapse. You think forecasters couldn't see it coming?
So that's the contradiction, or rather evidence of market distortion. They lend money out, knowing full well that there is good chance they won't get it back. This is irrational behavior, which makes sense only when you bring government into the mix, who via the quasi-governmental banks of Fannie Mae and Freddie Mac, in essence guaranteed the subprime loans (not to mention the fact that they pushed for them to happen in the first place).
I will gamble all my savings in a casinos if you tell me you'll reimburse any loses I incur. In this situation, in fact, the most rational action for me to do is play the games with the highest rewards (and therefore the highest risk). At the root of it, that seems to be essentially what happened.
In which they were already in (or going to be in). I argued that this has nothing to do with the central problem. The hole is already there - why is there?!
>As for why banks would take on risky investments, subprime loans charge higher interests, which generate more profit for them.
Profit is not enough. There's a reason why banks don't take their money to casinos and bet it all on blackjack. The potential profits are staggering but the risk of losing everything is huge. And that's my point.
>The banks saw this trend and tried to capitalize, but they couldn't predict when this trend would stop in time.
This is what doesn't make sense to me. You can't possibly expect me to believe this. Sure, they couldn't predict when this trend would stop, but they knew it would. Everyone knew what was happening to home prices was a bubble that was going to burst. The few years before the housing bust, everyone was just waiting for it to collapse. You think forecasters couldn't see it coming?
So that's the contradiction, or rather evidence of market distortion. They lend money out, knowing full well that there is good chance they won't get it back. This is irrational behavior, which makes sense only when you bring government into the mix, who via the quasi-governmental banks of Fannie Mae and Freddie Mac, in essence guaranteed the subprime loans (not to mention the fact that they pushed for them to happen in the first place).
I will gamble all my savings in a casinos if you tell me you'll reimburse any loses I incur. In this situation, in fact, the most rational action for me to do is play the games with the highest rewards (and therefore the highest risk). At the root of it, that seems to be essentially what happened.
