posted by dsk on March 21st, 2008 at 2:18PM
>What I meant to say was that giving large loans (meaning large principal, not necessarily high interest) to poor people is a bad idea.
I agree but not because the action is bad in itself. Lenders balance risk with return. Poor people carry with them a higher risk of defaulting on a loan, hence why credit issued usually carries a higher interest rate (you balance out the higher risk with a higher return). Further, applications for high principle and low interest loans (such as a mortgage) would in most situations be rejected. The risk is simply unacceptably high when compared to the potential return. On a small scale there will be fuck-ups, as certain loans will be issued for clients that are inherently too risky. And when that loan eventually gets defaulted on, the lender loses tons of money (or goes bankrupt) and learns a valuable lesson.
Clearly the onus is then on the lenders to protect their money by making rational decisions, because ultimately they are the ones who pay for defaulted loans.
The subprime mess requires its on explanation, because its a fuck-up on a large scale. Its almost inconceivable that so many lenders would choose to make so many high-risk gambits. Obviously human nature plays a part but I think massive market distortion is the culprit. The fact that the big lenders are protected from bankruptcy by government, lowers risk for them in issuing credit. You can take chances on higher-risk clients because there's a level that the government will not let you fall through, choosing instead to bail you out if you fall flat on your face. Another culprit is the rate cut and the injection of capital into markets post 9/11, to prevent a recession. I've read a few articles that made a convincing case that this was in fact the reason for the subprime bubble.
I agree but not because the action is bad in itself. Lenders balance risk with return. Poor people carry with them a higher risk of defaulting on a loan, hence why credit issued usually carries a higher interest rate (you balance out the higher risk with a higher return). Further, applications for high principle and low interest loans (such as a mortgage) would in most situations be rejected. The risk is simply unacceptably high when compared to the potential return. On a small scale there will be fuck-ups, as certain loans will be issued for clients that are inherently too risky. And when that loan eventually gets defaulted on, the lender loses tons of money (or goes bankrupt) and learns a valuable lesson.
Clearly the onus is then on the lenders to protect their money by making rational decisions, because ultimately they are the ones who pay for defaulted loans.
The subprime mess requires its on explanation, because its a fuck-up on a large scale. Its almost inconceivable that so many lenders would choose to make so many high-risk gambits. Obviously human nature plays a part but I think massive market distortion is the culprit. The fact that the big lenders are protected from bankruptcy by government, lowers risk for them in issuing credit. You can take chances on higher-risk clients because there's a level that the government will not let you fall through, choosing instead to bail you out if you fall flat on your face. Another culprit is the rate cut and the injection of capital into markets post 9/11, to prevent a recession. I've read a few articles that made a convincing case that this was in fact the reason for the subprime bubble.
