A series of monumental bank and investment firm failures precipitated by a massive increase in foreclosures, panic in the global financial markets, and a staggering $700 billion bailout proposal that was still being fine-tuned over the weekend in Washington. The collapse of so many financial companies is the culmination of the subprime crisis, which came to light in 2006 and 2007 but was in reality brewing for quite some time. Up through the late 1970's, home mortgages were heavily regulated. A complex process which bundles, sells and repackages loans into bonds to be sold to investors allowed lenders to spread the risk and frees them from reliance on deposits and capital reserves, securitization was key to sub-prime lending because it diffused the potential of risks and default for lenders and removed rational incentives for prudent lending.
Students who have followed the crisis are largely weary of the bailout package.
ReplyDeleteTight credit markets also affect decisions like buying a car. In general, loans have the potential to become more difficult to receive, and more expensive.
ReplyDeleteIn my opinion, the arrogance of the financial institutions, the mad scientists they employ to manipulate the rules and rule makers, and the Emperor's New Clothes (trust me they're safe) marketing tactics they employ really do need to be regulated-- by the government, sure; by corporate boards of directors, absolutely!
ReplyDeleteI believe in a Working Capital Model world, there would be no financial crisis.