Probably the best explanation of the financial meltdown:
The article doesn't delve into the reason this could happen -- too much ideology and not enough pragmatism. The ideology in this case is that the free market is a panacea. That all regulation is bad and that the market will take care of all ills.
What is "subprime"? Loans that don't meet the government regulations of how much mortgage a borrower with a certain financial profile can carry. When a bank makes a high-interest loan to a borrower who will not be able to keep up with the payments, the bank is not being just a lending institution. It is being a real-estate firm -- the only way it'll make a profit is if the price of the home increases enough to offset its transaction costs. Banking, credit and investment regulations used to prevent that sort of thing.
Such regulations were slowly dismantled, thanks to bribes (i.e. lobbying) to politicians. Such corrupt behavior, unfortunately, was bipartisan. Sen. Phil Graham, now McCain's economic adviser, was in the fore-front of this. But so was Sen. Chuck Schumer, a Democrat from New York.
What we are seeing is the result of a free market without any regulations.
Just as homeowners took out big loans and stretched themselves on the assumption that their chief asset — their home — could only go up, so did Wall Street firms borrow tens of billions of dollars to make subprime mortgage bets on the assumption that they were a sure thing.
The article doesn't delve into the reason this could happen -- too much ideology and not enough pragmatism. The ideology in this case is that the free market is a panacea. That all regulation is bad and that the market will take care of all ills.
What is "subprime"? Loans that don't meet the government regulations of how much mortgage a borrower with a certain financial profile can carry. When a bank makes a high-interest loan to a borrower who will not be able to keep up with the payments, the bank is not being just a lending institution. It is being a real-estate firm -- the only way it'll make a profit is if the price of the home increases enough to offset its transaction costs. Banking, credit and investment regulations used to prevent that sort of thing.
Such regulations were slowly dismantled, thanks to bribes (i.e. lobbying) to politicians. Such corrupt behavior, unfortunately, was bipartisan. Sen. Phil Graham, now McCain's economic adviser, was in the fore-front of this. But so was Sen. Chuck Schumer, a Democrat from New York.
What we are seeing is the result of a free market without any regulations.
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