Subprime

GOVERNMENT FAILURE:

In 1995, US authorities told banks that they had to start giving mortgage to poor areas to avoid accusations of discrimination. The only way for the banks to profit from this risky debt was to bundle it with good debt and pass it on. The investors didn´t have to worry too much about the risks because they knew that the banks were too big and entangled to fail and that the Fed would bail them out if there was a crisis. State-owned Chinese and German banks belonged to the most enthusiastic buyers. And they were all being helped by a US monetary policy that lowered interest rates more and kept them low longer than the market would have, which poured liquidity into real estate and stock markets.

Now the mortgage bubble has burst and most commentators blame free markets and tell us that we should give wise autorities and bureaucrats more power to regulate to save us from another crisis. Judging from how they handled it this time, that sounds about as risky as subprime loans.

I write about this in Dagens Industri today (subscribers only)." johannorberg.net