Re: The Economy, Lounge Style
Wheee economics by borodog! Last time I participated in one of these I learned a lot about Austrian economics, I hope this one becomes just as interesting.
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1. Have there always been sub-prime lenders or is this a relatively new phenomenon?
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Sub-prime borrowers are just a class of borrowers who have a higher credit risk. What's recent (prior to subprime meltdown) is the amount of subprime lending done without tight standards and the increasing ways in which this debt is held, in the form of structured products. The widespread investment in this risky debt and errors in risk management is what led to problems.
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2. You say that these risky loans looked justifiable...but to whom? The sub-prime lender, the MBS's, or the customer? Did the sub-prime companies know this would happen and is this why they turned around and sold the mortgages quickly?
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The loans looked justifiable to everyone, that's why there was a market for these things. Not sure what you're getting at here. Some (like Warren Buffett) predicted that this would happen with all the non transparency but there was such a strong potential for profiting off the interest from the subprime mortgages that a lot of people jumped in anyway.
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3. What kind of financial institution would think this was a good idea? It seems like this kind of outcome could be predicted. Overall, what company suffered the most from the housing bubble bust? The large banks?
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Any financial services firm or institution trying to make money would have been interested in this. The housing bubble supported the stream of payments from these babies, and there was a lot of money being made off these. One of my professors invented the method of tranching mortgages into different levels of risk and he's now ridiculously wealthy. Any type of company exposed to housing, consumer spending, or the debt instruments themselves suffered from the housing bubble bursting.
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4. I wonder if any of my mutual funds were invested in these MSB's.
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Probably not directly but they all probably had some level of exposure in the form of stock of banks, construction companies, etc.
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