Dean Baker: The subprime crisis is passé.

[marmar]

from The American Prospect:



Doesn't Everyone Know that It's Not a Subprime Problem?

Subprime is so yesterday as people up and down the income ladder are defaulting on their mortgages in record numbers. After all, why pay off a $400k mortgage on a home that is worth $300K?

I thought that everyone understood this point by now. The problem is the collapse of the housing bubble. It showed up first in the subprime market because these were the most vulnerable people, but the collapse of the subprime market is just a portion of a much bigger problem.

Anyhow, word has not yet filtered through to the NYT. David Leonhardt asks the question today (I double-checked the date) "how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?"

Of course, if the problems were just in the subprime market we would not be facing a meltdown of the banking system and the worst financial crisis since the Great Depression. The problems run right through the entire $10 trillion mortgage market. That is why the Fed folks are staying up late and working weekends.
If it were just subprime, they could deal with it in normal business hours and still have time for lunch.

--Dean Baker

Posted by Dean Baker on March 19, 2008 9:51 AM


http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=03&year=2008&base_name=doesnt_everyone_know_that_its

[mrreowwr_kittty]

1. Less equity in home > less consumer spending > economic collapse

Really pretty easy to understand.

[Trajan]

3. The middle class sees less wages and compensation from jobs ...

Less wage-increases while the cost of living skyrockets over decades > Less money on hand to pay bills > Decreased ability to absorb mortgage reset spikes > Economic collapse, which in many ways is directly caused by conservative wage policies ....

They starve the bottom, either unaware or unconcerned that it will eventually starve the top ....

[mrreowwr_kittty]

4. Of course that's included too. It goes without saying.

For the past 6-7 years, home equity and credit have driven our economy. That's why we have a negative savings rate.

[Mountainman]

5. I think you are right, the economy depends on consumers spending.

When you take away the ability of consumers to spend the merry-go-round stops. The last round of spending was on credit and now cannot be repaid. There is not enough money to pay back debt and spend. To make things worse the deregulation of the financial markets accelerated the coming of the end by making it harder to repay the debt. Prices on everything are rising. So people default on the debt spending stops and everyone is sitting on a merry-go-round not moving.

There is no more wealth so suck out of us. The end result of conservative ideology is a stopped economy.

[Trajan]

7. Exactly ....

It is so short sighted, and ill fated.

There are still those few who reap a whirlwind of profit, even at the expense of their 'fellow' business owners, killing off whatever business activity which depends on price stability in the energy sector: Airlines - Trucking and Freight - Vacation related industries ... ALL are hurt by the current spike in costs. ALL so a very few can pull in monumental, historical profits .....

They simply want it all, even if it hurts everyone else around them .... It is like a narcissistic sociopathy ....

[gasperc]

2. revenue depended on ridiculous lending terms

future revenue and growth was tied to increased payments from high interest loans with balloon payments and onerous pre-payment penalties. On top of that, the lenders had the infinite wisdom to loan the money to people with no income, no job and no assests, by the Billions. no one could have predicted.

[magellan]

6. The problems go way beyond the mortgage market

This is the result of decades of growing income disparity between the wealthy 1% and the rest of us. The Repubs have overseen the destruction of the middle class by selling it to supporters as "tax cuts" and "reduced public spending".

No more money to welfare queens! -- it's funneled to crooked friends of the government instead. And Repub voters seem just fine with that...until budget shortfalls mean their local services are being cut or forced to charge up front for what used to be "free".

Repubs: too stupid to get it.