[FoRK] Subprime apologetics
<gojomofork at xavvy.com> on
Sun Nov 4 22:33:23 PST 2007
Maybe the widely-spread losses from the subprime mortgage market
meltdown -- touching financial institutions worldwide -- are
happening just as they were designed to...
NPR Marketplace: Banks find a subprime silver lining
October 29, 2007
Tyler Cowen: We've all heard about the defaults on subprime
mortgage loans. But so far, the real story is how little the
broader American economy has suffered. That is partly because of
sophisticated trading networks.
More than ever before, banks can spread their financial losses
very broadly, including to foreigners.
In the old days, banks lent out mortgage money and kept those
loans on their books. If enough borrowers could not repay, the
bank went out of business. That was a big problem in the Great
Depression of the 1930s.
Today, banks usually sell their loans to third parties -- this is
called "securitization." You might have originally borrowed money
from Wells Fargo, but now a bank overseas cashes your mortgage checks.
If a large group of people can't pay their mortgages, they might
lose their homes. But the banks don't suffer as they used to --
local American lenders have already converted those loans into
cash and sold off their risk.
In fact, German regional banks suffered some of the most
significant losses from bad American mortgages. Other European and
Asian banks and hedge funds took their lumps as well. American
banks essentially bought insurance by exporting their risk overseas.
So far, we don't know the total damage from subprime failures, but
it probably is less than 1 percent of the American economy. Those
are big losses if concentrated in a few institutions, but the
global or even the U.S. economy can handle them. Lots of American
domestic banks have suffered losses, but there have been no
Now European real estate markets are weakening. Soon some American
banks will be returning the favor and bearing some losses for
others. But we're still better off for sharing our risks, and that
is why most U.S. stock prices remain high.
You're hearing lots of bad economic news from the media. The
secret is that we're learning to cope with it better each time.
RYSSDAL: Tyler Cowen is professor of economics at George Mason
University. His latest book is called Discover Your Inner Economist.
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