[FoRK] Subprime apologetics

Gordon Mohr <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 
massive failures.

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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