cigarscool
New Member
- Joined
- Jun 12, 2008
- Messages
- 3
I'm only a junior in high school and I feel I have a lot to learn about the world still, but here's my take on the sub-prime mortgage mess and please correct me where I am wrong.
Lower interest rates under Fed chairman Alan Greenspan encouraged the undertaking of high-risk mortgage-backed securities at firms like Bear Stearns. The reasoning for this is relatively simple. If financial institutions need to pay higher interest rates in order to obtain money from the Fed to then loan out either directly or through smaller institutions to individuals for home mortgages, they will be far more discriminative as to whom they relend that money since they are paying a higher price to get that money. The inverse is also true. If financial institutions could pay extremely low interest rates (like 1-2% in 2003), they would be more likely to lend the credit back out to riskier prospects. Therein lay the causes of the present-day subprime mortgage mess. At the banks, easy money came in from the Fed, and easy money went out in the form of subprime loans to customers who were surely too risky and unfit to pay back such loans. Now that these loans are defaulting and the markets are once again shaken, the Fed has resorted to the same cure that caused the illness in the first place. Bernanke and the Fed have now continually lowered interest rates once again. Is this not going to cause similar problems all over again years down the road?
Obviously, some responsibility lies with the financial institutions, but banks and lenders will act in what they perceive as their own best interest and their inherent greed will not and cannot be expected to take the well-being of the American economy into consideration. Greenspan could have prevented this mess with higher interest rates and did not.
I will be honest and admit I'm young and probably naive, and I am quite new to the subject of economics. Please enlighten me to things I have missed or do not know that may change my point of view on this.
Lower interest rates under Fed chairman Alan Greenspan encouraged the undertaking of high-risk mortgage-backed securities at firms like Bear Stearns. The reasoning for this is relatively simple. If financial institutions need to pay higher interest rates in order to obtain money from the Fed to then loan out either directly or through smaller institutions to individuals for home mortgages, they will be far more discriminative as to whom they relend that money since they are paying a higher price to get that money. The inverse is also true. If financial institutions could pay extremely low interest rates (like 1-2% in 2003), they would be more likely to lend the credit back out to riskier prospects. Therein lay the causes of the present-day subprime mortgage mess. At the banks, easy money came in from the Fed, and easy money went out in the form of subprime loans to customers who were surely too risky and unfit to pay back such loans. Now that these loans are defaulting and the markets are once again shaken, the Fed has resorted to the same cure that caused the illness in the first place. Bernanke and the Fed have now continually lowered interest rates once again. Is this not going to cause similar problems all over again years down the road?
Obviously, some responsibility lies with the financial institutions, but banks and lenders will act in what they perceive as their own best interest and their inherent greed will not and cannot be expected to take the well-being of the American economy into consideration. Greenspan could have prevented this mess with higher interest rates and did not.
I will be honest and admit I'm young and probably naive, and I am quite new to the subject of economics. Please enlighten me to things I have missed or do not know that may change my point of view on this.
