On July 1, 2005, the Chairman of then President George W. Bush’s Council of Economic Advisors told a reporter from CNBC that,
“We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”
His name was Ben Bernanke. And within a year he would become Chairman of the Federal Reserve.
Of course, we now know that he was dead wrong.
The housing market crashed and dragged the US economy with it. And Bernanke spent his entire tenure as Fed chairman dealing with the consequences.
One of the chief culprits of this debacle was the collapse of the sub-prime bubble.
Banks had spent years making sweetheart home loans to just about anyone who wanted to borrow, including high risk ‘sub-prime’ borrowers who were often insolvent and had little prospect of honoring the terms of the loan.
When the bubble got into full swing, lending practices were so out of control that banks routinely offered no-money-down mortgages to subprime borrowers.
The deals got even sweeter, with banks making 102% and even 105% loans.
In other words, they would loan the entire purchase price of a home plus closing costs, and then kick in a little bit extra for the borrower to put in his/her pocket.
So basically these subprime home buyers were getting paid to borrow money.
Of course, we know how that all turned out. By 2008 the entire system crashed, and the post-game analysis had some pretty obvious conclusions:
Bad things tend to happen when you pay people to borrow money, especially when they’re not particularly creditworthy.
Thank goodness no one in finance engages in such risky behavior anymore!
Or do they?
Today, subprime is back.
There’s been a lot of talk lately about a growing bubble in the subprime auto loan market, and even student loans.
at http://www.zerohedge.com/news/2016-06-04/financial-bubble-8-times-bigger-2008-subprime-crisis
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