The newspapers and the blogosphere are filled with commentary pointing blame for the credit crunch all over the place - Federal government forcing banks to loan to high-risk people, greedy investment bankers who gave themselves big bonuses for just moving money around, house buyers signing for loans they couldn't pay in the end, the media, the conservatives, the liberals, and...
I think that, yes, blame can be spread far and wide, but all of these malefactors had the same basic premise: loaned money can be bought and sold.
The beginning premise sounds simple. A local bank lends money to someone for some purpose. At a certain point, the bank has no more money to lend except for what dribbles back in as loan payments. To raise more money, the bank sells its loans to a larger entity. But the larger entity can only do this far so long. In order to buy more loans, it has to raise more money. So it sells its loan to a larger entity. Where does it end?
If house prices keep going up, it never ends. But prices will not keep going up. Either everyone who wants a house has one, or prices go so high that fewer people are willing to buy houses. So, prices go down, sometimes very rapidly.
Sometimes prices drop so rapidly that people would rather stop paying their loans than pay more than their house is worth. Of course, if they walk away from one house, they will have a hard time buying a house of much less worth. That further reduces the number of qualified buyers further reducing the prices of houses.
Tulips, Florida real estate, houses, when will they ever learn?
