The financial crisis

There are tons of articles on the financial crisis out there -- but here are two (well, one is an article, the other is just a quote) that helped me make sense of it*.

Jim Manzi's exceptionally well-written take explaining what's happening in terms of a primitive hunter-gatherer society.

And this quote from Barry Ritholtz, who writes at the Big Picture blog:

To show the impact of deregulation, consider the underlying premise of all credit transactions – loans, mortgages, and all debt instruments. Over the entire history of human finance, the borrower's ability to repay the loan has been the paramount factor in all lending. With mortgage, this included elements such as employment history, income, down payment, credit rating, other assets, loan-to-value ratio of the property, debt servicing ability, etc.

Greenspan’s decision to not supervise mortgage lenders led to a brand new lending standard. During a five year period (2002-07), the basis for making mortgages was NOT the borrowers ability to pay – rather, it was the lender's ability to sell a mortgage to firms that securitized them.

This represented an enormous change from the past.

These new unregulated mortgage brokers no longer cared about a standard 30 year mortgage being repaid over time. In the new world of repackaged loans, all that mattered was that the loan did not come back to the originator. By contract, this was typically 90 or 180 days. As long as the borrower did not default in that period of time, it could not be put back to the originator. [emphasis mine]

*Of course everyone's been talking about the housing bubble for a long time. What I didn't know about was the labyrinth of "securitization" that existed behind each mortgage which was how subprime mortages were viable in the first place -- something that is only now becoming clearer to me, as I read about the crisis. (In my defence, I've never taken out a mortgage, so I have no idea of what it entails). :-)