These loans were not all bad. There is a very false impression being given that this was a bank scam. It was not. Many hundreds of thousands of people got into home ownership, through just this system. It is 30 years old, & worked to the borrowers advantage in a growing economy.

Increasing values, & wages allowed the home buyer, with these low start loans, to build equity, & increasing wages allowed them to meet their commitments, & become home owners. The market even survived the "Housing & Loan" fiasco, a few years back, so it is much more than just a pack of cards, as has been suggested.

Those with a better & less selective memory, will remember that no greater labor luminery than Tom Burnes, started the same system here. It was widely praised. Some of the later borrowers got into trouble, in a downturn here, just as they have in the US.

Burns was widely critisied. I felt sorry for him. He had done much good for many, & I doubt anyone was more upset than him, that some were hurt, by the unforseen problem. After 30 years of near constant growth, many did not think a downturn was possible. Fortunately for the rest of us, it was only a tea cup sized storm, in the big picture.

House prices, in the states, are much lower [less than half] than here in Oz. Last year you could still by a house worth living in, for US$70,000. It's probably $35000 now. You could pay these houses off, for no more than the rent you would pay for the same house. Buyers were only up for the taxes [rates], & maintenance costs, above the cost of renting.

The real problem was bundling these things as AAA rated investments. Of course they had behaved as just that, for many years, so perhaps, even that was warranted.

I wish someone, who really knew, would detail the steps that led to the present situation.

Dear Graham,

They don't have a choice but to bail them out
unless they're prepared to sacrifice the lives
of 160 million Americans plus other global
investors with financial investments in the US
through the stock exchange.

Let's hope that future American Governments will
learn from this experience and regulate the
banking and investment sector to ensure that
this doesn't happen again.

The US Government by bailing out the banks will be
buying out the debts (mortgages) and in future
will be able to sell them back at a profit.
In the meantime this will give the banks time
to recover. That's the theory, as presented by
American financial advisers.

Did America apologise for sub-prime? Many need to hear it.

Anasi,

you say >> "The minimalist government Republicans are suddenly all for government intervention. Sounds a bit like capitalism with a socialist cushion and government stepping in when the market forces are trying to balance out. Please Daddy, we need help, can you give us a loan?!"

This is unadulterated nonsense.

Firstly, it was Republicans in the house who were threatened by economic liberal groups to vote down the "bail out"
or else face competition when their re-elections came up.

Secondly, look up the history of central banking. Its not new or remotely anti-capitalist for the gov't to inject funds into the economy to manipulate the market. How do you think the reserve bank sets interest rates?

One of the central banks roles is to be a lender of last resort, providing liquidity to the market when funds are tight. http://en.wikipedia.org/wiki/Central_bank

Yabby,

I'm not suggesting Bush isn't responsible. All I'm saying is that it was a democrat policy that Bush seems not to have changed to provide these loans.

The problem is a lot more complicated than just greedy bankers. It makes it nice a simple for the punters, but doesn't reflect the reality of the situation.

Hasbeen

"The real problem was bundling these things as AAA rated investments."

This spread the problem but it was not the root cause. I'm not sure if it was the case with all the loans that have been defaulted on, but certainly many were very definitely part of a deliberate banking scam, despite your statement to the contrary.

NINJA mortgages were sold by agents who were paid by the banks. They were paid on commission for each sale so the incentive for reckless selling was there. The loans were Automatic Resetting Mortgages whereby the initial repayments were affordable but the rates jumped sharply after two or three years. This critical piece of information was buried in the fine print and not pointed out to the loan recipients. I don't know about you, Hasbeen, but that's certainly a scam in my book.

Sure, we can all condemn these people for not reading the contract carefully. But these were low-income people, probably poorly educated and with a poor grasp of the English language, and with no access to expensive lawyers to point out the pitfalls awaiting them. These people are as entitled to the American dream of owning their own home as anyone else and when they were led to believe it was possible, their lack of caution, while stupid, is perfectly understandable.

As I have said before, and sorry to start sounding repetitive, they are the victims here. The banks are the villains and they are the ones who should be wearing the blame for this fiasco.

Anansi,

Intervention is State Capitalism not Market Capitalism.

All,

Prudent Banking practice is not only to lend to the right borrowers but also to lend on the security value not the market value of the property: i.e, 80%-85% the property's worth at the time of the loan. Thus, providing a margin negative property value fluctuation. [Shares are 50%]

Circa 1974, the World moved from Bretton Woods [1944] to assist the US. Ironically, in 2008, prompting-up the USD might help US investors (FDI) buy into AAA economies like Australia and Canada, at low currency exchanges, as banks and traders sell the minor currencies to help the States.