The sub-prime crisis is at the heart of the world’s current economic problems. It all boils down to financiers playing fast and loose with the rules of how money works, and the US government not keeping an eye on them.
Essentially, they created a whole new class of interest-bearing pieces of paper that were supposedly backed up by the payments from sub-prime mortgages. These are mortgages banks had lent to people who couldn’t really afford their mortgages because the banks had stacks of savings from China and the Middle East they needed to lend to make profit. Inevitably, it all went to custard. Now, US banks are collapsing, they’re going into recession, and we’ll probably avoid recession but it will be a close thing.
Finance, with derivatives and options all that, is complicated but these new pieces of paper (CDOs) are so complicated even most financiers didn’t understand them. Fortunately, we have a cartoon to explain (best viewed on full screen):
For those more audibly inclined, here is a very good extended panel discussion [6MB mp3] with economist and writer Max Fraad Wolff, former investment banker and journalist Nomi Prins and mortgage analyst and activist Josh Zinner interviewed by economics commentator Doug Henwood on the subject. They put the blame where it belongs – international finance speculators.
I wonder what former international finance speculator, John Key, would have to say about the root cause of the crisis that is threatening not just the US economy but ours?