Interest Rate Roundup

Thursday, February 08, 2007

My thoughts on the subprime mess

I'm up in Orlando for the World Money Show, so I apologize for not blogging as much as usual given all the events out there in the markets I follow. But I had to drop in and comment today on the latest subprime mortgage sector news.

If you had the chance to catch CNBC today, then you saw my segment on the latest news out of New Century Financial and HSBC. I recounted some of the thoughts I've shared here -- namely, that when you give too much easy money to too many borrowers who probably had no business getting loans in the first place, this is what happens. Default rates surge. Losses pile up. Subprime lenders get killed. The last major down cycle in 1998 led to the closing or absorption of several major subprime shops (Anyone remember the Money Store?). It remains to be seen whether things get that bad this time around. But given the way lending standards were thrown out the window in the past couple of years, it's well within the realm of possibility.

Here's one last thing: How is it that so many people are shocked ... SHOCKED ... to see these kinds of blowups? All the ingredients for a colossal mess were there. In fact, I wrote back in January and much farther back -- in July 2006 -- that exactly this kind of scenario would likely unfold.

Am I happy about being right? Of course not. People are suffering real financial pain. It sucks. I hope next time housing starts booming, lenders won't push the envelope so much. I also hope regulators and monetary policy makers will act sooner to stop that boom from turning into a bubble. But given the experience of the past couple years, you can probably understand why I'm just a wee bit skeptical.


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