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Origins of the Meltdown

So I was thinking on this a bit more over the last few day and have some more thoughts on the combination of events that came together:

  1. The anomaly in rates, specifically, the short term rate dropping to record levels, 1%. And of course, the subsequent rise back to more normal levels.
  2. The surge in the high end home prices. Of course you can say that the rates drove the prices higher, as the same dollar bought far more mortgage at 3% than it did at 9%.
  3. The no-doc mortgages, brokers filling in applications that were signed when still blank.
  4. Between fancy computer modeling and ratings agencies that did not do their job, much of the paper got rated AAA when it should be C or less. (my thanks to Douglas Johnson for pointing this last factor out to me)

An article in the August 5th New York Times gave a good overview called “Housing Busts and Hedge Fund Meltdowns: A Spectator’s Guide.” It still leaves some questions unanswered, but it’s worth a quick read.

JOE

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