Monday, October 6, 2008

A lesson on the crisis why and how

A little "historical" analysis by the NY Times:

Note the vigorous congressional support for lending money to people
with poor prospects of being able to pay it back.

""When homes are doubling in price in every six years and incomes are
increasing by a mere one percent per year, Fannie's mission is of
paramount importance," Senator Jack Reed, a Rhode Island Democrat,
lectured Mr. Mudd at a Congressional hearing in 2006. "In fact, Fannie
and Freddie can do more, a lot more.""

Mr Reed is apparently not economist enough to know that cheap
mortgages contribute to rising home prices, and rising home prices push low income people out of the viable market.

Then add 100% financing, and now there is no risk to the buyer, creating a "walk away" mentality.

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