01 Oct 2009

Curse Those Subprime Loans!

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I was getting my car fixed up for the road trip to Greenville, SC tomorrow (Mises Circle on Saturday), and I was the only customer near the TV. So I flipped through the channels and decided CNBC was the least of 46 evils.

They kept giving snippets of Bernanke’s testimony to some Congressional committee. The funniest assertion I saw was some guy telling Bernanke (paraphrasing): “I am curious how you see the role of the Fed in the future growing, to regulate the financial markets and prevent the sort of excesses that contributed to our current situation. I know in my district, there were many people who obtained subprime loans, when what they really needed were prime loans. As a consequence they are now in default, many have lost their homes, and we have vacant homes pushing down housing prices.”

Now there is a grain of truth in that someone who had an adjustable rate mortgage might end up buying too big a house and then defaulting, when a more conventional mortgage would have prevented the foolish purchase.

But that doesn’t seem to be what the Congressman was getting at. No, he seems to think that deregulation caused banks to charge more in interest rates from safe borrowers than they should, and then this higher rate caused the borrowers to default. So the housing bubble was caused by lenders being too cautious in their evaluation of the riskiness of borrowers, and charging them too high of an interest rate. (!)

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