Reply #28: The US sub-prime crisis in graphics [View All]

[dipsydoodle]

The US sub-prime mortgage crisis has lead to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded.

How it went wrong :

Traditionally, banks have financed their mortgage lending through the deposits they receive from their customers. This has limited the amount of mortgage lending they could do.

In recent years, banks have moved to a new model where they sell on the mortgages to the bond markets. This has made it much easier to fund additional borrowing,

But it has also led to abuses as banks no longer have the incentive to check carefully the mortgages they issue.

http://news.bbc.co.uk/1/hi/business/7073131.stm

On the diagram you need to tick the "How it went wrong" box before and after to see the changes. IMO that's a sound model to explain what's occured. Those antics have in many respects screwed the world and as such the USA is unlikely to receive much sympathy from outside.