Thursday, March 20, 2008

Get A Grip

Some people seem to be having trouble grasping the credit crisis:

"But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?" -- The New York Times

Look at it this way. The overwhelming majority of football players are doing just fine. So how is it that a late score in one football game could ruin so many problem gamblers?

A bad bet on a football game can cost you much more than the price of the ball.

A lot of the money in the economy is riding on bets. They're complicated bets that a lot of people don't understand, but in simple terms, they're just bets.

That shouldn't be so hard to understand.

1 comment:

Michael said...

You have to admit, though, it's a little counter-intuitive that you can lose money giving out a loan secured against property.

I mean, if I loan you $190,000 to buy a $200,000 house (i.e. with you making a 5% deposit) and you default, I lose $190,000 but gain a $200,000 house. Sure, it costs to repossess and sell that house, but I'm sure one can repossess and sell a house for less than $10,000. And if the house has devalued and doesn't cover the loan? You still have to pay the difference.

It's hard to understand how investors can lose money with such favourable terms.