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Originally Posted by kane
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What pisses me off is how the media is making it out to be the banks fault solely. They seem to take the slant that these people that are being foreclosed on are victims. The reality is both are reaping what they sowed. The bank lent money to someone they knew might have trouble paying it back and the lender bought more house than they could afford and now they are stuck together.
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Agree with you. This pattern just keeps repeating for every boom and bust cycle. Were the Henry Blodget's of the world responsible for the NASDAQ boom and bust? ($400 price target on Amazon). Should investors in the late 90s tech stocks be refunded their losses because they weren't "sophisticated"? Everyone should take their lumps.
Another interesting point is that 40% of real estate sales in 2005 were second homes; "investment homes".
Both do have to reap what they sow with some caveats. Obviously if people really were duped (incorrect info in contract) the contract should be null and void. Institutions should be allowed to fail unless it threatens the entire system.
Unfortunately financial innovation has brought unparalled and historic leverage into the system in addition to a large amount of counterparty risk. As far as leverage, the top 25 banks hold $180 trillion dollars of derivative contracts. That's more than 10 times the size of the whole annual US economy. The underlying assets only make up 6% of that. Now you combine that financial leverage with counterparty risk. Institutions put together derivative contracts for other institutions. Bear Stears, it is estimated, is holding $10 trillion worth of derivative contracts for other institutions. This is why they couldn't be allowed to fail. Bear Stearns goes under and suddenly a domino effect wipes out a chunk of the financial system. There are going to be further tough decisions between permitting "moral hazard" and preventing a domino effect of failures.
Things are gonna change.