Understanding the American Sub-Prime Crisis

You’ve no doubt heard about the American sub-prime mortgage crisis, its impact on the American and global economies, and the dreary outlook for 2008. I’m certainly not the sharpest tack on the cork board when it comes to global finance, so I didn’t have a particularly cogent picture of the crisis.

I do now, thanks to an excellent BBC documentary that explains the situation using California’s hardest hit town as an example. From an accompanying article:

“People went to the bank and got a loan on the increase in the price of their home. They went out and spent all that money,” he explains. “Price of the home went up again, they went back to the bank and got another loan. They went out again and spent that money on cars and jewellery and furniture – whatever they wanted.”

With the help of the banks, Mr Carrigan says, people in Stockton “spent their house”.

It’s not the most fascinating subject in the world, but it’s having an impact on markets in every corner of the globe.


  1. This would be a good subject for a new Common Craft Video. It would help explain
    the issue and be quite funny as well.

  2. Hi Tev!
    Thanks for the suggestion. We’ve been thinking of current issue style videos and this one is certainly a good idea. We’re pretty well versed in real estate and I think it could lend itself to a bit of humor as well. As usual, I can’t say if or when, but it’s on the list!

  3. The media consensus name of “subprime mortgages” is very annoying. I would love to have a subprime mortgage *rate*, a rate below prime. The media also talks about “low teaser rates”. The media almost never mentions the actual rates.

    It took me a while to figure out it actually should have been called something like “mortgages for high-risk borrowers”. They don’t get low rates, they get introductory rates at like 8%, that go up to 11% or more.

  4. How about just “high-risk mortgages”? I still find it hard to believe that financial institutions, which are supposed to be averse to such risky transactions, somehow thought this was all going to work out, just like all those investment firms somehow thought the dot-com boom would go on forever.

    The human mind is remarkably poor at understanding probability or making even medium-term plans.

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