Did you know that 25% of Americans are rated as subprime loaners? It is a quite large market that many credit companies were willing to deal with, albeit its risks. But those credit lenders are no fools. Subprime lending is full of arrangements, that even if the loaner gets broke, the lender can still make a lot of money.
It all started with the stock market bubble and the dot.com bubble. Billions of dollars poured into the United States. But this money ended-up in the hands of speculators (cordially called as financial institutions) that instead of investing on American jobs and production line, speculated on a housing bubble, that burst in Fall last year (2007).
First they started lending to good loaners. But for the amount of money they had, the good loaners’ population was not enough. They needed more people to pay for the interest that they earn on, without producing a single American car. So they dived into the subprime market, mostly composed of Latinos and Afro-Americans.
Clever enough, the interest rate calculated in subprime loaning already computes for the number of people that will default their payments. So, the lender lends knowing that will send some loaners to foreclosures and negative financial status (in other words, to be in big trouble!). Well, they don’t care that they have invited Joe Doe to a deal which will trouble him, because the other Joe Does will pay for the ones who did not.
But with rising oil prices, rising interest rates and some good deal of inflation in a semi-recessionary economy, it all ended-up on a record foreclosure for subprime housing mortgage. Why? Because The US is simply not producing anymore. The US lives now on lending and printing money. Most of what is consumed is imports. The US became specialized in banking and financial services, which structurally calls in for speculation, in order to be kept alive.
All these characteristics took away the hegemony of the US currency in the world, being almost replaced by Euro and Yen, which is a good thing though. The US will not be proud of its dollars, but the currency will be cheap enough to be able to sell US made products and services overseas, thus creating more jobs to Americans.
Brief and to the Point:
Have we learnt the lesson?
Our Economy Right Now
Foreclosure of the American Dream