Saturday, February 15, 2014

The real cause of sub prime lending

Re: Wells returns to sub prime lending

The author blames the banks, as if for some unknown reason bankers simply choose to expand lending to sub prime borrowers.  But the real source is the Fed's artificial lowering of the interest rate, which sets in motion a chain of events which force banks to make what will become bad loans.  Home buyers find that the carrying cost of owning a home has fallen.  The most expensive component of the monthly carrying cost of a home is interest.  So, drop the interest rate and this component opens up a whole new class of what appears to be worthy borrowers.

It ain't the banks; its the Fed!

1 comment:

  1. Interest rates are the cost of money . Without skin in the game , when money is practically free, missallocation of resources is inevitable .