Vertigo-X said:
I agree with the idea that these loans with interest rates are bad for a number of reasons. Does anybody know if it's a common practice for people involved with loans (loan issuers particularly) to use the loans currently being paid back to them as collateral for loans they themselves take out? I believe that's how that housing bubble (and consequent economic collapse) came into being, but I could be grossly misinformed on the specifics.
I'm pretty sure it's evident I'm no economics expert. ;) |
Not quite...
What happened with the loans worked kinda like this.
Say I agreed to lend Ascii 100 dollars, with the agreement that he pays me 10 dollars a month for 24 months, netting me 240 dollars at the end of 12 months.
However, i'm not 100% sure he'll pay me back the 100 bucks. So I offer you $1 a month, so that if he fails at any time during the loan (which is unlikely, but possible) You will pay me 50% of what he lost. Meaning I now make a $10 profit but have much less risk. While your making a quick $10 while shouldering only half the burden on a loan that's probably going to be paid back immdeiatly anyway.
Essentially a giant web of that, led to a bunch of people who shouldn't have had loans in the first place defaulting, destablizing the system, causing these guys to raise their intrest rates to avoid folding (instead of 120 i now want 130, since there was a provision in the deal allowing this.) causing more people to fail their morgages.... leading to the more people needing to make up more of the losses...
well you get the picture.
