Wild West of Mortgage Loans

Senator Schumer of New York said "the subprime market is the Wild West of mortgage loans" (Buttimer, 2011), an adequate euphemism I quite like.  You can see from this graph from S&P/Case Shiller HPI, the US housing market suffered a devastating blow when the subprime market collapsed. As I’m sure your aware this landslide was the dominating factor leading to the global recession. Much like the UK, the US market felt the effects of upward moving mortgage interest rates and downward shifting house values. However, unlike in the UK, US citizens can simply walk away from their debt with great ease. By popping the keys through the letter box of the house it was no longer the resident’s responsibility in other words relinquished ownership of said house, leaving the mortgage provider to foot the bill so to speak.

But how does it all tie in? To cite Schnabl & Hoffmann (2008) “The US subprime market crisis is shattering the world financial system.” But what did they mean? When the US housing bubble burst, it caused securities tied to US mortgages, or Mortgage Backed Securities (MBS), to crash which in turn had repercussions on financial institutions across the world. This was the catalyst for the economic contractions have seen ex post of the crash.

Buttimer, R.J. 2011, "The financial crisis: imperfect markets and imperfect regulation", Journal of Financial Economic Policy,vol. 3, no. 1, pp. 12-32.

Schnabl, G, & Hoffmann, A 2008, 'Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View', World Economy, 31, 9, pp. 1226-1252, Business 

Source Premier, EBSCOhost, viewed 24 February 2013.

Standard & Poors (2013) S&P/Case-Shiller Home Price Indices. [press release] January 29, 2013

Tour De Economy

An excellent analogy I read in Kindleberger & Aliber’s (2003) book in describing a bubble read as follows “After several years of bubble-like behaviour [it] resembles that of a young person on a bicycle; the rider needs to maintain the forward momentum or the bike becomes unstable.” Fitting don’t you think?

Bubbles appear across the world, some more notable than others relating to commodities, currencies, property and shares have been prominent since the early 1970’s. With housing and property bubbles, property differing to housing because it includes commercial buildings, occurring in the 1980’s in Japan, Finland, Norway and Sweden, the 1990’s for Thailand, Malaysia, Indonesia and other neighbouring Asian counties, it’s not just the UK and America who have seen the boom and bust. Kindleberger & Aliber (2003) define a bubble as “a non-sustainable pattern of price changes or cash flows”.

History has taught us that the implosion of bubbles is quite often quickly followed by economic failure and the collapse of banks and other financial firms, followed by a sluggish economic growth in years to come. Wall Street Crash (1929) & the sub-prime collapse of America comes to mind. Global recession and depression. Some Journalists compared the collapse of the American property bubble to the Wall Street Crash and rightly so.