Feb. 15th, 2009

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Two nifty Articles:
One on the geography of this (and other) financial crash by the guy who wrote _The Rise of the Creative Class_.

Jon Chait on the defense of waste in the stimulus.
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I was grumbling on chat that conservatives just have less of a grasp on economics that I had thought, when they complain about too much spending in the stimulus it's like complaining the water is too wet. Even complaining about wasteful spending in the stimulus is like complaining about using hot water to try to put out a fire.

Then someone started the more reasonable (but wrong) complaint about that the problem was that we gave to many loans to people who had no business getting loans. While there was some of that, there was a lot less than people think and it just isn't credible as a source for the economic collapse. Look at this graph:

This compares the percentage of late payments between sub-prime (blue) and prime (gold) loans over the last decade. If the problem was really just too many loans to people who couldn't pay them you'd see the blue line spiking and the gold like staying pretty level. Instead what you see are both lines going up at about the same rate, that means that both the people who got loans they maybe shouldn't have and the people who were good credit risks both started having problems paying their mortgages at about the same rate.

The real problem was in the leveraging of derivatives off these loans. Bankers bundled the loans together then borrowed huge amounts of money against the bundles. My house is worth ~150K, what they essentially did was like if I borrowed $5 million dollars to start a business using my house & earning potential as collateral. As long as I am thriving I can make the loan payments and everything is spiffy. However if my shop gets closed down I can't make the loan payments and I can't even make my mortgage payments so the people who loaned me the $5M are just screwed.

Multiply all the numbers by a million and repeat thousands of times and you have our current financial cirisis.


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