The losses associated with the sub-prime crisis are now being estimated to be US$500b. Lenders are now being overly careful about who they lend to ('shutting the gate after the horse has bolted') and generating talk of a US 'liquidity trap' that prevents credit market transactions occurring even though official interest rates are set low. Mining ventures in Australia with sound business prospects are facing difficulties getting finance because of inept US lending policies.
I was interested in one vignette on the crisis by George Anders from the Wall Street Journal. It was in Thursday's The Australian - I cannot find the link.
Anders points out that there is an emergent class of new US home owners who are 'owners' in name only. They bought houses on typical low or zero deposit loans and hence have almost no equity in their properties. Their solution to the sub-prime crisis and crashing property prices: walk away. Many couples are defaulting on mortgages but keeping credit card payments up to date. Simply walking away from a property whose resale value is less than the outstanding debt turns out to be the simplest way of restoring their troubled finances.
Lenders end up being stuck with the housing as a consequence of their lack of prudence in lending policy, cheap credit-rating data and their 'herd mentality' for market share.
While one might feel a certain sense of satisfaction that the outcome reflects poor business decision-making the costs will generally not be borne by those executives with poor foresight hungry for a quick buck. Moreover, as phenomena such as 'walking away' intensify capital losses, the costs spill over into other sections of the credit market to home borrowers with substantial equity and to potential borrowers with sound business prospects.
These external costs provide a convincing case for macroeconomic intervention in these markets to restore better lending practices. This again is to a large extent 'shutting the gate after the horse has departed' but helps prevent a distant repeat. Self-interest alone in economies populated by quick-buck merchants where ownership is separated from control and where other types of credit market 'agency problems' abound will not drive sensible behaviour.