Friday, August 17, 2007

A Very Short Summary of the Subprime Loans Problem

And now, a simplistic and unintentially jingoistic view of the subprime mortgage crisis. This is kind of a throwaway post. I did a more serious take on the subprime mortgage problem here.

The United States has economic bubbles like the recent mortgage or high tech ones for three reasons.

1. The global economy is growing and producing lots of profits.
2. The United States is the safest place to invest and grow your investment.
3. Eventually, you run out of good investments no matter where you put your money.

If you're a tycoon in, say, Taiwan, and you have buckets of cash to invest, where do you go?

  • You could invest in Eurabia France. However, France produces agricultural products. They haven't been a growth investment since the Industrial Revolution.

  • You could go to Russia and have it all stolen by the kleptocrats in Putin's administration.

  • You could go to China, but when you look at their companies' financial statements, they look like they were assembled by three dogs and a goat. Who knows what's really going on there?

  • You could go to South America, but every so often they seem to have a banking crisis and the numbers on their money suddenly acquire more and more zeroes at the end.
And so on. The safest place to invest is the US. Unfortunately, economic titans that we are, there's still only a finite number of us that know what to do with your money. Eventually all the good investments get priced wildly and you either end up investing in some guy who builds jet packs in his barn in Idaho or paying $4,000 for a share of That's when you know it's a bubble.

Sort of like when mortgage lenders start giving home loans to drunks on the street corner.


Kelly the little black dog said...

Nice clear and direct. I'd be interested on your take of this piece.

Anonymous said...

Thank God for strikethroughs (the line through Eurabia)! Aren't they fun?!