Stop talking about the subprime crisis!

I must confess I’m a little tired of hearing people and expert talking about this alleged subprime crisis. Why do I say “alleged”? Well, because “subprime” means that the borrower have a heightened risk of default (since they have, for example, a recorded bankruptcy, or a history of loan delinquency or default), so there is no surprise if there is a default.

Problems, in my opinion, are quite different: first, many banks lent money to people that should knew couldn’t afford it (that is quite different from “subprime lending”), most of all in case of a rise of central bank rates — but did really everybody (included banks) expect that FED rates would not rise, when they were at 1%?

Second, many risky securities (and subprime-related are such, by definition) ended up in some kind of financial meat-loaf, passed off as low-risk investments, but nearly no investor really knew or understood what there was in. Even now, it is not completely clear where subrime mortgages securities ended up.

So this crisis should be called “bank transparency crisis”, because this is the main problem. Problem that, let me add, should be correctly presented: to let think an account holder that he is risking the same as a shareholder is essentially misinformation. Sometime I suspect that somebody is trying to make a some confusion, so who misbehaved and structural problems can pass unnoticed, and everything can remain the same.

Original Italian post: Basta parlare della crisi dei mutui subprime!

Banche e Risparmio []