Monday, January 21, 2008
Bad debts are “unknown unknowns”
What happened in the subprime market was an “unknown unknown”. There were several layers of middlemen between investors and house-buyers, most of whom had an incentive to overstate either house prices or a borrower's ability to repay. Worries about other parts of the debt market remain. In recent years struggling consumers have been able to consolidate their credit-card debts into their mortgage loans; that option is no longer open. Will that affect default rates? And car companies have relied on cheap financing rates to maintain sales. Has that led to a decline in lending standards?