The reason subprime loans expanded.
Financial institutes imputed risks to other people while gaining instant money in a CDO market. Namely, bankers and lenders did not care to invest in subprime loans because they could sell the mortgages out in the form of CDOs. What is more, if you assume that housing prices are going up continuously, the risk of mortgage loans seems very limited.
This naturally led to more subprime loans because the most popular kind of CDO was based mainly on subprime loans. Banks sold it very well, and bankers had gotten bonuses by making subprime loans, creating CDOs and selling them to people who did not know the actual worthlessness of CDOs. That was how financial institutes earned money.
The possibility
In 2007, even back then, it was possible to realize the actual value of Subprime-related securities by searching for accurate data or observing new residential areas that were supposed to be filled with new people but were almost empty or filled with people wanting to sell their houses. One of the difficulties is that some people realized the unrealistic prices of CDOs, but it took more than one and a half years to crash after the failure started to seem apparent and defaults of subprime loans became prevailing.
The incident in 2008 was the appearance of a flaw in Capitalism.
In conclusion, expanding too many subprime loans was evil, but that was instead encouraged by the capitalist system or the desire for money. Capitalism is good because it drives people to be productive, but in the incident in 2008, the capital moved some people into doing wicked things.
What is next?
Since society learnt that Capitalism could drive people badly, the governments have made restrictions on the economy based on the lessons in the great recession.
We will discuss the lessons and restrictions in the following article.
Check out the project later.
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