I want to argue in a longer post that the financial crisis should not be thought of a problem with subprime loans, nor a problem of leverage (so consider this a teaser/placeholder). Instead, I think the culprit is the securitization of risk and structured finance. Something down the line would have broke, if it wasn’t housing it could have been credit card debt, or some other securitized debt vehicle.
The problem is that subprime + leverage is a particularly toxic catalyst for the failure of structured finance. It’s like this: if you take 20 shots of vodka, you’re gonna get really really sick; if you take 20 shots of grain alcohol, you may die. The ‘problem’ is not Everclear versus vodka, the problem is alcohol poisoning. Likewise, the problem is not credit card debt versus subprime, the problem is securitized debt and its infrastructure. That the financial system can die from subprime and credit default swaps makes it easy to think that they are the problem, not just the catalyst.
Oh, and I think there’s at least another wave of nasty bank deaths coming down the chute. Wanna know what other kinds of debts are securitized? Wanna know what one of the spillover effects of car manufacturer deaths might be?
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