General Discussion
In reply to the discussion: The banking committee hearing is nothing more than a sham show. [View all]Sekhmets Daughter
(7,515 posts)your limited ability to comprehend. Had the banks not created MBOs and MBSs which contained both prime and sub prime loans, there would have been no crisis. The issue was was not that loans were defaulting, but that no one knew which derivatives were good and which weren't. Credit froze as the banks had no idea of what they had on their balance sheets.
Joseph Stiglitz, in his book "Free Fall", posits that without that mixture the markets would have burped and moved on.
The actual root of the problem was that interest rates were kept too low for too long, then the Fed began raising the rates, the housing market began to collapse, home values declined (as they always do when interest rates go up) and people, who had been sold a bill of goods regarding the ability to refinance their mortgages before double digit interest rates overtook them, couldn't afford the new payments began defaulting. I left the industry in 2004 and returned briefly as an office manager in 2007. I left for good when I saw the types of bs prospective buyers were being fed.
Credit Default Swaps are not the only derivatives. Mortgaged Backed Obligations, M B Securities, CDOs are all derivatives as well and there are a host of others.