”legal protections, not the accuracy of their predictions, were the basis of the Big Three’s continued existence and profitability”
There are at least two reasons why low LTVs might correspond with lower default rates. The first reason is heuristic: A borrower who can put 20 percent down is likelier to be in better financial straits than one who cannot, and is likelier to be committed to staying in the house and thus to making the required payments. Second, however, even if the financial condition of the borrower is poor, when the LTV declines due to a housing boom, it means that the resale value of the house is probably going up. A financially stretched subprime borrower thus has an incentive to keep making difficult-to-afford payments until he sells the house.
Thus, the I.M.F. (2008, 5) reported in April 2008 that “delinquency rates on subprime mortgage loans originated in 2005-6 have continued to rise, exceeding the highest rates recorded on any prior vintage.” The “vintage” is the year in which a mortgage was originated. The I.M.F. data show graphically that delinquencies on subprime mortgages that were originated in 2000—before the housing boom—peaked four years later, with an average of 25 percent of the loan balance unpaid (ibid., 6). By contrast, 2006-vintage subprimes had reached 25-percent delinquency values a mere one year after they were issued, and as of March 2008, the slope of their ascent was nearly straight up (toward 100 percent default) and showed no sign of tapering off.
“not only… the regulators allowed the crisis; but, furthermore, that the regulators encouraged the crisis by offering large advantages to banks that held triple-A-rated assets—because the regulators were as ignorant of the risks as the bankers were.
“even if the regulation takes the form of an inducement rather than a prohibition, it has a homogenizing systemic effect… heterogeneous opinions among regulators do not matter. Only one regulation becomes the law in any jurisdiction…the process of competition “learns” these lessons as mechanically as evolution does—not by recording them or thinking about them, let alone engaging in debate about them, but instead by eliminating the erroneous theories embodied in loss-making firms
Many companies (not just financial but industrial) could make the same bet, and the bet could be wrong; or sudden, homogeneous uncertainty about whether that bet is wrong could cause credit to freeze.This is similar to the classic Keynesian explanation of a macroeconomic crisis, and it is also what routinely happens when there are asset-market bubbles: The participants are making the same bet, and eventually they (homogeneously) realize that the bet is wrong. Yet, again, no asset bubble’s popping, including the Crash of ’29, has ever sufficed to cause a systemic failure in the financial system or in the real economy, because despite homogeneity among the bubble bettors, there has been sufficient heterogeneity in the financial system as a whole….La crisis se produjo por una serie de decisiones regulatorias que taken together, had the unintended effect of concentrating (what came to be seen as) especially risky investments in the financial sector.