The cause of the sub-prime crisis

If you want to know what to make of the current panic in the financial markets and the role of sub-prime mortgages in creating it, do read Sebastian Mallaby in the Washington Post this morning. As Mallaby argues, the problem isn’t sub-prime mortgages per se—which have played a huge part in raising the US home-ownership rate—but the failure to sufficiently appreciate the risks of this kind of investment.

Mallbay’s assessment of how the current storm will blow itself out is also wroth paying heed to. Mallaby writes:

“There’s more pain to come in this shakeout. Now that financial markets are panicking, bystanders who never touched a subprime mortgage may get trampled. The European Central Bank led an international effort to pump money into the banking system last week, because private lenders were yanking back their money for fear that banks might be harboring unannounced subprime losses. Nobody knows where subprime trouble may be lurking, so every financial player has a hard time borrowing.