File talk:Subprime diagram.png

This diagram is a bit misleading. For example, under "Govt. & Central Banks" the boxes "Fed emphasizes growth over inflation" and "Fed cuts interest rate" should be under the "Causes & Enablers" column as opposed to the "effect/impact" column. In the same row under the "response" column, the box "Downward pressure on Dollar = Inflation" is only partially accurate: The markets during the mortgage-backed securities collapse are currently experiencing rising price levels (price inflation) but the Fed has not been introducing additional bank notes into circulation in its open market operations (monetary inflation). This is an important distinction, because all current metrics actually indicate that the market is experiencing deflation, not inflation, at this time. Gilgamesh79 (talk) 07:18, 23 March 2008 (UTC)

Hello Gilgamesh and thanks for your feedback. A low interest rate environment early in the decade (to address the impact of the dot-com bubble bursting and to address deflationary concerns at the time) was a cause of the housing bubble, as it encouraged banks to be aggressive in lending. They could borrow cheaply and loan high, resulting in amazing profitability. That aggressive lending is now haunting them. As Mr. Bernanke said earlier this week, boom times are when a bank should be building its capital reserves, to handle the bust cycles. The Fed raising rates back to more normal levels was one of many causal factors in the housing bubble bursting in 2006. "You don't fight the Fed" (i.e., don't buy stock when the Fed is raising rates) and homes turned out to be more like investments than people thought, perhaps due to rampant speculation. The lowering of rates recently has been a response, to encourage banks to start lending again and keep the economy moving. We have also begun to see inflation, some of which is due to a commodity bubble in energy and food, some of which is due to monetary and fiscal policy. We had to get inflation when the interest rates were lowered this much and the Fed began lending to many institutions. Money supply has spiked up a bit in 2008 according to the Economist (towards a 7% annual growth rate vs. more typical 5-6%.) So inflation is here. The dollar appears to be strengthening now that the Fed has indicated a shift in emphasis towards a more balanced interest rate policy (e.g., likely to hold for awhile until effects of lowering rates, which have some lag as you know, are known.). Fed is focused on shoring up the banks, which is probably the key step as opposed to interest rates. Bernanke has been very innovative I think and doing a great job. Check this out for a bit more info.Farcaster (talk) 21:36, 16 May 2008 (UTC)

Legend

I added a legend to the description because I did not recognise several acronyms (not being familiar with United States jargon). These remaining items need explaining:

• "Teaser rate" - the initial rate of an Adjustable rate mortgage?
• "Workout" - no idea what this means.
• Foreclosure - appears to be a US term with a different meaning in the UK, should this be noted?

-84.222.6.66 (talk) 14:03, 1 April 2008 (UTC)

Thanks for adding the legend. Terms are defined in the article. Loan workout means loan adjustment.Farcaster (talk) 21:36, 16 May 2008 (UTC)