I'd call that a catalyst - the cause is much wider and deeper. We built a financial house of cards and removing one card (sub-prime) is taking down the house.

From therealdeal.com sept 2008

If you look at numbers from 2006,2007 and 2008 - the trend upward shows up clearly.

Foreclosure is the last step but there is a much higher percentage of people who are behind mortgage payments that may or may not lead to foreclosure. I agree what has happened is absurd.

"It all started with the rising defaults in the housing market. My limited understanding of this sad telenovela is: the spiral begins with eager homebuyers going to their favorite retail banks that entice them with low, low rates of interest (so that even a buyer who should logically be able to afford only a $100,000 loan borrows $300,000) since the bank turns around and bundles these mortgages into securities and guaranteed by their famous Fannie Mae and Freddie Mac, which securities (mortgage-backed securities or MBS) were sold to Wall Street (such as Lehman Brothers), which were repackaged with collateral debt obligations (CDOs) or collateral debt swaps that were insured (among which, AIG), and sold to institutional investors that included pension and retirement funds, hedge funds (Bear Stearns). Eventually, the housing bubble bursts as home buyers begin to default on their mortgages. The next step down is when the Wall Street institutions can't pay off the MBS which they used as collateral to leverage their own increased debt. Note that CDOs do not have any real assets behind them -- what we call "ampao." One more step down: banks, faced with mounting debt and shrinking assets, freeze credit to the detriment of production and business. Investors in the stock markets flee, and everyone is trapped in a dreadful downward spiral. Clearly, that would result in a financial sector collapse of huge proportions"


So basically, you had a highly leveraged system that is not designed to take any downside risk in house prices or the economy. The main reason why so many of these complicated bonds and derivatives have been drawn up is that bankers can make a quick profit through them. Therefore the whole crisis really arose through the greed of bankers. Many countries incluing mine have experienced house price drops of more than 50% and yet our financial system remained intact. The main reason was that everybody realized there was a bubble and a 30% downpayment was requried for property purchases. Also of course, the mortgages are not repackaged as bonds and so we did not have extra layers of leverage.

That is why for the long term, I am still very concerned about the situation. After the events of the past months, it would be extremely surprising if house prices do not fall even much further. Therefore the amoung of money involved will grow much larger.

Derek

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Government is the cause of the problem and especially the Fed's loose monetary policy.

Don't expect the problem to go away anytime soon

There is no one cause - the mortgage melt down is a major factor but so is the war in Iraq and the trade deficit we have with China.

We keep spending $$$$ in Iraq and we have nothing to show for it and the trade deficit with China doesn't help.

These are the 3 major factors that have led us to this point in time.

The Iraq war was definitely a big cofactor, but there were others as well. One was very high oil and commodity prices, which was again driven by speculators.

Remember in the 2nd quarter, most economists were optimistic that the worse was over. That was until oil prices started rising relentlessly.

-Derek