"Those who lend money without charging interest, and who cannot be bribed to lie about the innocent. Such people will stand firm forever." Psalm 15:5
Reading the news about the crisis in the global markets at the end of last week gave me a slight glow of satisfaction, not because I enjoy seeing other people suffer, and certainly not because I believe capitalists have always 'got it coming to them', but because someone had explained to me a few weeks ago what was going to happen, and as events unfolded it was nice to feel I had a vague understanding of what was going on.
Everyone will have noticed the constant mention of 'sub-prime' mortgages, and many people will now know what this means: lending money to buy a house to people who might very well not be able to pay you back.
But why, you might ask, would anyone do such a thing? You can understand why they'd lend to people who can pay them back, but why lend to those who might well not?
The answer is that the system is not just about making money out of mortgage repayments. The system doesn't stop with the bank or building society giving money to someone and taking interest from them.
Rather, mortgage deals themselves become 'saleable' assets, which are then traded with the seller making money on the deal. But what happens when the supply of mortgage deals begins to dry up because everyone who reasonably can take out a mortgage has done - when the supply of 'prime' mortgages is diminishing? I think you might be able to guess!
Just in case you haven't, the answer is you open up new mortgage markets with deliberately generated 'sub-prime' mortgages. However, a sub-prime mortgage is, obviously, a risky deal. Indeed, some of the deals are apparently very risky indeed. Selling-on the mortgage as an asset then becomes like what used to be called 'Northern Irish Pass-the-Parcel'. No one wants to be stuck with a ticking bomb when the music stops - except (and this is where it gets tricky) if everyone is convinced the parcel is not a bomb at all, that it is in fact a package of 'prime' mortgage deals. Then the game continues blithely on.
Or at least, it does until someone, somewhere, for whatever reason, unwraps the parcel. In marketing terms, this simply means someone who wants to realise their 'assets' tries to do so. Then they may discover that what they've bought isn't actually worth anything - unless they can sell it to someone who doesn't know it isn't worth anything: someone as ignorant as they were when they bought it.
But, hey ho, you have a problem, because the wrapping is off the parcel.
That, in a nutshell, seems to be what has been happening. I suppose the thing to watch will be the American markets. Meanwhile, I can't help thinking, "If only we'd listened to God a bit more, or maybe even just CS Lewis."
Just to stoke up the pessimism a bit more, read here.
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