Guest Post: Greenspan says bundlers bungled subprime

"Subprime mortgages were and are risky, but they are worth it."  A comment from former Federal Reserve Chairman, Alan Greenspan during a speech he gave on Monday in the UK.

His argument was that a larger ownership class equates to more Americans who are vested in building wealth in society, adding, "I'm terribly concerned that we would cut back on the availability of subprime that has enabled a very significant increase in mortgages among minorities in the United States."

Yes, subprime loans are a good thing. Where we went wrong is in underestimating the market forces involved in how these loans were rebundled for sale to investors. Ratings agencies overvalued these bundles. Investors scurried to the table, and the resulting lower rates enticed a lot of buyers who probably shouldn't have purchased a home to do so.

But the pendulum never seems to swing only half the way. Greenspan went on to remark, "What we saw was a 180-degree swing from euphoria to fear and what we've learned over the generations is that fear is a very formidable challenge."

It's easy to blame mortgage brokers, or greedy lenders, or good ole' boy realty agents for the problems. But the cold hard truth is that free market capitalism is always going to unintentionally hurt people. It just does so less than any other economic system.

--Todd Carpenter - lenderama

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