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Subprime is a Fancy Word for Too Much Debt

This post is a response to What's So Special About the Subprime Mess? by Stephen J. Dubner on the New York Times Freakonomics Blog.

Subprime is a fancy word for too much debt. Adam Smith would actually say that housing over and above shelter has no utility value. If that is true, we are in for some serious additional write downs (think second homes).

On another note, Subprime could have worked if the loans stayed true to their risk and were made at “loan shark” type rates (5% “money-down” should have warranted a 20% rate; instead we were lending it at 7-10%). As a result, we were only realizing less return on a greater expense in the form of lower and lower investment rates (Menger, Say, Smith, Jevons and others), but more risk. At the end of the day, its all about (un)employment. As the construction industry (contractors will contract), related materials (steel, wood, etc.), autos (Detroit is the worst economy in the country) and financial services (the mortgage industry will certainly downsize) are forced to lay employees off (that is what happens whey your company loses a billion dollars, but the crains are still in the sky adding to supply and falsely buoying employment), we will be forced to find new jobs elsewhere for these people or we will surely have a recession, depression or whatever you want to call it.

Unemployment only leads to more unemployment as production and consumption fall back into equilibrium. That will be the critical question. Where will the new jobs come from to keep up production and consumption or employment and trade? Its all about renewable energy.


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