Here’s a comment left on a blog that I want to remember:
The subprime mortgages aren’t the real evil. They are like the kid who acts as a mule for a big-time drug dealer; involved but fungible. If it wasn’t subprime mortgages it could have been something else, such as tech stocks or tulips. Total subprime mortgages were worth less than 1 trillion, of those, a few hundred billion worth of defaults. That is a lot of money, but an amount that could have been absorbed by the economy without causing particular harm.
The real evil is unregulated derivatives. Credit default swaps alone are estimated at over $60 trillion. Those are all just side bets on the original 1 trillion of subprimes. It’s like a craps table. The guy holding the dice drops a $100 chip on the table. If he loses, he goes home $100 poorer. But the derivatives markets then bet the farm on that same roll of the dice. And I mean the whole farm. The entire world’s domestic gross product is estimated at about $60 trillion. Derivatives makers and dealers bet the equivalent of the world’s economy on whether some poor schlub would default on his mortgage.
Deal with everything else but not unregulated derivatives, and this will all happen again. Deal with the derivatives market, and everything else is just mopping up.
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