Tuesday, April 01, 2008

Why lenders are reluctant to part with their money

The best explanation.

From David Warsh at Economic Principals:

How did the subprime crisis become so serious?

The drop-dead shorthand explanation emerged today when Deborah Solomon of the Sunday New York Times Magazine asked former Treasury Secretary Paul O’Neill how some fast-and-loose mortgage lending at the margin could trigger “a financial crisis of global proportions.”

You remember O’Neill: he is the straight-arrow finance chief who was fired by George W. Bush and Dick Cheney on the eve of their war with Iraq.

O’Neill replied, “If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.”

That's why this idea makes sense.