Sometimes the best way to summarize a complex situation is with an analogy. The Greek debt crisis, for example, is very much like the subprime mortgage crisis of 2007-08.
As you might recall, service workers earning $25,000 annually got $500,000 mortgages to buy McMansions in subprime’s go-go days. The applicant fudged a bit here and there on income and creditworthiness, and lenders reaping huge profits from originating and selling mortgages were delighted to ignore prudent underwriting standards and stamp “low-risk” on the mortgage because it was quickly sold to credulous investors…
The loan was fundamentally imprudent and risky because the borrower was not qualified for a loan of such magnitude. But since the risk was distributed to others, the banks ignored the 100% probability of eventual default and skimmed the profits upfront.
Greece was the subprime borrower, and its membership in the euro gave the banks permission to enter the credit rating of Germany on Greece’s loan application. Though anyone with the slightest knowledge of Greece’s economy knew it did not qualify for loans of such magnitude, lenders were happy to offer the loans at interest rates close to those of Greece’s northern neighbors, and then sell them as low-risk sovereign debt investments.
In effect, the banks were free-riding the magical-thinking belief that membership in the euro transformed risky borrowers into creditworthy borrowers.
Two quick thoughts:
1. Most analogies made about McMansions are not likely to reflect well on such homes. Here, McMansions are part of huge financial problems. Later in the piece we have more negative ideas about McMansions:
Meanwhile, the poorly constructed McMansion is falling apart…So the hapless subprime borrower with the crumbling McMansion and Greece both have the same choice: decades of zombie servitude to pay for the crumbling structure, or default and move on with their lives.
Not exactly attractive options. Yet, the assumption here is that all or most McMansions fall apart within ten years or so. Is this truly the case with McMansions – do they have more repair issues than other homes? Perhaps Consumer Reports could sort this out for us since they like collecting such data.
2. I don’t recall seeing strong evidence that the subprime crisis was primarily driven by people purchasing McMansions. Rather, mortgages were granted that were too risky. But, how many of these loans were actually made for McMansions as opposed to other kinds of housing? The whole housing market was doing crazy things, not just in the McMansion sector.