Financial Shock (Updated Edition): Global Panic and Government Bailouts—How We Got Here and What Must Be Done to Fix It

1. Subprime Précis

Until recent events, few outside the real estate industry had even heard of a subprime mortgage. But this formerly obscure financial vehicle has grabbed the world’s attention because of its ravaging effect on the global economy and financial system.

Simply defined, a subprime mortgage is just a loan made to someone with a weak or troubled credit history. Historically, it has been a peripheral financial phenomenon, a marginal market involving few lenders and few borrowers. However, subprime home buyers unable to make good on their mortgage payments set off a financial avalanche in 2007 that pushed the global economy into its worst downturn since the Great Depression of the 1930s. Financial markets and the economy will ultimately ...