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

2. Sizing Up Subprime

Imagining how something as obscure as a subprime mortgage loan could have brought the global financial system to its knees and pushed the U.S. economy into a deep recession might be hard. It’s particularly strange because such loans, designed for people with a dark mark on their credit records, were, at most, marginal financial products for most of their quarter-century history.

Yet the word subprime has come to stand for something much bigger: an unprecedented, broad-based erosion of credit standards. During the subprime lending frenzy, practically anyone could get a mortgage. Loans were streamlined, stripped of most controls, and offered freely under conditions that would have given most traditional bankers nightmares. ...