It’s easier to understand the subprime mortgage meltdown and how it’s erasing gains in the global markets with the humorous little metaphor we heard offered on the BBC world service this morning from the editor of Britain’s MoneyWeek magazine. She likened the “eventuality” (seeing as we’re not quite ready to call it a crisis yet) to a butcher shop. It used to be that retail banks kept mortgages on their books for the life of the loan, but within the past five years, they realized that you instead of just eating the porkchop among your family, you can chop it into “tiny bits” and make them into “loads and loads of sausages” and sell them to everyone.
The problem is, if the porkchop is bad, instead of just your family getting sick, now there’s tons of bad sausages on the market making everyone sick. No one wants the sausages, we don’t know who’s got the bad sausages so all sausages are suspect, and the price plummets.
To mix agricultural metaphors, the porkchop comes home to roost in that we could see it becoming hard for small businesses to get loans, or for regular people with good credit to get mortgages, in the coming months until the banks and companies own up to the bad debt on their books.
(Photo: Kent Wang)