Saturday, July 16, 2016

Brief Housing Bubble 2.0 explanation

Housing Bubble 1.0, created in part by Basel II risk-weights of only 20% to AAA rated securities backed with mortgages to the subprime sectors, exploded, and a lot of liquidity was then injected with Tarp, QEs and other means.

Much of that liquidity was channeled through banks with not much capital and which, because of lower capital requirements (risk-weights sovereign = 0% and residential housing = 35%), channeled that liquidity into financing the government (low interest rates) and housing. The SMEs and entrepreneurs, with a risk-weight of 100%, had no chance to access loans at correct risk premiums.

If there is no change we all end up in houses with mortgages, but no jobs to pay the utilities and service the mortgages with.