THE CARTOON EXPLANATION OF SUBPRIME MORTGAGES.

THE CARTOON EXPLANATION OF SUBPRIME MORTGAGES. One of the posts by Doctor Manhattan that I linked to yesterday had this cartoon explanation of the subprime mortgage crisis. (The link came from Greg Mankiw, who is a notable economist and teacher). Nick sent me an e mail asking: “Just flipped through the sub-prime mortgages cartoon. I realize it’s crude, but is that really the type of thing that was going on?” Kids, the answer is: YES. I would add two points. First, what is shown in the cartoon happened on an enormous scale, involving billions of dollars. Second, the cartoon depicts a “Norwegian Village Pension Fund” as the hapless purchaser of some of the artificially-created mortgage-based securities (referred to as CMO’s and CDO’s in the cartoon). Norwegian Village Pension Funds are not the only owners of these securities. Nobody knows who owns — or is exposed to the risks of — these securities of doubtful value (take insurance companies as an example). There are huge losses out there. How can you know whether a company you may be doing business with has enough bad securities that it won’t be able to pay you promptly — or at all?. The AP reports today that JPMorgan has agreed to buy Bear Stearns for a price that is 1% (one per cent!) of the price the investment bank was worth 16 days ago. It notes that “Bear Stearns was founded in 1923 and in recent years was best known for its aggressive investing in mortgage-backed securities.”