The 1% that have Sub-prime problem loans are because of "free trade"? Did they import that house from China or something?
Very clever! No, the rolling of sub-prime paper across the pond to suckers, who in the past would have been protected by the barriers of national self-interest, but no longer so because of the last penny greed upon which free trade is based, is how the problem has infected western economies other than ours.
Yes, indirectly.
It used to be that when a bank made a home loan, the bank carried the loan, and the associated risk, on its own ledger.
This gave the bank more incentive to be circumspect about lending money, to require a larger down payment, more evidence of income and likelihood you would *keep* your job, and the like.
However it happened, the banks discovered that they could 'sell' mortgages to those who wanted a guaranteed stream of income, or more or less guaranteed. As long as the banks maintained their stringent lending standards, that worked ok.
Then some over-educated cretins decided that they could use data analysis to combine pools of mortgages, leavening good mortgages with a few bad ones, to dilute the risk, and sell the bundled securities to even more customers -- insurance agencies, hedge funds, pension funds, overseas banks, and the like.
Once this became widespread, two things happened. 1) The banks realized, "Hey! It's not on OUR books anymore! We don't have to be as stringent in vetting the loans!"
2) The banks, mortgage brokers, and others, began to realize significant chunks of change by *processing* and *selling* mortgages to others, rather than just holding individual mortgage loans on their books to maturity.
The combination of 1) and 2) led to pressure on the banks to increase cash flow by increasing the 'churn', the rate at which they underwrote and sold mortgages, at the same time as the bank's own risk in making questionable loans decreased.
As it happened, this coincided with the 40-year lows in interest rates following the 9-11 attacks.
The result was a housing bubble.
The REASONS it didn't go on forever, are that the bubble drove prices up to the point where even "liars loans" couldn't provide enough rationale to float the loans; that is, the "margin of safety" (price appreciation) which allowed the liars loans to be made slowed down.
All the people who bought, had (and interest rates stabilized so the re-financing slowed down, too); and finally, the formulae and methodology used to price the risks inherent in sub-prime mortgages were based on data from before the bubble, when the riskiest loans in the bundle were much better than they were at the top of the bubble.
So the bubble finally ran into a pin and it is somewhere between deflating and popping.
The problem loans would NOT HAVE BEEN MADE back in the days when the banks carried the loans and the risks on their own books. But the banks DID sell the packages of mortgages to a number of foreign banks, especially in Europe, some in Asia; so in a sense the sub-prime problem loans WERE enabled by free trade.
Cheers!