Friday, August 10, 2007

Unprecedented Disruptions

ScienceBlogs, The Frontal Cortex (08.09.07), via Schpatz (link in original):
"The shit is hitting the fan: all those sub-prime mortgages given out so recklessly over the past two years are getting their interest rates re-adjusted. And that, of course, is when the foreclosures begin.

By most measures, sub-prime loans are a bad idea."

The Psychology of Subprime Mortgages

So why do people commit for these things?

Jonah thinks "a big part of the reason sub-prime loans remain so seductive, even when the financial terms are so atrocious, is that they take advantage of a dangerous flaw built into our brain. This flaw is rooted in our emotional brain, which tends to overvalue immediate gains (like a new house) at the expense of future costs (high interest rates). Our feelings are thrilled by the prospect of a new home, but can't really grapple with the long-term fiscal consequences of the decision. Our impulsivity encounters little resistance, and so we sign on the bottom line. We want the house. We'll figure out how to pay for it later."

In the meantime, Bloomberg (08.10.07):

"U.S. stock-index futures followed European and Asian markets lower on concern the widening credit crunch might hamper growth in the world's biggest economy.

Countrywide Financial Corp., the biggest U.S. mortgage lender, led a retreat in financial shares after saying investor demand for its loans has dried up amid 'unprecedented disruptions' in the mortgage market."

U.S. Stock-Index Futures Drop; Countrywide, Goldman Decline



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