Business, Economics and Jobs

Subprime mortgages not solely to blame

Subprime mortgages have been blamed for the financial crisis -- everything from the international banking system's downfall, to exploitation of the poor. But "Newsweek's" Senior Editor, Dan Gross has a different take, and he wrote about it in an article this week.

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According to Gross: "There's this great tendency with all the debacles we've had to blame this whole mess on sub-prime lending, you know, lending to poor people, lending to working-class people, lending to people who haven't been in the financial services mainstream. And, what I set out to show in this article was that it's not the theory that was the problem, it was the practice. It was people lending recklessly to poor people; just in the same way that people who lend recklessly to really rich people -- like these private equity firms, the hedge funds, and oh, Donald Trump -- they end up losing hundreds of millions of dollars too.

"So we have this huge explosion in, you know, these companies that went out there, they had mortgage brokers, they made the loans, they sold them to Wall Street, they took their fees, they didn't care if the people could pay them back, they didn't care what they were doing to their customers. Those have all failed ... that business model is dead."

Gross says there was a small number of lenders who were "ethical subprime lending industry" -- like community development banks and unions, who practiced careful lending to working-class and poor people. They charged slightly higher rates, but they worked with people to make sure they pay them back. And these institutions are still viable.

Gross goes on to say that subprime is a symptom, and not the cause, for the financial crisis.

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