Saturday, May 28, 2005


One day after Paul Krugman wrote his article about the housing market bubble (mentioned below), there's this:

More than a third of the mortgages written in the Washington area this year are a risky new kind of loan that lets borrowers pay back only the interest, delaying for years repayment of any loan principal. Economists warn that the new loans are essentially a gamble that home prices will continue to rise at a brisk pace, allowing the borrower to either sell the home at a profit or refinance before the principal payments come due.

You probably know this, but in 1929, investors were allowed to purchase stocks on margin. That meant they could buy stocks at a fraction of their actual cost, essentially gambling that the price of the stock would keep rising. And once the stocks started to drop instead, all of the investors had to suddenly cover the full cost, and many couldn't. That turned a stock-market downturn into a full-scale crash and depression.

That other shoe is going to land hard.

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