COLUMNISTS Washington is deserted in August, so demands for a political response to the financial-market debacle have been muted. Rest assured, this will change. The problem will not be dealt with by next month – things could easily get worse before they get better – and some appealing suspects are just asking for a regulatory beating. Enron and the other corporate scandals begat Sarbanes-Oxley. What will the subprime mortgage meltdown bring forth?
Observers of the subprime mortgage business (not counting those who work for it) had been predicting a breakdown for quite a while. Regulated banks do little if any such lending. Bank affiliates or independent mortgage companies have built the business – and they are, respectively, lightly regulated or virtually unregulated. They lent eagerly to borrowers of limited means, often on patently reckless terms (initially low “teaser” rates switching to expensive variable rates; interest-only loans; loans whose principal increased over time). Everything was premised on perpetually rising house prices.
