Risk & Consumer Behaviour

A lot is being written these days about the "global credit crunch". A result of financiers' ability to create complicated financial assets out of consumer debt and trade debt as an asset on the global market. The advantages of doing this were that risky consumer debt instead of lying on banks' books could be sold as a rent providing asset on the global market and would therefore spread the risk across the entire financial food chain.

So what happened? Where did it all go wrong? Well, frankly, if you minimise your risk, what usually happens? You end up taking more and more of it. And this is exactly what happened in the mortgage market. Since the risk of mortgage takers defaulting was supposed to get passed around the world as a rent providing asset, the original mortgage provider had no qualms in offering more and more risky mortgage since it was not going to be on his books anyways. It ended up being an orgy of mortgage being doled out with people with no income proofs being offered loans for houses. The most safe form of lending backed by a person's own dwelling became more risky than the personal loan being offered around. Whats more, it was available at much lower interest rates than personal loans. A crisis which was waiting to happen...