Comment by winslow | Hacker News Reader

Comment by winslow | Hacker News Reader

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So we are back at the subprime lending model. Correct me if I am wrong but from my understanding this is what ultimately caused (or one of the biggest factors along with adjustable rate mortgages) the housing collapse and economic downturn circa 2007/2008. So how is this subprime lending any different via the credit cards?

We could hypothesize that credit card debt won't be as massive as mortgage debt and thus may not cause catastrophic events. However, on the flip side there is little to no collateral in credit card debt that a creditor would get in return of defaulting on your credit loan.

The more I look at credit debt, student loan debt, and fairly recently CDO's (Collateralized Debt Obligation) that banks are doing again we are setting ourselves up for failure again.

Anyone have any thoughts on all this?

As long as credit card debt is rated properly, its acquirers know exactly what they're signing up for, and at certain point will exhaust the resources they're ready to pour into junk-level securities (or at least be somewhat contained by the public's appetite for junk).

The subprime mortgages propelled into the prime markets only after a major insurer with a strong balance sheet announced that they will make their investors whole in an [unlikely] event of a default, which led to ratings' agencies decision to assign the AAA rating.

Without AAA, such securities are relegated to their own little corner of the market, which sooner or later faces capital constraints.

It's actually substantially different. Most importantly, it's much hard to paper over shoddy lending practices with credit cards.

If you give a subprime borrower a mortgage and the market continues to go up, they can pay it back with the gains from selling the house. On paper, it looks like everybody won.

With credit cards however, the owner eventually does have to pay the debt back. If you're too loose with handing out credit cards, it's easy to end up with a bunch of people defaulting.

Plus, the scales are an order of magnitude different. Moreover, credit card debt isn't tied to the rest of the economy as heavily as mortgages are.

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