I’m not an economist, but I read a lot. Here’s what happened: greed + stupidity. Greed on the part of the lenders, i.e. taking advantage of people who can’t read finance terms, and stupidity on the part of…people who can’t read finance terms.
Here’s how it plays out:
Greedy, immoral people loan stupid amounts of money to people they know probably won’t be able to pay it back. They do so using loans that are variable in rate — a concept that many with subprime credit don’t grasp. The key concept here is that they knew many of these people were going to default. They absolutely knew that these people couldn’t handle what they were agreeing to, but the loans were made anyway. Greed.
A large number of people who aren’t educated or mature enough to have a high credit score enter into agreements that are virtually guaranteed to screw them over if economic conditions change. Economic conditions change. They get screwed over. Stupidity.
This isn’t an isolated incident. This is the way America works. The greedy and powerful take advantage of the stupid and weak. The only difference here is that this particular greed-fest was so voracious that it’s affecting the ability for the powerful to continue to rape their victims. It’s like a lab rat experiment gone wrong, “Damn…we upped the extraction rate and killed this entire group…”