less-than-perfect credit scores grew, and the level of credit rating sank like a stone. Some mortgage offerings were known as NINJA loans, an acronym for“ No income, no job or assets.”
The peak of the bubble came in 2007 and the housing market began to crash as dodgy borrowers increasingly defaulted on their loans. Quickly following that, banks began failing and lending ground to a halt.
The underlying problem with this innovation was not primarily lending to lessthan-perfect borrowers, but rather, the question of how much interest to charge such borrowers given their higher risk.
Cointelegraph
FTX crypto exchange founder Sam Bankman-Fried in an interview during the Bitcoin 2021 conference.
benefit of hindsight and the world has embraced it.
Likewise, in Britain, joint stock companies were a relatively new innovation. One of the earliest was in 1606 in Virginia. These companies allowed people to invest in a company, but their risk was limited to what they put into the company. That was radically different from previous ventures where investors could be held liable for losses. In the longer term, the new system would encourage more investment by people and increased opportunities for entrepreneurs to experiment with new ideas.
Subprime Mortgages Catastrophe
In the late 1990s and early 2000s, bankers took on a radical approach to offering home loans. There had been government pressure to get more people on the homeownership ladder, as it was seen as a way to help lift people out of poverty and build wealth.
Typically, Americans had to show a solid credit record, enough earnings to more than cover the mortgage payments and have adequate cash for a down payment. One thing stopping people with less-than-perfect financial health was the inability of banks to charge higher interest rates on riskier home loans. That changed in 1980, when the Federal Depository Institutions Deregulation and Monetary Control Act scrapped interest rate caps. That decade also saw a change in taxation that would allow US residents to offset the interest costs of a mortgage against income taxes. In addition, the Alternative Mortgage Transaction Parity Act freed up offerings to allow floating rate mortgages and balloon payments on mortgages. Initially, there weren’ t too many problems.
Then came the 2000s, where some bond market whiz kids decided to package mortgage loans into bonds that included layers of different loans; some were highly risky, and some were high quality. These socalled mortgage-backed loans had a similarly to collateralized bond obligations that even back in the 1980s were known as toxic waste. The business grew, fueling property development and homeownership.
But over time, it seems that the portion of loans offered to people with
Back to Crypto
Cryptocurrency and its related blockchain do have some legitimate uses. Most obviously, it can be used as a fixed value currency, and the blockchain technology can keep track of where the money has traveled around the banking system. The latter could easily help speed up money laundering reviews by financial institutions.
But there are further uses that allow blockchain technology to maintain thorough recordkeeping, such as a history of what changes were made to a home and what planning approvals were granted. Medical records can also be attached to blockchain, giving physicians access to a complete set of health data for individuals. In time, it seems likely that memories of crypto scandals will disappear and the benefits will become integral to the financial sector.
The real message from this look at financial history is that new financial products have often suffered embarrassing failures when they are first introduced. But as people begin to understand the benefits these innovations make to the financial system, as well as what needs fixing, financial innovators will no doubt embrace the new technology instead if shunning it.
Simon Constable is a fellow at the Johns Hopkins Institute of Applied Economics, a financial journalist and a broadcaster. You’ ll find his written work in Time magazine, The Wall Street Journal, Barron’ s, Forbes and other distinguished publications. He’ s a regular contributor to CBS Radio’ s“ Eye on the World” with John Batchelor.
www. MoAF. org | Spring 2025 | FINANCIAL HISTORY 35