Via Big Picture the Financial Times has an interactive map which charts the winners and losers of the subprime credit crunch. The three red dots on the Australian continent are Macquarie Bank, Absolute Capital and Basis Capital (Hedge fund).

It is not really surprising that there are issues around subprime lending as it is a high risk area by definition. Subprime are borrowers that do not qualify for market interest rates or have bad credit history.

The lenders try to make this up by having higher interest rates and increased fees for default and late payment. This is a similar use of economic technology as insurance; if the risks are higher to the company providing the service then the costs to the consumer are higher to cover the extra financial risk.

If subprime lenders are having meltdowns on the global market at the moment, it is their own fault and they should go the way of the dodo. They obviously do not have a sustainable business model. Isn't this exactly what the market is supposed to do?

More - Barry Ritholtz has a run down of the amounts the world's reserve banks spent to keep liquidity up and overnight interest rates down. The Australian Reserve Bank injected 4.95 Billion AUD on friday.

To put that in perspective Australia spends 17 Billion a year on its defence budget.

More - Gary Sauer-Thompson asks why there is Reserve Bank intervention, shouldn't the market be left to deal with liquidity issues itself under classic liberalism. He writes, "On that scale? Give me a break. This global market turmoil is more than a liquidity crisis. It looks as if classical liberalism is going to be mugged by economic reality."

More - Peter Martin analyses the issue from the Australian political perspective. He quotes Peter Costello, "So the Australian exposure to non-conforming or sub-prime loans is about one-fifteenth what it is in the United States. In the US the delinquency rate is about 2.5 per cent. In Australia it is about 0.4 per cent, one-sixth."

The subprime crisis has dominated financial thinking lately including taking a few CEO scalps amongst banking companies. Why are we surprised? It was a high risk venture predicated on house prices rising forever. Those that take those risks should be able to accept them.

Government is not there to bail out those risk takers. Between the Greenspan/Bernanke put and now the Bush Administration negotiating that subprime mortgages not go to the higher interest rates for another three years - we have massive interventions into the allocation of risk and reward.

They are making the market fail.

From the article:

If adopted, this policy would create winners and losers. The winners would be people who bought homes they couldn't really afford by getting subprime loans whose rates were due to skyrocket after two or three years. Other winners would include the neighbors of these people, who wouldn't have to live next to empty, foreclosed houses. Local and state governments would benefit if the policy keeps property taxes rolling in. And there are those investors that the Journal mentions, the ones who are anxious about the mortgage meltdown. They must always be watched out for.

The losers include people who want to buy houses, and who would benefit from increased inventories of distressed homes on the market. It's bad news for Realtors, lenders and mortgage brokers, who depend on home sales and refinances to stay in business.

There are some issues here too; one is the investors who backed these high-risk are now expecting a high return for those that could afford the starting low price period and are now in the high interest rate part of the loan. Secondly the banks don't own these loans, they sold the subprime mortgages off into the equity market. They really don't have any authority to mess with these loans - nor does the government.

The article continues:

And what about people who saved up for down payments and got responsible mortgages? This policy seems like a slap in the face to them. They're suckers. They should have been irresponsible with their debts and bought unaffordable houses with 2/28 subprime ARMs instead of being responsible, right? Is it good policy to reward subprime borrowers and make prime borrowers feel like schmucks?

I was one of those people. I saved up a 20% down payment before buying a house. I don't particularly care about that; however, markets are markets and government bailing out of anyone who has been caught in a bad deal - whether Lockheed Martin or a subprime borrower - destroys the whole purpose of having a market system.

The Bush Administration is wrong to do this.

Or more accurately were intended to work.