Thursday, January 13, 2011

Subprime loans equal redistribution of wealth from rich to poor

I am half way thru The Big Short by Michael Lewis. It brings us into the world of repackaging subprime mortgages to investors. The basic idea is mortgage brokers gave poor immigrants with no documented income quarter of a million dollars. The mortgage brokers then sold the loan to firms which bundled them together into a collateralized debt obligation (CDO). This basically transferred the money from a rich wall street firm to a poor person. Those CDOs where then bundled in bigger groups of CDO. Insurance was also created on these CDOs called credit default swaps or CDS.

Thus we have a case study for what happens when the redistribution of wealth from rich to poor occurs. So let's look at what happened. Did everyone thrive? Did our economy become very heathy as Aftershock's author Robert Reich believes?
Unfortunately, no. We created a housing bubble which is still reeking havoc throughout the entire world. I then we can call this the final proof that redistribution of wealth from rich to poor doesn't "work"


  1. I strongly disagree with the premise. There was no redistribution of wealth, a loan was extended and packaged into the CDO.

    The money was definitely going from the person to the bank, if the transaction was completed. In the event the person couldn't pay it the government was the guarantor, which prompted the loans extended to non-credit worthy individuals and thus the bubble.

    Taxes, Charity and Volunteer work are forms of 'redistribution of wealth'. If you say with finality that they don't work; Well, we don't really NEED public libraries, roads, schools, soup kitchens, the red cross, doctors without borders or any of the zillion things we raise funds for in our service driven organizations like the rotary club, churches or schools.

    Not trying to be harsh but I think this was one of the worst ideas that ever got traction in politics. Redistribution of wealth is a cornerstone of Christianity and America as a whole (the very things the opposition claims to represent).

  2. The tax payers actually were the originators of the money that was redistributed. Redistribution of wealth is a loaded term. If someone loans me 500k and then I never pay them back, is that redistribution?