What's really going with this subprime thing? Why is it wreaking havoc for the USA, even the world?

In USA, like most of the world, people borrow from the bank to buy houses. If the borrower checks out, he or she gets the house and pays monthly mortgages for a long, long time. For those who the banks think are too risky, that they may not afford the monthly mortages, they are out of luck.

Then someone invented subprime: loans with very low mortage payments. All of the sudden, many more can afford houses. It is good for everyone: developers keep on building, real estate agents keep on selling, consumers keep on buying houses, and banks keep on lending money and raking in interest payments.

There is a catch. The payments are low only for a while, in a few years bank will drasticallly increase the monthly payment. There is no free lunch. Those people really just shifted payments to the future. The loan becomes a race: or gamble. The house buyers need to generate higher income, refinance the loan, or sell the house before the payment goes up. Otherwise, the bank will foreclose the house and evict them.

The gambling factor turned housing market speculative. The recipe is simple and straight-forward. Buy with cheap loans. Sell quickly whenever the price goes up. Pay back the loan. Repeat. Wait! This looks like the famous bubble. The price cannot keep on going up. The last one who cannot sell will lose everything and face bubble burst.

Some loan agents turned nasty in certain areas. They lured people with "cheap money" and waited. In a few years, either they make lots of money with the higher interest, or they get the collateral when the borrower cannot make payments. It is predatory.

It gets even worse. Since banks knew these loans are risky, they unloaded them quickly. They will bundle these loans together and sell it to the general public as a "high yield annuity." Banks keep the proceeds from selling the package and the general public owne those risky loans, now disguised as high-yield investments. This is almost a scam.

Finally, future arrived. The housing bubble reached the last fools: the one who cannot sell his/her house. The victims of predatory loans bankrupted. The banks cannot dispose thousands of foreclosed houses. The investors lost money. Institutes that underwrote those investments must close. It is a big a mess.

Simply, subprimes infuse the society with money from the future. US consumers simply spent those money, instead of putting them to good uses. When the future catches up, there is no money to pay back. Economy shrinks, companies bankrupt, people lose jobs, and lives become hard.

Governments knew that it is much better for countries to grow steadily than gyrate between booms and busts. This means the scape-goat hunting season is now open. Hey, some heads must roll.