The Sub-Prime Bust

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If banks have money to lend out they typically want to lend it to their best customers. But unfortunately every other bank is trying to do the same thing and this leads each of them to offer the best terms and rates. Unfortunately, once all of the best customers are taken if banks still have more money to loan out then they will start looking for customers with less-than-stellar credit histories. Still their will be keen competition for their business as well. Banks will naturally want to charge higher rates of interest to cover for the increased probablilty of default on these types of loans. But since they really want to make these loans they might compete on something else other that price. That is some banks may simply make it easier to get credit with them by not requiring as stringent requirements as their competitiors. In some instances this might even mean forgoing a formal credit check or not requiring copies of the loan applican'ts W-2 forms or check stubs. Of course eventually some of these folks who took out these "Sub Prime" loans had difficulty (not unpredictably) in paying back their loans. Some of these banks got into big trouble and more than a few have failed as a result. Is this kind of competitive activity really any different than what we see in other industries? If it is then why is it that the government believes it is their responsibilty to intervene? Make sure to explain your argument carefully.