By 2001, as the demand for safe assets began to rise above what the U.S. corporate world and safe mortgage‐ borrowers naturally could provide, financial institutions began to search for mechanisms to generate triple‐A assets from previously untapped and riskier sources. Subprime borrowers were next in line, but in order to produce safe assets from their loans, “banks” had to create complex instruments and conduits that relied on the law of large numbers and tranching of their liabilities.
... does this make sense? So, financial institutions poorly measured risk, sure. But, in order for complex instruments to be made from subprime loans, more subprime loans had to be made. Meaning, there had to be incentives for subprime borrowers to receive subprime loans. Does Caballero really believe that lower interest rates couldn't have been among these incentives? And that had interests rates been higher, there wouldn't have been less incentive? Ricardo Caballero's story can't be the one held by most academic economists, can it?