Where did all the money come from that fueled the sub-prime lenders?

The simple answer: Wall Street. But what does that mean?

Every year our money supply is greater than it was the year before. This is called inflation. Inflation is NOT an increase in price level, it is an increase in the money supply. The Federal Reserve Bank (the "Fed") is charged with managing the money supply. If the money supply were to "contract" which is the opposite of grow it could lead to Depression. We absolutely don't want a Depression. Therefore the Fed causes or allows (however you want to look at it) the money supply to grow.

All this money needs to go somewhere. If you get some of it you will undoubtedly spend it. I know this is true because we have a "negative" savings rate. We don't add to our savings year-to-year. Eventually all this money finds its way into the accounts of major financial institutions. They traditionally park this money in the bond market where they receive interest based on the riskiness of the particular bond issue. Mortgage-backed bonds have shown themselves to be good investments over time for these funds.

The sub-prime mortgage market was simply an extension of this use of "surplus" funds.

The money supply is still growing. As a matter of fact it is growing faster now because with higher interest rates more money (from Europe, China, etc.) is coming home.

Read all about this chart at http://agonist.org/bernanke_opens_the_floodgates_of_money 

All this money has to be "invested." Idle money is not productive. That is a cardinal sin of the nation's money managers.

So what can we expect?

I don't think that we can expect a repeat of the S&L crisis. So far we have lost some mortgage banks. Some might even say a lot of mortgage banks. But these aren't "real" banks in the traditional sense. They do not have depositors. They are not insured by the FDIC. They are just "companies" as far as the banking regulators are concerned. Another company more or less is no big deal.

There is still a "ton" of money out there that needs to be employed. Mortgages are still a good "bet" for the money managers. Sub-prime lending will be back with a vengeance. Some say it never went away. The rules will be a little different. The riskiest loans will disappear. Sub-prime will be meshed with Alt-A. Calling it something else doesn't make it something else.