The subprime mortgage crisis caused a temporary paralysis in the credit markets and led some to speculate that the economy would soon slide into recession. How did this crisis evolve, how serious is it, and what does it tell us about the state of our capital markets?

At the heart of this problem are lenders who made bad loans to borrowers. They made money by originating subprime loans and securitizing them into debt instruments that passed the risk on to someone else. The instruments were highly rated by the rating agencies, and were then gobbled up by investors attracted by their high yields.

Then something unfortunate happened. Home prices started to fall. Subprime borrowers—particularly those with adjustable rate loans—could no longer meet payments. The result is about $1 trillion of commercial paper that can't be properly priced and no one knows who holds.

Yet it's important to keep in mind that the estimated $1.3 trillion in subprime loans represents a small portion of the $10 trillion in total outstanding mortgages. It represents an even smaller share of a securities market that is worth $100 trillion. Furthermore, only half of the subprime loans have adjustable rates.

While the alarmists are getting plenty of ink in the press these days, at the Chamber, we don't see the subprime crisis spreading to other parts of the mortgage market or the broader economy. Growth will slow for awhile, but the chance of a recession remains small. With some action from the Fed, the market is already righting itself.

The reaction to this situation from our politicians, regulators, and fellow citizens tells us a lot about how they view capital markets. It underscores a growing desire by many to try to eliminate all risk from investment. While no one wants to see someone lose their home or investments, we need to understand that the market goes up, the market goes down. Some people make a little money or a lot of money. Some people lose money. That's the way it is supposed to work.

Of course, there should be strong protections against fraud and manipulation in the markets. Reasonable regulations have an important role to play. Transparency is essential throughout the entire capital formation process. But not every investment loss, market downturn, or bubble should result in legislation, regulation, or litigation.

If the goal is to eliminate all risk, then our markets will no longer be the engine that drives a growing economy and rising standards of living. So what do we need to do to ensure that we have the best capital markets in the world? Tune in again next week!