Subprime fallout arrives in the suburbs

There is a widely held belief in the United States that the fallout from the subprime mortgage meltdown primarily affects lower-income borrowers who are primarily Hispanic or African American. While the subprime crash has affected the middle and upper class by slowing economic growth, few believed they would lose their homes.

Turns out, this perception is completely false. A Wall Street Journal analysis of 130 million home loans made over the last 10 years found that subprime mortgages were made "in nearly every corner of the nation, from small towns in the middle of nowhere to inner cities to affluent suburbs."

A good example of this is the greater Washington, D.C., area. One might think that subprime loans would be most popular in poorer areas of the District. And they'd be right. According to a study by the nonprofit Urban Institute, high-interests loans were indeed popular in low-income neighborhoods. However, they were much more popular in Fairfax County, which has a median income of $100,318—the highest in the country. Many homeowners there used subprime loans to upgrade to a larger house. In fact, these kinds of loans fueled the McMansion phenomenon.

When more wealthy homeowners start to lose their homes (and as Passport noted a few weeks back, the worst is yet to come), the confidence of U.S. investors will suffer greatly. This, in theory, will further slow global growth, as consumers will be less likely to spend.

This is what should happen, in theory. It should already be happening, as we're about eight months into this subprime mess. But the Dow keeps chugging along. I can't figure out why. I asked a trader in Chicago what he made of it, and his explanation was simple—it's irrational. Stocks are trading up on the hope that Fed Chairman Ben Bernanke will cuts rates again, as he did last month. But there's no indication that would happen. It would probably be a mistake, as it could (and probably would) trigger inflation.