Federal Reserve Is In A Fix

One of the major causes of the housing bubble and bust was interest rates.

They were so low at the beginning of the past decade that they made mortgage affordable for a wider group of the population who then competed to buy homes, driving up prices dramatically.

With this awesome demand, the Federal Reserve became concerned about inflation in 2005 and started raising rates.

This made adjustable rate mortgages less affordable. Mortgage defaults started rising leading to the subprime crash of 2007 and the consequent worldwide economic collapse.

Barry Ritholtz writes for the Washington Post:

Fed Funds rates were at 6 percent in early 2001 before the Fed began slashing them. They made eight rate moves between January and August 2001, cutting rates in half to 3 percent. Note this was before the Sept. 11, 2001 attacks. It looked to this observer that Greenspan was panicked by the market reaction to the terrorist attacks: He took rates all the way down to 1.25 percent. At the time, it was unprecedented to have rates below 2 percent for three years, and at 1 percent for a year.

This unprecedented Fed intervention unleashed a series of unfortunate events: Bond managers scrambled for yield, ultimately finding AAA-rated mortgage-backed junk products. The dollar plummeted 41 percent over the next 7 years. Anything priced in dollars — oil, gold, foodstuffs — skyrocketed, sending inflation screaming higher. Housing took off, loan standards collapsed, credit quality suffered.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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