can someone plz explain how Alan Greenspan’s decisions to keep reducing the overnight rate exacerbated the subprime crisis? is it because mortgages became so cheap that people were able to buy houses they normally coudl not afford? or were there other reasons too? thx.
Because decreasing rates made mortgage more attractive…increasing more structured rubbish papers! it is like put petrol on the fire! HE IS the man to blame!!!
Basically yes. He made borrowing extremely cheap so people who otherwise would not have had a shot in hell at receiving a loan, mortgage, etc… we’re suddenly getting approved in minutes by these automated loan writing systems. Lowering rates would have been fine if it were not for the exotic mortgage products that existed. These borrowers we’re flocking to the ARMs because they sounded so attractive at the time. Fast forward a few years and all of those loans have reset to levels 2-4x higher than they previously were resulting in an unprecedented level of foreclosures and delinquencies. So everything snowballed into one giant financial meltdown. Bascially, Borrowers can’t pay->Securitized mortgage products rapidly lose value->Wall Street gets pummeled because they invested in the mortgage backed securities using borrowed money.
Greenspan should go back to primary school!!!
Nice interview to Greenspan: http://uk.youtube.com/watch?v=m6b4qX_qm40
the Fed not regulating the products was far more destructive than having low interest rates
Sims Wrote: ------------------------------------------------------- > the Fed not regulating the products was far more > destructive than having low interest rates Definitely. There was essentially zero regulation on the lenders.
If anything, lower rates should have increased fixed rate mortgages and decreased ARM’s. Lower rates spur the economy, it’s not Greenspan’s fault lenders went nuts. Just because rates are lowered doesn’t mean risks change.