interview question

arbitraily in a finance interview, they asked you… so how do you think the US economy got into this mess… be comprehensive as possible… how would you guys answer?

I think it’s 9/11. After 9/11, risk premia went up. Everybody needed to adjust to the idea that terrorism really could strike us anywhere. Nobody wanted to spend money on new projects or buy new cars or new ski equipment or whatever because it was unseemly to celebrate when we were supposed to be mourning. But the Fed saw the economic slowdown as a monetary problem and dumped cash into the economy like taking a depressed person and feeding him speed. It worked and the economy didn’t hit the skids. Alas, lots of money meant easy money. It was so easy to get money that credit spreads were crazy low. In 2004, people were afraid to board airplanes but completely unafraid to lend money to anybody who came asking. Combine all this with financial innovation of CDO’s which really picked up steam as a way to package up all this risk and sell it and we set the stage. Three or four years after the crappy loans went out, the money ran out and we got into a vicious cycle of decreasing real estate values and loan defaults.

joey good answer. to orginal poster, i left you a reply on level 2 board

^ Yeah, I agree completely.