The Fed’s Contribution to Mortgage Blues

According to Alan Greenspan the housing bubble had far less to do with the Fed’s policy on interest rates than on a global surplus in savings that drove down interest rates and pushed up housing prices in countries around the world. Many Fed officials counted on the housing boom to prop up the economy after the stock market collapsed in 2000.

What a concept. People were saving too much money. The Fed reduced the interest rate to the point where it was not cost effective to save in a traditional manner. Rich people invested in the market, poor people bought a house. In 2001 there was a mini-recession following September 11. The next line was the Fed further reduced interest rates to get more people to buy homes, refinance to lower payments, or receive cash out. The Fed encouraged equity stripping. The recession was postponed by freeing up liquidity from the equity in their homes and giving them more money to spend. For the last few years we have watched prices double and triple on life’s basic necessities, while being told “there is no inflation, the economy is good”.

Foreign investors were pouring trillions of dollars into American securities. Much of that money, often described as the “global savings glut,” flowed directly into mortgage-backed securities that were used to finance subprime mortgages. That seemed to be fine on the surface. Bonds were created to satisfy the need for foreign investors. It created what us country folk call a “pig in a poke”. Now it appears there is nothing left but the squeal.