How'd we get in this mess? A look back
Kai Ryssdal takes us back to the point at which the financial markets' problems began -- five years ago when the Fed made it cheap to borrow money and Wall Street took advantage, devising complicated investment schemes that hid their high risk.
"Foreclosure" is hung on a For Sale sign in front of a townhouse in Herndon, Va. (Paul J. Richards/AFP/Getty Images)
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TEXT OF REPORT
KAI RYSSDAL: Today is, interestingly enough, Constitution Day -- the 221st anniversary of the signing of that document. I'm pretty sure there's nothing in there about the secretary of the Treasury and the chairman of the Federal Reserve setting themselves up in private business. That sounds kind of strange. But with the Feds' bailout of the insurance company AIG last night, that's effectively where we are. Fortunately, you don't have to go all the way back to the founding fathers to understand how we got here. You just need to remember the words of a man almost as revered.
ALAN GREENSPAN: The Federal Open Market Committee stands ready to maintain a highly accommodative stance of policy for as long as it takes to achieve a return to satisfactory economic performance.
Alan Greenspan, of course, saying in that way he has that he's going to keep interest rates low as long as it takes. When he gave that congressional testimony five years ago, he was about to lower the Fed short-term interest rate to 1 percent and leave it there for more than a year. That, in and of itself, wasn't a bad thing. It's what people did with all that cheap money that's gotten us into trouble.
They borrowed. They borrowed a lot. And then they got creative, using things like collateralized debt obligations to bundle risky mortgages into something they could sell off in the markets. But when the value of the houses behind those mortgages began dropping? Well, here's financial analyst Peter Cohan.
PETER COHAN: Nobody knows what's in these bundles of mortgages. And they have a very, very low value because nobody can open them up and figure out which ones are paying and which ones are not paying. It's like Superman trying to look inside of a box that's wrapped in lead. You just can't see inside.
If there's one thing we've learned over the past year-and-a-half, when the markets don't know what's inside. they just stop. They stop lending. They stop buying. Nobody trusts anybody. And, presto, a credit crisis.
There's an argument to be made -- and lots of really smart people have made it -- that all those financial innovations, things like CDOs, were inevitable. That once you had basically free money, thanks to Alan Greenspan, and a crowd on Wall Street that's always looking for an edge, abuses were bound to happen. That what we've got here is a failure of regulation.
Kathleen Keest at the Center for Responsible Lending calls it a culture of anti-regulation.
Kathleen Keest: Well, I think the mantras were: "We know what we're doing," and "Government will stifle access to credit and we don't want to do that."
Even today, after all the economy's been through the past year-and-a-half, Treasury Secretary Hank Paulson still isn't convinced regulation's the answer. Here he is from two days ago, the day Lehman Brothers went under and Merrill Lynch was bought out by Bank of America.
HENRY PAULSON: Well, I think there's got to be a balance between regulation and market discipline. You can't rely on one to solve the problem.
The Dow Industrial Average disciplined itself down 500 points that day. And since then the govenment's added insurance to its business portfolio.
Comments
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From Cedar Rapids, IA, 09/22/2008
If the housing market is causing this calamity, wouldn't it make more sense for the FED to require mortgage holders to refinance bad mortgages and use government money as an incentive? How is it possible that homeowners are $700 billion behind on their mortgage payments. Is this amount actually Principle or is it fines, penalties and interest?
09/19/2008
Greed always exists. Its what got cavemen out of caves and away from fires, into homes.
What IS needed, is regulation. So contrary to the first poster, Phil Gramm and et al 's desire for deregulation, let the markets do exactly what they did under Papa Bush's eyes--the S&L crisis, for example Neil Bush and the Silverado S&L--got us to here.
We made it easy, then said, "go forth and prosper". When that wasn't enough, we had to create new ways to hand out mortgages. As we all know, when you create new ways to make money, there are no rules of nature, science, gravity or anything else to judge the results by. You can't predict an artificial market, b/c there are no rules. Its artificial.
The truly disturbing part of all this is...the best investment in America was not its infrastructure, it wasn't harvesting its raw materials, it wasn't chasing after its intellectual abilities, it wasn't creating new energy sources as gasoline made its slow climb....no, it was selling Ponzi mortgages, that would get instantly resold to bigger suckers.
Where is America going, that the biggest investment is in a sucker's game?
From Los Angeles, CA, 09/18/2008
I'm sorry but I call "bull$hit" on this story. This problem wasn't caused by Greenspan, the Federal Reserve or lack of government regulation. This was caused by greed. More specifically, the greed of real estate agents, mortgage companies, banks and the rest of their ilk.
- The real estate agents and/or loan originators put people into homes that they knew the buyers could not afford. They gets their money through fees and then move on.
- The mortgage companies and/or banks floated them a subprime loan or an ARM. The bank gets revenue through the fees and then sells the mortgage.
- The banks and loan originators didn't care about the quality of these mortgages as they sold them off and get their money up front. They also said "The federal government will bail Freddie and Fannie out because they are too big to fail. I have my money, it is now someone else's problem."
So thanks to some greedy bastards in the real estate and financial businesses the U.S economy will definitely go into a recession along with the departure of a couple of banks, mortgage companies, Wall Street investment firms, tens of thousands of jobs and a few hundred billion dollars.
09/18/2008
Allan Greenspan is the last person to be waxing profound about a car that he allowed to roll downhill w/o putting on the break...
check out this interview on FreshAire with Terry Gross and Michael Greenberger==someone's whose memory of events is much less tainted by coverying his own roll in the debacle.
http://www.npr.org/templates/story/story.php?storyId=94686428
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