Cowboy Confessional

As talking heads franticly attempt to lay blame on one political party or another for the current financial market meltdown, all have avoided asking what or who ignited the problem. They blame deregulation (wrong), Bush (wrong), the Democrat Congress (wrong, which may be a first).

The mark of Cain is on Alan Greenspan, former head witchdoctor of the Federal Reserve.

For whatever reasons Alan’s alleged mind concocted, Greenspan gathered the firewood, lit the kindling and blew on the flame that now engulfs the global financial markets. Feel free to reserve your place in the long line of people who will queue to piss on his grave.

Greenspan lowered the Federal Funds Rate to historic lows for an extended period of time. From 1954 through 2000, the average Federal Funds Rate was 6.1%. From 2001 to the time Greenspan left office, the average rate was 2.2%. In other words, Greenspan put money into the lending stream at 1/3rd the historic rate, and he did so for more than four years.

Every person and institution (and institutionalized persons including your Congressman) performs risk/reward analysis. Even muggers ponder the odds of being shot by an armed citizen before picking their target. Banks do the same thing. Before they lend money, they assess the risk. Part of the risk equation is “what is the cost of the money I’m lending?” If the cost of money is low, the risk is lowered and thus banks are willing to take bigger chances, including lending to people they otherwise would not.

This is the essence of the sub-prime “let’s lend money to anyone regardless of their credit worthiness” mortgage market. With plenty of cheap money available, lenders took increasingly larger risks. With each new home owner in the market, the housing supply shrank and thus home prices rose. This encouraged banks to lend to even riskier new home owners for even more inflated properties. This reinforcing cycle continued until the riskiest of loans started to default and a reverse chain reaction occurred.

In short, government caused the problem by creating a purely artificial situation. Money cost less than it would in a free market. Cheap money makes people stupid (look at any trust fund child). The Fed was stupid which made banks stupid enough to lend to people too stupid to otherwise risk lending money to.

There is no telling where this fiasco will end, but let history name it well: Greenspan’s Disaster.

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This entry was posted by Guy Smith on Monday, September 22nd, 2008 at 6:18 pm and is filed under Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.