Just how did we get into this economic mess? The answers are both complex and troubling. Blame greed, irresponsibility, lax government oversight, conflicts of interest and especially blind faith in a housing boom that seemingly had no end. But end it did, setting off a chain reaction that has left the economy in tatters and stuck the American people with the tab.
Thus far, the government has committed $1.75 trillion to buying or propping up a portfolio dominated by devalued real estate assets — and this may be just a down payment. The Obama administration has a new plan that will commit more government cash to rid the financial system of the toxic assets that have wrecked the economy.
Roots in an Earlier Collapse
The origins of the current crisis can be found in an earlier calamity — the collapse of the technology industry in 2000. The Federal Reserve responded to that downturn by lowering interest rates. Ideally, lower rates trigger more borrowing and spending, which in turn lead to economic growth.
In May 2000, the Federal Reserve’s federal funds rate — the rate banks charge one another for overnight loans — was 6.5 percent. By August of 2001, it was 3.5 percent. The Fed further lowered rates after the attacks of September 11, to 1.75 percent by December. By June 2003, the rate had been cut to 1 percent and the average monthly rate on a 30-year, fixed mortgage, according to a Federal Home Mortgage Corp. (Freddie Mac) survey, dropped to 5.23 percent, the lowest level since the mortgage buyer started tracking rates in 1971. And so everyone, it seemed, was looking to buy a home.