Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis

Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis

Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis

Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis

Synopsis

To work our way out the economic crisis, and to avoid such meltdowns in the future, we must fully understand how it happened. The chief culprits are now trying to pin the blame on one another-with Congress pointing at Wall Street, financiers blaming the Federal Reserve, who in turn point back to Congress.

Like so many other stories about our time, this one begins on the morning of September 11, 2001, with 19 terrorists and four passenger planes. Their attack, which cost almost 3,000 people their lives, shook our known universe. All U.S. aircraft were ordered to land immediately, and North American airspace was closed down. Routes of trade and communication were blocked as fear of additional attacks paralyzed the entire world, and speculation arose about long wars. The U.S. stock exchanges were closed; when they reopened, the New York Stock Exchange fell by more than 14 percent in one week. The United States was in a crisis, and the global economy was therefore under threat.

But there was one man on whom the world could pin its hopes. A New York economist of Hungarian-Jewish extraction with a bad back, who prefers to read and write lying down in his bathtub. A former jazz-band saxophone player who used to move in the laissez faire circles around writer Ayn Rand. A man whose dark clothes and reserved demeanor had caused his friends to nickname him “the undertaker.” After a career in the financial sector and a few stints as a presidential adviser, however, Alan Greenspan had become a pillar of the U.S. establishment.

Even so, few had predicted the next step in the career of this man, who had advocated both in speech and in writing that the Federal Reserve, or “Fed,” the U.S. central bank, should be closed down and that the market should instead determine the price of money, which should preferably be backed up by gold. In 1987, Greenspan was appointed chairman of the Fed at the age of 61. He soon acquired a reputation for expressing himself unintelligibly. This is probably . . .

Excerpt

I can calculate the motions of the heavenly bodies, but not the
madness of people.

—Isaac Newton, after losing a fortune in the South Sea
Bubble in 1720

In the fall of 1991, a high-pressure system from northern Canada collided with a powerful low-pressure system over the coast of New England. The large temperature contrast in such a small area gave rise to a cyclone. The cyclone, in turn, absorbed a nearby dying hurricane, which created an enormously powerful storm. The winds at times attained 75 miles per hour, and 35-foot waves shook unfortunate seafarers. The biggest individual wave measured was 100 feet high.

Meteorologist Bob Case at the National Weather Service in Boston explained that circumstances were perfect for the emergence of a storm. Three independent weather phenomena happened to occur at the exact times and places required for them to interact to create the most severe storm in living memory, causing great loss of human life and property. Circumstances were—unfortunately—perfect for devastation.

The world has just been struck by a perfect financial storm. A series of circumstances that individually would not have had to lead to disaster—low- and middle-income countries starting to save money; the head of a central bank's wishing to avoid a crisis; political demands to expand homeownership; new financial instruments; and new banking regulations, credit-rating requirements, and accounting rules intended to prevent cheating—came into existence at the same time and reinforced one another into what Alan Greenspan has called “a once-in-a-century event.” Circumstances were perfect for a financial storm so tremendous that few people now alive have seen anything like it. The monster waves are swallowing gigantic . . .

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