Friday, February 18, 2005
the american dream
the federal reserve has done much to encourage the boom, embarking in 2001 on a plan to suppress interest rates to real negatives -- where the prime rate is significantly less than inflation, offering massive incentive to borrow for private interests everywhere -- in the aftermath of the stock market bear. he even threatens to run the printing presses to create more dollars ex nihilo. it's rather like free money. the government is paying large lenders to borrow -- and they do. massively. the cheap money finances a huge housing boom, but leaves everyone in ever greater debt.
one of the products of this amazing housing boom has been the expansion of the federally-chartered mortgage giants fannie mae and freddie mac. these twin monsters buy mortgages from banks, keep some and bundle the rest into saleable chunks of debt known as mortgage-backed securities. this provides liquidity to the mortgage market -- the banks that lend to people are relieved of their risk at some profit and can go out to lend again, collecting the closing fees that have become an engine of bank profitability.
the economist renews its warnings about the state of affairs this week, citing the testimony of alan greenspan.