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.<\/p>\n
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.<\/p>\n
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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.<\/p><\/blockquote>\n
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.<\/p>\n
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.<\/p>\n