07
May
09

Capitalism in Crisis

Excerpt from wsj article:

Lending borrowed capital — the essence of banking — is risky. That risk is amplified when interest rates are very low, as they were in the early 2000s because of a mistaken decision made by the Federal Reserve under Alan Greenspan to force interest rates down and keep them down. Because houses are bought with debt (for example, an 80% first mortgage on a house), low interest rates spur demand for houses. And because the housing stock is so durable a surge in demand increases not only housing starts but also the prices of existing houses. When people saw house prices rising — and were assured by officials and other experts that they were rising because of favorable “fundamentals” — Americans decided that houses were a great investment, and so demand and prices kept on rising.

http://online.wsj.com/article/SB124165301306893763.html

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