Andrew Leonard, Salon, August 17, 2007
From New York to Hong Kong and everywhere in between, alarm bells are ringing. Central bankers are on 24/7 alert, ready to perform life support on catatonic markets. Stock traders are panicking — the Dow’s wild ride on Wednesday, down 350 points and then almost all the way back, is just the latest declaration of confusion and fear.
If you had been paying only casual attention to the financial markets as summer rolled along, you could be excused for glancing at the headlines and wondering, what the hell is going on? By many measures the global economy is growing faster than it has for decades. But in our globalized world, anxiety is everywhere. Soon after the markets close in New York, Asia’s traders start running for cover. By the time they’re exhausted, Europe is picking up the relay. And then back to the United States it comes.
People who devote their entire lives to studying the intricacies of high finance are confused right now. But the basic story line isn’t that complicated once you break it down into simple building blocks. And that’s what Salon is going to do. Here are some simple questions and, we hope, some simple answers.
Q. How did this happen? How did we get here? What does it all mean?
A. There is a standard explanation included as a paragraph in almost every story attempting to explain the current turmoil. It goes like this: Anxious to goose the U.S. economy out of its dot-com-bust doldrums, Alan Greenspan and the Federal Reserve Bank lowered interest rates to rock bottom in 2001. The resulting flood of cheap money encouraged an orgy of borrowing at every level of the U.S. and world economies. Whether you wanted to buy a house or a multibillion-dollar conglomerate, lenders were your best friends, falling over themselves to offer you whatever amount of capital you desired — and charging low, low rates of interest. Cheap money led to a growing complacency about risk. If you ran into trouble, you could just refinance your house, or borrow a few billion more dollars today to pay off the billions you might owe tomorrow.
Greenspan’s policies are being blamed for inciting the greatest housing bubble in U.S. history. The collapse of that bubble set off a wave of defaults by homeowners no longer able to make the payments on their mortgages. Mortgage lenders were the next link of the chain to break, followed by the investors who were trading in bonds and securities whose value was tied to these loans. Suddenly, risk was back!
Volt, there’s another factor affecting our economy no one is mentioning, that is very scary. I’ll post it.
Grim
Comment by grimgold — August 17, 2007 @ 7:22 pm