The Credit Crunch

The economy in the United States and around the world stopped in its tracks. The lifeblood of the financial system, credit, began to boil. The story of the worst economic crisis begins the day after September 11, 2001.   The economy was already hurt from the dot com bubble burst. After 9/11 Alan Greenspan, Chairman of the Federal Reserve, flew over the southern tip of New York City and said, “I was very much concerned we are in the throws of something we have never seen before.”
Alan Greenspan was right, something he has never seen before was about to happen. The people of America stopped spending, as there was news of more terrorist attacks on the way and investors continued to see billions of dollars disappear. One tool the Federal Reserve used was to change the money supply by increasing or decreasing the discount rate. Greenspan lowered the interest rates the Reserve loaned to banks so banks could loan more. This strategy worked, because borrowing more money became more attractive and Americans started spending more again.
The lower interest rates made borrowing more appealing, but the demand for homes increased causing the prices of homes to increase a lot faster than incomes. If prices kept rising and people could not get enough money to buy these homes, the demand for houses will fall and the housing market will slow down. As a result, Veterans of the mortgage business were thinking up new ways to allow loans for everyone. Lenders didn’t want to say no.
According to Bill Dallas, obtaining a mortgage use to take 90 days when lenders would shake down potential borrowers to make sure they were going to get paid back. Freddie Mae and Freddie Mac were created by Congress to increase home ownership. They would buy mortgage loans from loan companies and they dominated the mortgage back securities. Rules were strict and only bought mortgages from homeowners who could pay back their loans.
Loaners in California wanted to change who they could lend to. They...