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Econwatch
January 13, 2010 8:46 AM

Economists: Interest Rates Fueled Boom

By
Alex Sundby
Topics
In The News
(AP Photo/Jose Luis Magana)
Of all the economic factors that possibly fueled the inflation of the housing bubble last decade, Federal Reserve Chairman Ben Bernanke has said low interest rates weren't one of them. The Wall Street Journal Wednesday published the results of a survey showing that the nation's economists haven't exactly fallen in line behind the chairman on that.

Two surveys the newspaper launched this week presented a healthy amount of reasonable doubt that interest rates set by the government contributed to 2008's crash of the housing market which affected the financial system. In one survey of economists on Wall Street and elsewhere, 42 of 54 said low interest rates partially contributed to the market's bubble. Another survey showed that 13 of 27 academic economists who study monetary policy agreed that the low rates helped the housing boom.

Bernanke is facing confirmation hearings in the Senate after President Obama nominated him to serve another six-year term as chairman. The Federal Reserve sets several interest rates, including one for what banks lend each other.

The newspaper's report comes as the Financial Crisis Inquiry Commission is scheduled to begin its hearings into what caused the near-collapse of the nation's financial system in 2008.

Among the panel's first witnesses are top executives at four major banks - Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America.

Wednesday's hearing is scheduled to begin at 9 a.m.

  • Alex Sundby

    Alex Sundby is an associate news editor for CBSNews.com

Add a Comment See all 23 Comments
by ibsteve2u January 14, 2010 6:25 AM EST
Hah! I concur with the economist who "are not falling in line" with Bernanke.

I would go further, and say that the great scam began with this speech: http://www.hud.gov/news/speeches/presremarks.cfm

June 18, 2002 - a MOST inglorious date.
Reply to this comment
by rcharles234 January 14, 2010 8:10 AM EST
I agree completely; there was a frenzy in Washington of trying to put every possible citizen, almost anyone who could fog a mirror, into their own home. Between pushing Fanny and Freddie to support low-down-payment mortgages and keeping interest rates too low for too long, they seeded the housing bubble. Behyond that, they turned off almost all banking regulation, which encouraged the fraudulent lending behind liar's loans and other abuses.
RCharles
by sjc_1 January 13, 2010 4:42 PM EST
Greenspan kept interest rates low after 2002 and Bush cut taxes for the rich as we were going into two wars. I can not think of a better formula for disaster than that.
Reply to this comment
by rcharles234 January 14, 2010 8:13 AM EST
Yes, absolutely. Greenspan had been told of the mortgage abuses and given authority by congress to manage the mortgage market, but he insisted "market forces" would correct any problems. Even in 2005 he was encouraging new buyers to consider ATMs instead of fixed-rate mortgages. My impression is that Greenspan wanted to keep the financial markets in overdrive through the 2004 elections to support another Bush term.
RCharles
by sjc_1 January 20, 2010 10:37 PM EST
Greenspan is a Republican and there is NO doubt that he wanted to see Bush reelected in 2004. Politics is not suppose to be in the Fed, that is the way it is set up, but in this case it was and we all suffered the crash because of it.
by curse914 January 13, 2010 2:27 PM EST
by Berkeley-SkirtLifter January 13, 2010 2:14 PM EST
Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.
______________

You are correct. Lenders (Private Sector) were confident in making any loan, no matter how risky, because it could quickly be rolled into a CDO (Collateralized Debt Obligation) and sold off when mixed in with prime loans. (Hence toxic asset) These CDO's were sold as AAA rated securities.

What a crock-o-crap. And no heads have rolled.

[][][][][]

I am going to quote Chomsky, even though I think he is a propagandist himself, he has a keen understand of how one should approach thinking critically.

Chomsky: "Obama Is Fast Becoming Proof That American Democracy Is Nothing But Media Performance Art, Designed To Deceive The Electorate While The Financial Elite Pillage The Treasury"
Reply to this comment
by pensacola8-2009 January 13, 2010 1:51 PM EST
After 2001, the war created significant impacts on the economy over the layer of losses encountered from lost tourism after passage of the Patriot Act. The mandatory passport requirement designed to stop bad people also stopped many good ones from entering the country. Since the US Dollar began to drop, and the Euro began to gain, the Bush administration decided to keep spirits up with lowered interest rates. They didn't foresee sub-prime mortgage lending schemes about to undermine the economic integrity of the nation's banking system.

The chain of events were definitely connected in the right sequence for the bubble.

The largely unmentioned contributing factor that still remains, is the high level of unsecured personal debt that all the citizens carry together. All of it exceeds the Gross Domestic Product. The last time his happened was in 1929.
Reply to this comment
by curse914 January 13, 2010 2:08 PM EST
"The largely unmentioned contributing factor that still remains, is the high level of unsecured personal debt that all the citizens carry together. All of it exceeds the Gross Domestic Product. The last time his happened was in 1929."

This is the end result of a non existent economy. All of our "growth" was in the financial sector an all of that "growth" was erased. If you look at the numbers, 30 years of glorious "Growth" has been erased.

We . simply . do . not . have . an . economy. A service based economy is dysfuctional. Free Trade with nations that have zero labor and product safety laws is dysfunctional, except for a select few Elite who are in a position to exploit this slanted playing field.
by curse914 January 13, 2010 1:48 PM EST
by variant_530 January 13, 2010 1:26 PM EST
Low interest rates give me a break. It was the community reinvestment act and programs like it that set the tone for the bursting of the bubble. To force businesses (Banks) to loan to individuals that have neither the means or the will to hoonor the obligation is the real culprit. People "walking away" from their mortgages and creating neighborhood blight are the other causes of this burst bubble.

[][][][][][]

God I am do tired of this Rush Limbaugh talking point. Learn to think for yourself; consider some basic courses in critical thinking.


]SNIP[

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets
]SNIP[

I expect only silence in response...waiting...
Reply to this comment
by Berkeley-SkirtLifter January 13, 2010 2:14 PM EST
Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.
______________

You are correct. Lenders (Private Sector) were confident in making any loan, no matter how risky, because it could quickly be rolled into a CDO (Collateralized Debt Obligation) and sold off when mixed in with prime loans. (Hence toxic asset) These CDO's were sold as AAA rated securities.

What a crock-o-crap. And no heads have rolled.
by variant_530 January 15, 2010 3:33 PM EST
You are right to expect silence as I dont debate with children, Morons or liberals.
by curse914 January 13, 2010 1:42 PM EST
Regulations in place to penalize lending institutions that lend to consumers without a job renders lower interest rates a moot point. Regulations to restrict lending 9 dollars to every dollar the bank holds in capital would have rendered lower interest rates a moot point.

The lower interest rates were put into place because we do not have an economy. Our economy consists of Bubbles, period. Bernanke understands America is in decline and apparently does not want to change anything to reverse this trend. No new regulations have been put into place, no admission that Free Trade can not work when there are no regulations in the nations a select few Elite are trading freely with.

Take note that money can move freely between nations without restriction but labor that does so is labeled "illegal". More evidence of Class Warfare on a global scale.
Reply to this comment
by mljohns00 January 13, 2010 1:40 PM EST
Bernanke is an idiot or a liar. It's obvious that artificially low interest caused much of the disaster. People aren't stupid. They borrowed large amounts of money at low interest rates to speculate on homes. The more the speculation, the higher prices went.

Throw the burgeoning Government spending and unfinanced wars on top of this and you have a major financial disaster. It was obvious several years ago what was going to happen. The only thing that wasn't obvious was that a new Federal Administration would CONTINUE to spend money on wars and would decide to spend even MORE.
Reply to this comment
by variant_530 January 13, 2010 1:26 PM EST
Low interest rates give me a break. It was the community reinvestment act and programs like it that set the tone for the bursting of the bubble. To force businesses (Banks) to loan to individuals that have neither the means or the will to hoonor the obligation is the real culprit. People "walking away" from their mortgages and creating neighborhood blight are the other causes of this burst bubble.
Reply to this comment
by jimbom121 January 13, 2010 1:53 PM EST
Please. The repeal of Glass Steagal (part of the Gramm-Leach Act of 1999) was the main culprit. Two other acts that helped this along were the reduction of required documentation on mortgage apps (passed in congress in 2002) and the reduction in the amount of capital required by brokerage houses (SEC passed this in 2005). A little known fact among the right wing talk show hosts is that the CRA (Community Reinvestment Act) has been around since 1968, under Nixon. The banks that participated had a lower default rate than those who did not. The mortgage brokers (such as Countrywide) were exempt from CRA because they were not considered banks. The major banks such as Citi and BofA had most of their defaults on their investment portfolios, not their own loan portfolios.
by Cyber998 January 13, 2010 12:08 PM EST
Conservative mismanagement of the economy? Who would have thought it?

This is the bunch who start shipping all our jobs over to China. Their motto has always been "short-term gain, who cares about long-term pain".
Reply to this comment
by lakota2012 January 13, 2010 11:45 AM EST
Anyone with only minimal economic intelligence, can plainly see that Americans were enticed into the housing bubble by years of record low interest rates, and a constant increase of real estate value until 2007. With the stock market going sideways during bushworld, the best investments were either in developing foreign markets or the U.S. housing market due to extremely low interest rates.
Reply to this comment
by patocc123 January 13, 2010 12:53 PM EST
Bushworld? Its Obamaworld now. The interest rates are still at the same level. Nothing has changed.
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