Free Inside Job by Charles Ferguson Page B

intelligence efforts. And second, Federal Reserve chairman Alan Greenspan aggressively
reduced interest rates. Greenspan cut rates from 6.5 percent at the peak of the Internet bubble all the way down to 1 percent by July 2003, the lowest in fifty years. 1
    The recovery, however, was an anaemic one, even if you took it at face value. And the real problem was that you couldn’t take it at face value. What followed, in fact, was a
remarkable alliance of financialsector greed and political calculation. The recovery of the 2000s was fake, driven almost entirely by unsustainable behaviour: massive tax
cuts and national deficits, the housing bubble, and consumer spending enabled only by borrowing. While the real economy did continue to benefit from Internet-driven productivity gains, the US was
simultaneously falling behind many other nations in the underlying educational, infrastructural, and systemic determinants of national competitiveness. America’s manufacturing sector was
quietly decimated. Moreover, most of the benefits of America’s productivity gains were now appropriated by the top 1 percent of the population, not by the broader workforce—a major
change from prior generations. As a result, during the 2000s, even during the bubble, real wage levels for average Americans stagnated or fell, and on a net basis very few jobs were created. Gains
from the fake economy and the (real) Internet revolution were offset by massive job losses both in manufacturing (including information technology products) and in services functions susceptible to
outsourcing or automation.
    A Marriage of Convenience Produces a Bubble
    GIVEN THESE STRUCTURAL problems, a fake recovery driven by a financial bubble was very politically convenient. Most of the growth in consumer spending
during the 2000s was driven by the bubble. As house prices rose, homeowners could borrow more against the supposedly higher value of their homes; and by spending the proceeds of their borrowing,
they both pumped up the general economy and also perpetuated the housing bubble itself, as borrowed cash was used to finance further home purchases (for second homes, rental properties, etc.).
    In fact, much of the 2000s-era subprime lending wasn’t about increasing home ownership at all. Fewer than 10 percent of subprime loans financed a first home purchase. 2 Many subprime loans issued during the bubble were devices to take money out of a home, to refinance a prior mortgage, or to buy a second home. Some of the loans werefor personal consumption (televisions, holidays, cars, home improvements); some were for trading up to a more expensive home; many were speculation driven by the bubble, for
the purpose of flipping houses repeatedly; and many more were frauds perpetrated against borrowers, who were tricked into deceptive, overly expensive loans.
    But all of them contributed to the bubble. As a result the CaseShiller US National Home Price Index doubled between 2000 and 2006, the largest and fastest increase in
history. 3
    Greenspan’s rate cuts undoubtedly helped start the bubble. Most people borrow heavily to buy a house, and the amount of house they can afford is driven by monthly mortgage payments,
which in turn are heavily affected by interest rates. As a result of Greenspan’s rate cuts, prime mortgage rates fell by 3 percentage points from 2000 to 2003. Assuming standard fixed-rate
mortgage terms, the same monthly debt service that supported a $180,000 home in 2000 would support a $245,000 home in 2003, a 36 percent increase. 4 Not
surprisingly, between 2000 and 2003, the Case-Shiller US National Home Price Index went up more than a third. 5 So, yes, interest rates were relevant. But
they don’t even come close to explaining that doubling of housing prices during the bubble, which continued even after US Federal Reserve Chairman Ben Bernanke started raising rates
again.
    Over the next four and a half years, from 2003 through mid-2007, America’s