1 Greenspan's Cheap Money
The financial collapse of 2008 has been described as an "economic 9/11" for the United States. How ironic, then, that the origin of the collapse can be traced, in part, to the federal government's response to the 9/11 terrorist attacks themselves. While most Americans felt vulnerable and uneasy about the nation's safety and security, actions taken by the government, in particular the Federal Reserve, would eventually have a major effect on citizens' financial security, rather than their physical safety.
Greenspan Fears Economic Shock
In the days following September 11, 2001, Federal Reserve Chairman Alan Greenspan worried the tragedy would send shockwaves through the economy, which was already in a recession, following the burst of the technology stock bubble.
President Bush Urges Consumers To Spend
Fearing an even more serious slowdown, exactly one month after the attacks, President Bush encouraged Americans to spend in order to keep the country's economic engine running.
Federal Reserve Cuts Interest Rates
Greenspan went a step further. Several steps further. On September 17, 2001, less than a week after 9/11, the Fed began a series of interest rate cuts that made it easier and cheaper to borrow money.
Cheaper Money Creates New Demand For Credit
The cuts continued for nearly two years, through June 2003, and created incredible new demand for mortgages, home equity loans, automobile financing, and other kinds of credit.
Economy Stablizes But Heads Down Risky Road
It was exactly what President Bush and Chairman Greenspan had hoped would happen. But it led to something they never expected.