Loans and financial matters

Let’s start with the big picture. By the middle of this decade, the world was awash in cash.The International Monetary Fund (IMF) estimates that over $70 trillion of global savings in fixed-income securities, more than double the amount in 2000, was held by sovereign wealth funds, endowments, pension funds, insurance companies, central banks, and the like. That’s a lot of money—roughly equal to the entire world’s gross domestic product (GDP)—and it needed a home.
Typically, the largest fraction of it would have been invested in U.S. Treasuries, but for three years beginning in late 2001, Treasury yields were particularly unattractive thanks to Federal Reserve Chairman Alan Greenspan cutting short-term interest rates to extremely low levels and keeping them there in an attempt to keep the economy out of a prolonged recession after the bursting of the Internet bubble and 9/11. The federal funds rate was a mere 1 percent by June 2003, the lowest level since the 1950s.
Greenspan knew that these actions would have an impact on home prices. In fact, in testimony before Congress on November 13, 2002,1 he said: “Besides sustaining the demand for new construction, mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners have built up over the years.” Greenspan was counting on consumers using the equity in their homes to create demand and keep the economy out of recession. He had no way of knowing then how right he was—and how disastrous the consequences would be. It is widely accepted now that Greenspan cut interest rates too much and kept them too low for too long, because this provided the liquidity and motivation to fuel the worldwide debt bubble.