Lucia Farris
ECO 201
August 22, 2013
Alan Greenspan’s Beliefs in the Free Market System Alan Greenspan, Chairman of the Federal Reserve, took part in a documentary about the downfall of the housing market in the United States. His confidence in the free markets, which only allows intervention from the Fed in dire economic times, being able to regulate themselves was unable to keep the economy growing. In contrast with this belief, his expansionary policy led to the Fed’s decision that helped send our economy spiraling downward. Other factors such as the established business cycle of the economy, questionable ethics of investment firms’, and the ineffective regulation of the oversight committees caused the economy …show more content…
This growth came in the form collateralized debt obligations backed by subprime loans. The subprime loan originators were not regulated properly and lent to those who otherwise would not qualify for a loan. The new homeowners enjoyed a period of prosperity while housing prices exploded. Wanting to cash in on their new found wealth many refinanced to a variable rate loan never expecting housing prices would fall and interest rates would increase. Unfortunately, incomes did not rise therefore when people refinanced and the economy tried to adjust itself for the inflation occurring within the housing market many loans defaulted as interest rates rose and housing prices fell. The subprime loan originators (i.e., also wanted to make a profit and started selling their subprime loans to securities firms. These securities firms, i.e. The Bear Stearns Companies, Inc., made their profit in the packaging and trading of the Mortgage Backed Security or MBS, and the Collateralized Debt Obligations (CDO). The CDOs were a collection of good or prime loans mixed with some bad or subprime loans that were not sold as part of MBSs. These packages were then sent to the credit rating agencies like Moody’s for their credit rating. Moody’s were complicit in giving CDOs that would have been rated as F’s a triple "A" rating meaning they were less risky