Alan Greenspan Lacks Foresight

Alan Greenspan is now saying that he "didn't get it." Somehow, the man in charge of our Federal Reserve for 16 years did not understand that the boom in the sub-prime mortgage market, coupled with the easy availability of credit due to his constant lowering of insterest rates, would inevitably lead to a credit crisis like we are seeing now.

So lemme get this straight: A huge proliferation in sub-prime mortgages (lending money, usually at a higher-than-average interest rate, to consumers who don't qualify for the best market insurance rates), coupled with low Federal interest rates and a high availability of credit for these consumer banks has created a problem? Was it really that hard to "get"? How unforseeable is it that these consumers, who already don't qualify for market interest rates, would default on these loans? Especially when sub-prime mortgages are tied in with low fixed interest rates for a short period, and then revert to high variable rates thereafter?

Of course there is a place for sub-prime lending, especially in the mortgage field, in a healthy economy. Providing consumers with less than stellar credit histories an opportunity to secure a loan is not only humane, but also good for business. If some of these people turn it around and pay off that mortgage, the banks have widened their customer base. But from 2004-2006, 21% of all mortgage originations were sub-prime (up from 9% from 1996-2004). That is more than one fifth of all mortgage lending. Of course, with the Fed constantly lowering interest rates from '01-'04, giving the banks an incentive to hand out these sub-prime loans (since they can charge a higher interest rate and make more money), it is easy to see why the banks would increase the number of these loans they hand out.

The rash of foreclosures, and ensuing economic downturn, seems to logically follow, doesn't it? What would you expect when you combine: (a) people with huge amounts of debt, or a history of not paying credit bills on time; and (b) loans with higher-than-average interest rates?