Ok, we all know that it was corporate greed that caused the mortgage meltdown. Or was it? Did corporations suddenly become more greedy? Or is there some other reason?
Well, I'm not qualified to answer the question about what caused the meltdown, but I feel I might just be qualified to ask a question. The question I'd like to ask is, just what was the Federal Reserve Bank doing in the lead-up to this catastrophe?
The best indicator I know of as to what the Fed was doing is the target federal funds rate. Basically, this is indicates how the Fed is trying to influence interest rates, and interest rates are at the heart of the problem. Here's the graph:
http://www.newyorkfed.org/charts/ff/
The target rate went from a high of 6.5% on 12/28/2000 to 1.75% on 12/11/2001 (that's a 73% decrease in less than a year) then continued to fall to a low of 1% on 6/26/2003 where it stayed until 6/29/2004. Then began a series of small increases until the rate settled at 5.25% on 7/11/2006 (that's an increase of 525% over about 2 years) and stayed there until 9/13/2007. Then, fell precipitously once again to 2% on 4/30/2008 where it remains.
Now, keep in mind, the Federal Funds target rate is just that, a target. This is where the Federal Reserve is aiming! We might understand such fluctuation and volatility if it were subject to some random and wild process of nature, but on the contrary, it is only subject to the whims of the Federal Reserve Open Market Committee and the Federal Reserve Chairman. I daresay, if we had a measure of corporate greed to put on the graph next to this interest rate chart, we would find it remarkably stable.
How is it that the Fed went from shooting at 6.5% to shooting at 1% to shooting at 5.25% to shooting at 2%? Since interest rates are an indication of the cost of money, has the cost of any other commodity been this volatile? If people are making investment and funding decisions based on short term interest rates when they are 1% and need to refinance two years later and rates are 5.25%, why is anyone surprised that they have difficulty? Why should we attribute this difficulty to greed?
The question I feel qualified to ask but not qualified to answer is why did the Fed target interest rates this way? How is it that we should not assume that the Fed has been driving the economy as if they were drunk and finally have crashed, and now, are asking the taxpayers to pay for the damage?
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