Cheap credit makes you dumb!

Think not? This is the cheap credit part.
The past Fed and its Chairman Allen Greenspan keeps the target fund rate so low for such a long period that banks and mortgage originators decided to expand their offerings of cheap mortgage products to a segment of the home buying public that had never before been able to qualify for a loan. On June 30th. 2004 the Fed bumps the rate from one percent to one and a quarter. By Dec. 2005 it was up to four and a quarter but the damage had already been done. By then there were millions of subprime mortgages in the system waiting to go sour in a few years

This is the dumb part.
Apparently willing to overlook these borrowers miserable credit histories and proven inability to repay their debts, and willing to believe that home values would continue to rise at 10 to 20 percent a year indefinitely, from 2004 thru early 2007 the banks proceeded to gin up all sorts of innovative vehicles to lure these credit impaired clients to the closing table. The idea being that if these questionable mortgages could be packaged up with AAA rated paper or better yet be AAA rated themselves then sliced into small pieces(tranches)and then be packaged into a Securitized Investment Vehicle(SIV) and sold off to the unsuspecting investors, all would turn out well so long as home values rose unrealistically year after year.

Not to be outdone by the greed of the mortgage originators, the borrowers suspended reality and decided that if a mortgage they could never afford to pay off, even if they got it at zero percent interest, were offered to them at such an unbelievably low interest rate, say three or four percent for the first year or two, they could then afford it. Cheap credit makes you dumb.

How could this unlikely scenario come to pass in a presumably sophisticated 21st century financial market? Greed, plain and simple greed. It is the grease that keeps our society skidding ever faster toward more of the same type economic problems that we presently face. Ask any three economists what the immediate problems are and you are likely to get three answers...inflation, recession or, stagflation. Not a pretty future regardless of which turns out to be the correct answer.