The above video does a great job explaining how the Federal Reserve lowering interest rates on Treasuries to 1% led to Investors getting into the mortgage game. With so much money to lend, standards were lowered to the point where a blind dog with a dollar bill in his mouth could get a loan. The chart below shows how the Federal Reserve actually accelerated the mortgage defaults by raising interest rates.
Higher interest rates make it harder to make payments on a variable rate loan. They also make it harder for new buyers to enter the housing market. It almost looks as if the Fed was trying to collapse the housing market.
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"Risk takers have been encouraged by a perceived increase in economic stability to reach out to more distant time horizons. But long periods of relative stability often engender unrealistic expectations of it[s] permanence and, at times, may lead to financial excess and economic stress." (Fed Chairman Greenspan, 2005)
In fact, it can be argued that the Federal Reserve, through raising interest rates, caused the credit crisis.
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