by Bob Trowbridge

Created on: February 13, 2008

There's plenty of blame to go around when it comes to the mortgage meltdown. One good place to begin is with Alan Greenspan and his interest rate decreases. Greenspan covered his butt in the dot com bubble by saying that you can't really recognize a bubble until it's too late.

This is hogwash because bubbles happen all the time. They can also be called booms and busts. The stock market and other parts of the economy go through these booms and busts quite regularly and they do so in pretty regular and dependable cycles. The smart money saw the dot com bubble getting ready to bust and they got out.

Greenspan decided that he was going to protect investors and the American public from the consequences of the dot com bust. Instead of letting the economy feel a little bit of pain for a short time, he set us up for a much bigger pain, one with far greater consequences and one which will last far longer; the housing bubble.

Greenspan offered cheap money and cheap credit. There were two immediate consequences of this reduction in the prime rate. Responsible people who were saving money in savings accounts, Money Market accounts, or other conservative vehicles, lost their earning power.

I received a small amount of money when my father died and put it in a six month CD. I got 1.15% interest, far less than the rate of inflation. People could no longer afford to leave money in these low interest accounts. As a result, the second immediate consequence of this cheap money was that these same people were forced to put their money into far riskier investments in order to try to keep up with inflation.

The other consequence, the one we are seeing unwinding today, is that people immediately started borrowing money on their homes. Unfortunately, many of these people did not borrow in order to reduce their mortgage payments or make improvements on their homes. They borrowed to buy things they didn't need, like big gas guzzling smog producing SUVs and big TVs.

Still others saw an opportunity to buy a house for the first time or upgrade to a better house. This would all be really positive if people purchased homes they could actually afford. But the mortgage companies saw an opportunity to cash in on this home-buying frenzy. To put it as simply as possible, the more money they could lend, the more money they could make.

It is said that the market moves between greed and fear. At this point there was a whole lot of greed and not much fear, and not much intelligence either. All bubbles smell

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