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CREDIT EXPANSION

CONTENTS
Housing: “A powerful stabilizing force” ................................................................
Subprime loans: “Buyers will pay a high premium” .............................................
Citigroup: “Invited regulatory scrutiny” ...............................................................
Federal rules: “Intended to curb unfair or abusive lending” .................................
States: “Long-standing position”...........................................................................
Community-lending pledges: “What we do is reaffirm our intention”.................
Bank capital standards: “Arbitrage” .....................................................................

By the end of , the economy had grown  straight quarters. Federal Reserve
Chairman Alan Greenspan argued the financial system had achieved unprecedented
resilience. Large financial companies were—or at least to many observers at the time,
appeared to be—profitable, diversified, and, executives and regulators agreed, pro-
tected from catastrophe by sophisticated new techniques of managing risk.
The housing market was also strong. Between  and , prices rose at an an-

nual rate of .; over the next five years, the rate would hit .. Lower interest
rates for mortgage borrowers were partly the reason, as was greater access to mort-
gage credit for households who had traditionally been left out—including subprime
borrowers. Lower interest rates and broader access to credit were available for other
types of borrowing, too, such as credit cards and auto loans.
Increased access to credit meant a more stable, secure life for those who managed
their finances prudently. It meant families could borrow during temporary income
drops, pay for unexpected expenses, or buy major appliances and cars. It allowed
other families to borrow and spend beyond their means. Most of all, it meant a shot
at homeownership, with all its benefits; and for some, an opportunity to speculate in
the real estate market.
As home prices rose, homeowners with greater equity felt more financially secure
and, partly as a result, saved less and less. Many others went one step further, borrow-
ing against the equity. The effect was unprecedented debt: between  and ,
mortgage debt nationally nearly doubled. Household debt rose from  of dispos-
able personal income in  to almost  by mid-. More than three-quarters
