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THE MORTGAGE MACHINE
process, the raw material going into it was actually bad quality, it was toxic quality,
and that is what ended up coming out the other end of the pipeline. Wall Street obvi-
ously participated in that flow of activity.”
The origination and securitization of these mortgages also relied on short-term fi-
nancing from the shadow banking system. Unlike banks and thrifts with access to de-
posits, investment banks relied more on money market funds and other investors for
cash; commercial paper and repo loans were the main sources. With house prices al-
ready up from to , this flood of money and the securitization appara-
tus helped boost home prices another from the beginning of until the peak
in April —even as homeownership was falling. The biggest gains over this pe-
riod were in the “sand states”: places like the Los Angeles suburbs (), Las Vegas
(), and Orlando ().
FOREIGN INVESTORS:
“AN IRRESISTIBLE PROFIT OPPORTUNITY”
From June through June , the Federal Reserve kept the federal funds rate
low at to stimulate the economy following the recession. Over the next two
years, as deflation fears waned, the Fed gradually raised rates to . in quarter-
point increases.
In the view of some, the Fed simply kept rates too low too long. John Taylor, a
Stanford economist and former under secretary of treasury for international affairs,
blamed the crisis primarily on this action. If the Fed had followed its usual pattern,
he told the FCIC, short-term interest rates would have been much higher, discourag-
ing excessive investment in mortgages. “The boom in housing construction starts
would have been much more mild, might not even call it a boom, and the bust as well
would have been mild,” Taylor said. Others were more blunt: “Greenspan bailed out
the world’s largest equity bubble with the world’s largest real estate bubble,” wrote
William A. Fleckenstein, the president of a Seattle-based money management firm.
Ben Bernanke and Alan Greenspan disagree. Both the current and former Fed
chairman argue that deciding to purchase a home depends on long-term interest
rates on mortgages, not the short-term rates controlled by the Fed, and that short-
term and long-term rates had become de-linked. “Between and , the fed
funds rate and the mortgage rate moved in lock-step,” Greenspan said. When the
Fed started to raise rates in , officials expected mortgage rates to rise, too, slow-
ing growth. Instead, mortgage rates continued to fall for another year. The construc-
tion industry continued to build houses, peaking at an annualized rate of . million
starts in January —more than a -year high.
As Greenspan told Congress in , this was a “conundrum.” One theory
pointed to foreign money. Developing countries were booming and—vulnerable to
financial problems in the past—encouraged strong saving. Investors in these coun-
tries placed their savings in apparently safe and high-yield securities in the United
States. Fed Chairman Bernanke called it a “global savings glut.” 
