Panic, Prosperity, and Progress: Five Centuries of History and the Markets

CHAPTER 24

The Great Recession

After the dot-com crash and the subsequent bear market, the United States faced the prospect of a deep, lengthy recession. Through a series of aggressive rate cuts, Alan Greenspan, the chairman of the Federal Reserve, replaced one bubble—Internet stocks—with another: real estate. By dramatically relaxing lending standards and interest rates, the U.S. government put inflated an enormous credit bubble that fueled consumer spending, real estate values, and the global economy, only to see it collapse into the worst financial crisis since the 1930s.

■ The American Dream

The seeds for the recession that spanned December 2007 through June 2009 were sown 80 years earlier, during the Great Depression. The FDR administration recognized that the housing industry was of paramount importance. The special place residential construction has in America is due to the fact that its own health benefits so many other aspects of the American economy: timber, professional trades, consumer appliances, and all the other materials and services that are required to build and furnish a home.

In 1938, the Federal National Mortgage Association (FNMA, often referred to as “Fannie Mae”) was created as part of FDR’s New Deal. Its purpose was to purchase mortgages from banks, bundle those mortgages into securities, and sell those securities into the secondary public markets. The value in doing so was that banks would continue to have a rich reserve of cash to lend instead of having ...