Asleep at The Wheel - Part III

From Jan. 2001 through June 2003 the Federal Reserve cut 550 basis points in 30 months, dropping the Fed Funds Rate from 6.5% to 1%. In effect, creating corporate welfare in the form of huge borrowing margins, aka the "carry trade".


During this period the average 30 year fixed mortgage rate decreased from 8.50% to 5.25%, a total of 325 basis points. This made it easier for many individuals and investors to purchase, refinance, extract equity and speculate in asset markets.


This resulted in the housing bubble and a financing boom as real estate mortgage lending grew from 11 Trillion to 29 Trillion, a 163% increase. The resulting monetary gravity attracted available capital to easy yield and short term money shuffing activities, such as mortgage lending, rather than investment in long term economically sustainable activities, such as capital investment and manufacturing.


The increase in M3 broad money supply and historically low borrowing costs and lending standards, resulted in an unprecedented overliquification of asset markets and speculation. Consumer spending and borrowing became profligate as consumer debt ballooned from 5 Trillion to 11 Trillion, over 120%. More to come in Part IV.