Anatomy of a crisis

Economy: How Washington and Wall Street got into trouble | Timothy Lamer

Associated Press/Photo by Richard Drew

The current financial crisis gripping Wall Street is head-spinning in its complexity. But economists and analysts have been able to identify several steps along the way that helped lead the country to where it stood last week, on the brink of a massive government program to buy hundreds of billions worth of bad mortgages. Here are some of the steps:

Step 1: Trying to avoid a recession brought on by the bursting of the tech bubble and 9/11, the Federal Reserve under then-Chairman Alan Greenspan began aggressively easing monetary policy. From 2001 to 2003, the Fed Funds rate fell from 6 percent to 1 percent, a 45-year low.

Step 2: With interest rates low and money easy, mortgage lenders started marketing loans to people with questionable credit histories. These "subprime" loans often required no down payments, had adjustable interest rates, and featured exotic elements like "negative amortization" (in which "homeowners" would initially pay less than the interest owed each month, causing the loan's principal to grow with each "payment"). With these loans fueling demand, housing prices rose, prompting speculators to enter the market and "flip" houses (buying them with debt and then selling them quickly at higher prices). A speculative bubble began to inflate.