Following the September 11, 2001 attacks, the Federal Open Market Committee voted to reduce the federal funds rate from 3.5% to 3.0%.[60] Then, after the accounting scandals of 2002, the Fed dropped the federal funds rate from then current 1.25% to 1.00%.[61]
Greenspan stated that this drop in rates would have the effect of leading to a surge in home sales and refinancing. Besides sustaining the demand for new construction, mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners have built up over the years.[61]
However, according to some,
Greenspan's policies of adjusting interest rates to historic lows contributed to a housing bubble in the US.[62] The Federal Reserve acknowledges the connection between lower interest rates, higher home values, and the increased liquidity the higher home values bring to the overall economy.
"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission." — Board of Governors of the Federal Reserve System, September 2005.[63]
In a speech in February 2004,[64] Greenspan suggested that more homeowners should consider taking out Adjustable Rate Mortgages (ARMs) where the interest rate adjusts itself to the current interest in the market.[65] The fed own funds rate was at a then all-time-low of 1%.
A few months after his recommendation, Greenspan began raising interest rates, in a series of rate hikes that would bring the funds rate to 5.25% about two years later.[66] A triggering factor in the 2007 subprime mortgage financial crisis is believed to be the many subprime ARMs that reset at much higher interest rates than what the borrower paid during the first few years of the mortgage.
Alan Greenspan - Wikipedia, the free encyclopedia