A couple of months ago, Timothy Geithner, the Treasury Secretary, did an interview with Charlie Rose, talking about the financial crisis and the recession. What did us in, ultimately? Geithner says it was easy money. And I think he’s right. There was easy money all over the place:
- Low interest rates that made borrowing less expensive (for businesses, investors and the rest of us).
- Easy credit, even for those with no credit history or poor credit, to encourage continued borrowing.
- Easy commissions and kickbacks for lenders and loan officers who could make risky loans, collect their fees, and the get rid of the risk by selling them to be packaged into securities.
- Sloppy ratings that labeled trash investments (like mortgage-backed securities and derivatives) as “AAA”, to encourage more investment for higher returns.
Indeed, it was so easy to borrow money to buy a big house, and it was so easy to make obscene returns investing in this ill-advised debt, that a bubble formed — and then burst. Eventually, it was too much to keep going. Easy money doesn’t last forever, and at some point, someone wants to cash in his or her returns. And some point a lot of someones realized that the whole thing was built on very little more than promises of wealth and greed.
It’s a good lesson for us: Easy money doesn’t remain easy forever.
If you have 50 minutes, you can watch the entire interview: