Alan Greenspan’s Big Blunder
Alan Greenspan caused the current housing bubble and credit crisis to occur, because he
made a few fatal errors while he was the Chairman of the Federal Reserve. This has been a very
controversial issue over the past two months ever since Greenspan released his memoir, entitled
The Age of Turbulence (Former Fed Chairman Alan Greenspan). In order to fully comprehend
this difficult issue, one must understand a few crucial terms, such as the difference between
adjustable-rate and fixed-rate mortgages. Following the bursting of the technology bubble and
September 11 attacks, Greenspan acted swiftly and lowered rates, which at the time was the
correct move, but he continued cutting rates until the federal funds rate was a measly 100 basis
points or 1 percent (Open Market Operations). The mistake he made was a huge failure on his
part, which has drastically affected the economy over the last six years. Greenspan’s poor
judgment allowed the housing bubble and the current credit crisis to form, which has wreaked
havoc on the economy over the past two years.
First, the terms which are crucial to understanding the issue at hand must be explained,
starting with an explanation of the federal funds rate. The federal funds rate is the “interest rate
charged to borrow federal funds” (Hafer). The funds are loaned temporarily overnight to make
up for shortfalls at a bank. In the 1960s, the federal funds rate became more actively used, and
today it is the principal instrument used by Federal Reserve “to achieve its long-term goals of
low inflation and stable economic growth” (Hafer). The federal funds rate is often used as “the
base borrowing rate upon which other rates depend”(Hafer).
Next, credit ratings and credit scores, which all adults should be able to comprehend, are
going to be explained in a way which makes them easier to understand. A credit rating is an
evaluation of one’s “credit...