The credit crisis that’s roiled financial markets has its genesis in the housing boom that began in 1998, David Leonhardt writes in the New York Times. The boom led lenders to create new financing options—including subprime loans—as investors saw potential for huge returns. Low interest rates encouraged investors, and homeowners, to stretch themselves too thin—and the seeds of crisis were planted.
Wall Street bundled mortgages for sale globally; individuals and institutions bought huge slices of the risky investment on credit. When the pieces began to fall, so did the market, leading to a devastating tightening of credit—as institutions lost confidence in the ability of others to back up promises. Only housing-market resurgence, Fed chief Ben Bernanke says, can turn things around.