Zombified Finance and the Walking Dead Economy
The financial crisis of 2007 was the result of a constant accumulation of risks facilitated by the gradual lowering of interest rates. This decrease allowed the emergence of an allocation of resources incongruous with the economic reality, decisively affecting the complementarity of production processes. As a viable example, the Federal Reserve, led at the time by Alan Greenspan, decided that between December 2000 and June 2003, the federal funds rate would be reduced from 6.5% to 1%. Immediately after that, in June 2004, the federal rate was increased by 0.25%, to curb the rise in inflation in the real estate market. But a constant decrease in the interest rate was reflected in specific, interest-sensitive sectors, such as real estate. This increase in investment appetite in the real estate sector was also due to legislative provisions, such as the Housing and Urban Development Act, which obliges GSEs such as Fannie Mae and Freddie Mac to have at least 30% of their loan purchases directly linked to affordable housing, which would stimulate mortgage lending in communities with limited resources. This phenomenon was also precipitated by the appearance of the Community Reinvestment Act, all of which facilitated a loosening of lending standards. At the same time, to support these mortgage practices, mortgage-backed assets appeared and implicitly the development of the shadow banking system. As these investments were interest-sensitive, with the increase in inflation in the real estate sector, a tightening of monetary policy affected the profitability of these investments and hence the ability to repay, effects that have also translated into the shadow banking system, repo markets and, finally, international markets. The detailed processes that led to the outbreak of the financial crisis are not the subject of this article, but their brief presentation was necessary to continue the presentation of the phenomenon of economic zombification. More
