How an Economy Grows and Why It Crashes



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how an economy grows

E P I L O G U E


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government. Our leaders irrationally promoted home-buying, 
discouraged savings, and recklessly encouraged borrowing and 
lending, which together undermined our markets.
Policies enacted by the Federal Reserve, the Federal Housing 
Administration, Fannie Mae, and Freddie Mac (which were 
always government entities in disguise), and others created 
advantages for home buying and selling and removed 
disincentives for lending and borrowing. The result was a 
credit and real estate bubble that could only grow—until it 
could grow no more.
Artifi cially low interest rates (which made the economy 
appear healthy) invigorated the market for adjustable-
rate mortgages and gave birth to the teaser rate, which 
made overpriced homes seam affordable. Alan Greenspan 
himself actively encouraged home buyers to partake. Then 
government agencies and government-sponsored entities 
compounded the problem by guaranteeing adjustable-rate 
mortgages based solely on the ability of borrowers to afford 
the teaser rates. Without such guarantees most of these 
mortgages never would have been funded.
Just as prices in a free market are set by supply and demand, 
fi nancial and real estate markets are governed by the opposing 
tension between greed and fear. But government has done all 
that it can to remove fear from the equation.
And so beginning in 2008, as market forces moved to defl ate 
the credit and housing bubbles, the government stepped in 
to re-infl ate both. First came bailouts for Bear Stearns and 
American International Group (AIG) and guarantees for 
E P I L O G U E



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