This is a Cato Special Podcast. I'm Caleb Brown. The financial crisis has in some

sense destroyed Wall Street and has left the Federal Reserve, the Bush

Administration, and the Treasury Department with a series of terrible options.

So how did we get here?

Jagadish Goklay, a senior fellow at the Cato Institute, comments.

As people are arguing about a solution to this mortgage mess, it's been very hard to come up with a clear narrative for how this actually occurred, who is to blame, and what the process was.

Well, I wouldn't want to assign direct blame to anybody, but I think you can probably trace the sequence of events

that led to the current credit crisis. I think the first thing that happened was

we saw an asset price bubble burst in stock market values collapsed in 2000.

Thereafter, very soon thereafter we had the 9-11 events, which both of these shocks obviously were negative shocks for the economy and the Federal Reserve was concerned

that that would set off a deflationary spiral and they proceeded to reduce interest rates to unprecedented low levels.

They held interest rates low for a long time.

From the beginning of 2002 through the end of 2005,

interest rates were below 2%.

The federal funds rate was below 2%. The federal funds rate was below 2%.

Well, that was domino number one.

Low interest rates for a long time.

And this changed behavior on the part of bankers.

Exactly.

What that led to was a spawning of a huge industry and home loan originations and bundling and reselling of home mortgages

to investors.

The way that worked was people would go and originate mortgages, banks and non-bank

...