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On June 23,
2003, Christopher Byron published a stunningly accurate article
in the New York Post. He wrote:

"Instead
of giving the overall economy a sustainable boost, the Fed's increasingly
cheap money keeps pouring into just two sectors – the housing and
home mortgage refinance markets – and it is creating what is shaping
up as one of the most spectacular sector bubbles in memory.

"But first
a thought or two on the Washington official whose endless supply
of hot air has created not only this bubble but the dot-com mess
before it, and who long ago deserved to be fired from his job: Federal
Reserve chairman Alan Greenspan.

"No serious
student of the economy any longer doubts that Mr. Greenspan's cheap-money
policy of the 1990s led directly to the stock market bubble that
popped in the spring of 2000, pushing stocks and the economy into
the downturn from which they have yet to recover.

"Meanwhile,
his rhetorical waltzing has become utterly shameless, as he intones,
in that ponderous way he has perfected, that the housing market
has not swelled into a bubble – because, when it pops, the result
won't be a ‘negative’ for the economy but the disappearance of a
‘positive.’ Oh, puhleeze, Mr. Greenspan, do you take the whole world
for fools?

"It is
the speculative bubble in the housing market, fueled by lower and
lower mortgage rates, that is alone propping up the economy, and
everyone knows it. In this summer of 2003, the national pastime
is no longer baseball or going to the beach – it's going to the
bank to refinance the mortgage.

"When
the bubble will pop is hard to say, just as it is hard to guess
the moment when the nation's patience will at last be exhausted
with Washington's czar of financialoney. But one senses that time
is starting to run out for both."

When the bubble
burst, investors who buy and sell mortgage loans recognized that
the houses as collateral were no longer enough to cover the loan
value.

Jesús
Huerta De Soto’s book Money,
Bank Credit, and Economic Cycles provides documentation
of cases. For example, real estate prices fell by 50 percent by
1349 in Florence when boom became bust. That boom was fed by bank
money creation:

"Evidence
shows that from the beginning of the fourteenth century bankers
gradually began to make fraudulent use of a portion of the money
on demand deposit, creating out of nowhere a significant amount
of expansionary credit. Therefore, it is not surprising that an
increase in the money supply (in the form of credit expansion) caused
an artificial economic boom followed by a profound, inevitable recession."

In the face
of excessive money, lenders tend to adopt laxer standards for making
loans. Borrowers and investors tend to use higher amounts of leverage.
Asset prices rise. When the rate of money creation slows or halts
and asset prices begin to decline, those who have bought houses
at high prices, perhaps with little or no equity of their own, quickly
find themselves in a position of negative equity, with their promised
loan payments exceeding their house values. This induces default
and foreclosures.

That is how
the subprime crisis began. It then spread to other sorts of securitized
loans and to capital losses of investors, including major banks,
in all sorts of loans.