The Map and the Territory by Alan Greenspan — THREE | THE ROOTS OF CRISIS

1. 1. The fall of the Berlin Wall in 1989 exposed that East Germany's productivity was only about one third of West Germany's, contrary to Western estimates of 75-80%.
2. 2. After the Cold War, China and many developing nations adopted export-oriented models like the Asian Tigers, combining low-cost labor with developed-world technology.
3. 3. Between 2000 and 2007, developing world real GDP growth was nearly double that of developed economies, and 800 million workers entered export-oriented markets by 2005.
4. 4. Developing world savings rates rose from 23% to 33% of GDP between 1999 and 2007, outpacing investment and causing a global fall in long-term interest rates.
5. 5. Falling long-term interest rates led to lower equity premiums and real estate capitalization rates, driving home prices higher worldwide.
6. 6. The subprime mortgage market was initially small and successful, but after 1996 home price acceleration made it attractive to investors, growing to 7% of originations by 2002.
7. 7. Starting in late 2003, major financial firms like Countrywide and Lehman Brothers accelerated securitization of subprime mortgages, driven by demand from Europe and GSEs.
8. 8. Fannie Mae and Freddie Mac, under HUD affordable housing goals, accounted for nearly half of all newly purchased subprime mortgage securities by 2004, five times their 2002 share.
9. 9. The share of ARMs in subprime originations soared to 62% by mid-2007, and delinquencies rose immediately as many borrowers failed to make even the first payment.
10. 10. Greenspan admits the Fed was aware of irregular subprime underwriting practices but viewed them as localized, not as a precursor to a bubble.
11. 11. Fannie Mae's defective bookkeeping hid the true size of the subprime problem; a 2009 reclassification revealed loans from 2003-2004 were actually subprime, not prime.
12. 12. Greenspan concludes that Fannie and Freddie played a key role in the housing bubble, and without them, the crisis would likely have been less severe, as seen in Canada and Australia.