Ironically, the much-maligned sub-prime loan market which is supposed to have started the current crisis was a democratisation of credit. After working continuously for 35 years, my grandfather used his savings of a life-time to buy a home. Till then he and his family had to make do with a rented home. There was simply no credit market willing to give him a loan when he was in his twenties, taking into account his future income and savings. Contrast this with today. People do not have to postpone home purchases till retirement. Sub-prime mortgages were an attempt to extend this facility which has been available for long to the middle class in the US to poorer sections of society.

In retrospect, scholars may conclude that the real tragedy was that the sub-prime innovation coincided with Alan Greenspan’s ill-conceived attempt to avoid a recession before he retired. By dropping interest rates to all-time lows and encouraging a real estate bubble (to steer away from a recession when the dot-com boom ended) he created distortions in sub-prime pricing making the credit rely on asset price inflation as the basis for its soundness. Ill-informed persons have argued that Greenspan relied on the doctrines of Milton Friedman. Au contraire, Milton Friedman was totally and emphatically opposed to the central bank tinkering with interest rates with the ill-conceived notion that business cycles could be fine-tuned. Friedman wanted central bankers to stick to an announced formula for money supply growth — not keep changing it off and on which was Greenspan’s style.

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