Bloated credit ratings

A number of inter-related factors led to the current economic situation.

Some say it started with Alan Greenspan's wholesale de-regulation of the financial system starting in the early '90s and continuing well into this this decade. Steven Perlstein wrote in The Washington Post in an early 2006 article that Greenspan's policies at the Fed has left the financial system "more prone to assets bubbles, corporate scandal and financial crises".

Fed also significantly lowered interest rates earlier this decade to pull the country out of the mild recession in 2000-2001. One one hand, it encouraged home ownership and simultaneously fueled innovation in financial instruments (so lenders can offer higher returns). There was little transparency in the composition and characteristics of the loans held in the pools sold as complicated securities and the power bestowed to credit rating agencies increased. The agencies (Moody's included) are alleged to have gone from being watchdogs for investors to being lapdogs for debt issuers. At the heart of the issue is the question of whether credit risks were undetectable or whether they were ignored. Did the three top credit-rating agencies go easy on their ratings of risky securities to rake in huge profits, eventually leading to huge losses for investors?