The subprime crisis: the U.S. government has announced that it will aid Americans affected by the subprime mortgage debacle, but the "aid" will merely delay and worsen the consequences.(ECONOMY)(Viewpoint essay)

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Back before the dawn of the new millennium, years of rampant money creation on the part of the Federal Reserve combined with paranoia over the supposedly insolvable Y2K bug to create the perfect economic storm. As Y2K bore down on an increasingly nervous international investment community, the Federal Reserve opened the monetary sluice gates as wide as they dared, flooding banks with liquidity to stave off fears of a millennial software Armageddon. The new money, as is often the case, was created with repurchase agreements or repos, which the sellers (the banks) would be obliged to repurchase from the Fed upon expiration sometime after the turn of the new century, unless the Fed opted to roll them over.

Many banks decided, as they had so often before, to loan their newly created money to institutions that promptly invested it in high-potential, tech-heavy stock portfolios.

As events turned out, this little-noticed feat of financial wizardry was the final act of folly in the farcical drama known as the dot-corn bubble. Soon after the new year, as it became apparent that the greatly feared Y2K technological meltdown was not going to happen, the Fed decided not to roll over all those inflationary repos, and the banks, obliged to come up with the funds to repurchase them, abruptly tightened credit.

With the money spigots turned off, the demand for stocks contracted correspondingly, and in March 2000, the years-long, Fed-fed dot-corn frenzy came to an unlovely conclusion.

Here We Go Again

Now history is repeating itself. No sooner had the dot-com bubble burst than a new bubble appeared, much to the relief beleaguered investors. And once again, even though the dizzying rise of real estate prices has been recognized as a bubble almost from the outset, buyers and investors, unable to resist artificially low interest rates and unprecedented access to cheap financing, have rushed to acquire real estate which under normal economic conditions would be beyond their means.