Current macro-economic conditions have been largely impacted by over two decades of unprecedented expansive monetary policy. This began with the 2001 recession, and eight-month economic downturn set off by the Y2k scare and culminating with the September 11, 2001 attacks on the World Trade Center. To maintain economic stability, the US Federal Reserve worked to lower rates to the lowest levels seen in the post Bretton Woods Era (the era following the abandonment of the gold standard). These historically low rates, combined with federal policy created to encourage home ownership, set off a boom in real estate and financial markets alike, causing a steep rise in total mortgage debt. Firms created new types of lending products, with lax credit standard for borrowers who could not previously qualify (known as “subprime”), with the expectations being that rates would remain historically low, and that home prices would continue to rise indefinitely. Prime examples of just how creative lenders to get to originate more loans during this period were products such as “Stated Income Stated Asset” loans (SISAs), and “No Income No Asset” loans (NINAs). Greed was rampant, and everyone was making money slinging risky loans. It was not uncommon during this period for loan officers (LOs) to coach their clients to call back and falsely state the necessary income needed to qualify. Appraisers were even paid off to make sure homes met the necessary value for the loan to close. LOs also received higher compensation for placing customers into higher rates, often leading to predatory lending. Another key contributing factor to the incoming collapse was the prolific use of the Adjustable Rate Mortgage during this period, known in short as ARMs. ARMs have an initial period of fixed interest, lower than traditional products. Once this initial period ends (typically three, five, or seven years), the rate then starts adjusting based on the index it is linked to (typically LIBOR during this time). The initially low rate was used as selling point by loan officers, who hawked these products to borrowers with the premise that because rates would stay low and home prices would keep increasing, the borrowers could simply just refinance once the fixed period of the loan ended. The result of this sudden boom in lending led to high demand for housing, which consequently caused the prices of goods and services to rise. From 2004 through 2006, the Fed slowly began slowly increasing interest rates to offset rising inflation. Good intentions can often lead to unintended consequences, and the increase in rates had a negative effect when these recently originated ARMs, with borrowers finding their previously low rates rising dramatically when they began to reset to the adjustable period of the loan, causing interest rate shock, and subsequentially mass default. To make matters worse, lenders had discovered that by packaging many of these risky subprime loans with higher rates into tranches within new securities with A paper loans (loans made up of borrowers with ideal credit and profile), they were able to maintain a better rating on the security, making it attractive to investors looking for investment vehicles with better returns. Financial institutions and banks became heavily over leveraged with these investments, ignorant to the ticking time bomb that was these incredibly risky loans packaged into their investments. The collapse began with investment banking giant Bear Stearns and culminated with the shuttering of Lehman Brothers. The ensuing fallout devested the US and spilled over globally, and the economy plunged into a deep retrace, now known as the “Great Recession”. The Fed sprang into action to try to keep the collateral damage to a minimum. The Fed Funds rate was slashed to a record low target of 0%-.25%, with the discount rate only slightly higher. They spun up what is now known as QE, or quantitative easing, which is to say, the central bank started injecting liquidity into the economy by purchasing of government bonds and other assets, including MBS (Mortgage Backed Securities). Fannie Mae and Freddie Mac, both the primary GSEs, or Government Sponsored Entities, were bailed out by the US government, and placed into conservatorship to ensure they remained solvent. Banks were provided with a staggering 7.7 trillion dollars of liquidity in the form of loans, and 787 billion in deficit spending, to try to stimulate the economy. New financial regulations were created to reform the broken system, known as the Dodd-Frank act. After going through a period of sharp but brief deflation, the former actions returned inflation to the forefront as the money supply was rapidly increased once again. The economy officially exited the recessionary period, and we entered the last decade, which has been the longest period of economic expansion in history. But at what cost was it to make this possible? In 2013 Ben Bernake (The Fed Chairman at the time) announced that they would begin reducing the rate of asset purchases at a future date, and effectively begin to reduce the money supply. The mere news of this caused bonds yields to rise sharply, and investors to panic, with the DOW experiencing only a temporary decline in mid-2013. This event came to be known as the “Taper Tantrum”. In 2015 the Fed finally embarked on their intended goal to taper asset purchases. Between December of 2016 through December of 2018, the Fed had gradually raised the Fed Funds Rate eight times. In 2019, the market began to stall and grow slowed. In March of 2019, the yield curve became inverted for the first time since the Great Recession. The yield curve is a way to measure bond investors’ appetite for risk. When the yield curve becomes inverted, this means that short-term yields exceed longer term yields, and the term spread becomes negative. Effectively, this signals that the market is betting on interest rate declining. The inversion of the yield curve has an impressive record for predicting incoming recessions. It has inverted before each recession in the past 50 years, with the recession typically happening one year after the inversion on average. President Trump, who had been frequently associated with the robust performance of the stock market during his tenure, started to panic. He began to pressure the Fed to reverse course and start another round of rate cuts, seeking to keep the economic expansion rolling. This was at odds with his prior statements, particularly during his election run, criticizing the Fed for keeping rates too low, and letting them rise to a level that would naturally attract private investment, allowing the Fed to unwind its balance sheet. Facing increased political pressure, the Fed complied, rates were once again slashed, and markets returned their ascent to new highs. Moving into 2020, as you the reader are aware, the world saw the emergence of the covid-19 pathogen. As the virus began to quickly spread nation by nation, the markets began to panic. It became clear that life as we know it would be essentially put on pause. The market panic began to create fallout. With the economy closing and the government barring lenders from foreclosing on borrowers due to missed payments because of job loss, mortgage lenders found themselves in a particularly difficult situation. They began to tighten credit standards, attempting to limit the amount of risk they would taking on with newly originated loans. Liquidity was drying up so fast, many found themselves with a potentially large amount of loans on their warehouse lines and nowhere to deliver them. The MBA, Wall Street, and President Trump began to call for help from the Fed. The Fed complied, slashing the Fed Funds Rate and discount rate to at or near 0%, completely undoing any previous rate hikes. They also announced several special purpose vehicles, designed to inject liquidity to support the flailing markets. The level of QE was more substantial than even a decade ago. Markets, high on the news of the incoming flood of liquidity, reversed course instantly. Mortgage Banks were suddenly caught in another precarious position. Because they hedge their interest rate risk on their pipeline, they began to find that their recent hedge positions on these pipelines began to blow up, forcing massive margin calls industry wide. It was chaos, however the pain in across Wall Street and Main Street slowly eased as stocks marched back towards previous highs.