How did we get into this mess?
JEN GOLDING
Issue date: 4/13/09 Section: Features
understand how we got into
this mess. It's so confusing."
According to Bucks economic
professor Deborah
Meissner, it all began with
easy credit created by the
Federal Reserve monetary
policy. Easy credit enabled
people to purchase homes
who were previously unable
to do so. This caused the
demand for housing to
increase, and therefore housing
prices skyrocketed.
Furthermore, loans were
made to people who couldn't
really afford them. There was
an expectation that as long as
prices increased it wouldn't
be a problem. However, last
year is when the trouble really
began. Oil prices began to
rise significantly, and since
oil is a resource cost for other
products, those prices rose as
well.
It was then that the Federal
Reserve increased target
interest rates to combat fears
of inflation. Higher interest
rates coupled with higher
gas, oil, and food costs
pushed high-risk mortgage
holders to default, leading to
housing foreclosures.
Foreclosures increase the
supply of housing on the
market, which causes housing
prices to fall.
"With little or no money
down, many houses are
worth less than the mortgages
taken out on them.
Lending institutions find
themselves in trouble, and
since many of these mortgages
were bundled and sold
as investments, the distress
spreads to the rest of the
f i n a n c i a l
c ommu n i -
ty," said
Meissner.
Because of
this, banks
are afraid to
lend out
money for
fear of not
b e i n g
repaid. This
tightening of credit causes
housing prices to decrease
even more and also reduces
the demand for other products
like cars and electronics.
The downward spiral continues
as companies in the construction,
automobile, and
electronics industries lay off
workers causing even more
foreclosures and further
reducing the demand for consumer
goods.
So who is to blame for all
this mess. It's so confusing."
According to Bucks economic
professor Deborah
Meissner, it all began with
easy credit created by the
Federal Reserve monetary
policy. Easy credit enabled
people to purchase homes
who were previously unable
to do so. This caused the
demand for housing to
increase, and therefore housing
prices skyrocketed.
Furthermore, loans were
made to people who couldn't
really afford them. There was
an expectation that as long as
prices increased it wouldn't
be a problem. However, last
year is when the trouble really
began. Oil prices began to
rise significantly, and since
oil is a resource cost for other
products, those prices rose as
well.
It was then that the Federal
Reserve increased target
interest rates to combat fears
of inflation. Higher interest
rates coupled with higher
gas, oil, and food costs
pushed high-risk mortgage
holders to default, leading to
housing foreclosures.
Foreclosures increase the
supply of housing on the
market, which causes housing
prices to fall.
"With little or no money
down, many houses are
worth less than the mortgages
taken out on them.
Lending institutions find
themselves in trouble, and
since many of these mortgages
were bundled and sold
as investments, the distress
spreads to the rest of the
f i n a n c i a l
c ommu n i -
ty," said
Meissner.
Because of
this, banks
are afraid to
lend out
money for
fear of not
b e i n g
repaid. This
tightening of credit causes
housing prices to decrease
even more and also reduces
the demand for other products
like cars and electronics.
The downward spiral continues
as companies in the construction,
automobile, and
electronics industries lay off
workers causing even more
foreclosures and further
reducing the demand for consumer
goods.
So who is to blame for all
Viewing Comments 1 - 1 of 1
AndrewR
Andrew Rumbold
posted 4/23/09 @ 4:00 PM EST
Professor Meissner did well to bring up the Federal Reserve as one of the culprits- but neglected to mention that the 'Fed' is no more federal than Federal Express. (Continued…)
Post a Comment