Keynesian Economics and the Mortgage Crisis
Keynesian Economics and the Mortgage Crisis The recent mortgage crisis in the US was unprecedented. It led to a massive clampdown of financial institutions, occasioning one of the worst financial melt-downs the US has ever faced (Jaffe, 2008). Quite naturally, it would be necessary to examine the cause of the crisis in order to draft prophylactic measures that would prevent the same financial disaster in the future. This paper will discuss the events that led to the mortgage crisis.
The housing bubble One of the factors that led to the mortgage crisis was the housing bubble. It started in 2001 and climaxed in 2005. A housing bubble is characterized by rapid increase in the value of real estate properties to an extent that it can no longer be sustained. Prices of real estate property are driven through the roof, well beyond the affordability of the people as their incomes remain fixed. These increases result into a decrease in home prices, resulting into mortgages that were higher than the value of the property. Housing bubbles occurred in the US in 2006 and were not detected until it was too late. During this time, home values were already overpriced. Economists warned that market correction could take years and would cost trillions of dollars in its wake. They further warned of massive drops in home values, much more than it was being expected. The worst inevitably happened and the bubble burst. Many people had taken mortgages whose values were much higher than usual. Eventually, most of the mortgage takers saw no need to continue paying out their mortgages when their values of the homes had dropped drastically. The big banks that had bought all those mortgages suddenly hit rock-bottom when home owners started defaulting on payments. This eventually led to the mortgage crisis.
Historically low interest rates Another event that could have precipitated the mortgage crisis was the extra-ordinarily low interest rates that
The housing bubble One of the factors that led to the mortgage crisis was the housing bubble. It started in 2001 and climaxed in 2005. A housing bubble is characterized by rapid increase in the value of real estate properties to an extent that it can no longer be sustained. Prices of real estate property are driven through the roof, well beyond the affordability of the people as their incomes remain fixed. These increases result into a decrease in home prices, resulting into mortgages that were higher than the value of the property. Housing bubbles occurred in the US in 2006 and were not detected until it was too late. During this time, home values were already overpriced. Economists warned that market correction could take years and would cost trillions of dollars in its wake. They further warned of massive drops in home values, much more than it was being expected. The worst inevitably happened and the bubble burst. Many people had taken mortgages whose values were much higher than usual. Eventually, most of the mortgage takers saw no need to continue paying out their mortgages when their values of the homes had dropped drastically. The big banks that had bought all those mortgages suddenly hit rock-bottom when home owners started defaulting on payments. This eventually led to the mortgage crisis.
Historically low interest rates Another event that could have precipitated the mortgage crisis was the extra-ordinarily low interest rates that
References: Bianco, Katalina , The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown. CCH Mortgage Compliance Guide and Bank Digest, 2008. Bernanke, Ben (2007) Housing, Housing Finance, and Monetary Policy.Speech on August, 31, 2007. Jaffe, Dwight M (2008) The US Subprime Mortgage Crisis: Issues Raised and Lessons Learnt. Working Paper No. 28, Commission of Growth and Development, The International Bank for Reconstruction and Development/ The World Bank. Tymoigne, Eric (2009) The US Mortgage Crisis: Subprime or Systemic? The Banking Crisis Handbook. Retrieved from