Wednesday, March 21, 2007

Mortgage Meltdown

Andy Laperriere argues that we see in the subprime mortgage market debacle the bursting of the housing bubble. But it is just the begginning. He asks "[w]hat role did the Fed's loose monetary policy from 2002-2004 play in fueling the housing bubble? Should the Federal Reserve reexamine its policy of ignoring asset bubbles?"

Mr. Laperriere, a managing director in the Washington office of ISI Group, comments in today's Wall Street Journal.

He goes on to say, "Stock markets world-wide have sold off the past few weeks over concerns the collapse of the subprime mortgage industry could prolong and deepen the housing slump and threaten the health of the U.S. economy. Federal Reserve officials and most economists believe the problems in the subprime mortgage market will remain relatively contained, but there is compelling evidence that the failure of subprime loans may be the start of a painful unwinding of a housing bubble that was fueled by easy money and loose lending practices."

The "wealth effect" has been a the tail wind boosting consumption growth and GDP. If house prices do fall 10 percent this year, it will feel like a Kansas gale in our faces. How far will it push us back?

2 comments:

ilanit said...

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Anonymous said...

Althought the lending practice has faltered and people can no longer pay their morgages. One of the greatest wealths of this nation, is the value of land in the United States. Land and housing is the primary collateral offered in receiving loans. Mortgages and Loans have been based off of their perspective value for years. Is this the time were the actual value of home and land are not worth what they are quoted for? Yes, Mortgages are not meet and people can no longer pay. Is it because People do not know how to spend money or because mortgages and our asking prices are too high?
-Michael Perry