Foreclosure Crisis at the Root of Recession that Sets in from End of 2008

September 30th, 2009 | Tags: Foreclosure Crisis

foreclosure crisis

Despite government rescue efforts towards the end of 2008 the credit freeze continued to be frozen and the investors began to worry about the jumbo banks. In November the stock markets fell to its lowest point in ten years. In December a group of economists declared that recession had set in – something Americans had been suspecting for many months - the foreclosures came.

In actuality the economy had fallen into recession one year previously. This recession is proving to be the longest in a generation. Unemployment is the highest since last 15 years. Trade has contracted. Housing prices are tumbling. With inflation having stopped the economists are now starting to worry about deflation and its relentless cycle of low prices, low wages and economic shrinkage. The winter holiday season turned out to be the worst in living memory for the retailers. Shops began to down shutters and seek bankruptcy shelter.

On 16th December the Federal Reserve responded by bringing down interest rate to nearly 0%. It also said balance sheets would be shored up. It tantamounted to printing money to fight the acute recession and frozen credit markets. Investors clapped and Dow went up by over 300 points. But pundits began to sorry about the Treasury loaded with billions in debt.

The fourth quarter reported losses in billions for the corporate sector and held no hope for 2009. There began to be doubts whether the first lot of bailout funds of $350 had had any impact whatsoever. Banks took and just sat on it instead of lending out to home purchasers. The stubborn attitude of the banks raised a sensitive question about whether the Obama government would have to nationalize banks.

But such extreme measures did not have to be taken as was evident from the first steps taken by the new treasury secretary Timothy Geithner. He chalked out a much more comprehensive overhauling and extension of the rescue efforts of the government attempting to garner in nearly $2 trillion from the Treasury as well as the private investors and government.

The envisaged plan included both the public and private sectors that has been referred to as the bad-bank. It would hold the soured assets and would utilize $500 billion to buy up the $1 trillion assets. Capital would be directly infused into the banks – the money coming from the balance of the first bailout measure. There were ambitious schemes of including both residential as well as commercial backed securities.

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