Shock Treatment Like Foreclosure Crisis Often Purges The Economy of Toxins

October 24th, 2008 | Tags: Foreclosure Crisis

A shock treatment like the foreclosure crisis often purges the economy of its accumulated toxins. Such crises are not uncommon in democratic nations. Economic corrections take place and the country emerges stronger than before.

US Savings & Loan banks collapsed in 1987 causing the NYSE to dip sharply. At that time many thought that Japan and other Asian countries would buy off a sunken USA. But Clinton steered the country through a long period of boom. But in 1997-99 the eastern nations went through trouble causing bankruptcy in Thailand and Japan. In the West in the 21st century there were two such critical instances that can be cited. The first one was the ‘dotcom bust’ in 2000 and the second one was just after the 9/11 shocks. But the markets surfaced through to see a boom from 2003 to 2008.

The market does have the power to correct itself under democratic governments. But in sharp contrast the socialist economies cannot pull through as can be noted with breaking up the Soviet Union into 16 countries after the financial crisis launched by perestroika linked with the name of Gorbachov. The Great Leap Forward and Cultural Revolution reduced China to shambles and it has survived only by opening its markets. The nations of Eastern Europe likewise collapsed in the 1980’s following economic travails. By taking on market economy the Czech Republic and Slovakia have managed to survive and prosper.

From these it can be foretold that the foreclosure crisis will blow over and allow a new invigorated America to make its debut. The foreclosure crisis is not akin to an economic holocaust comparable to the Great Depression. Economic theory says that like our body the market too needs to be purged of toxins periodically. The calculating process has been so advanced that such periods can be predicted. It is here that a failure took place causing the country to be caught on the wrong foot when the foreclosure crisis took it unawares. Many pundits had given out warnings to the USA government about rampant deregulation propelling a housing bubble that would inevitable burst. But the corridors of power did not pay heed and hence the outcome is the foreclosure crisis we are seeing today. It was highly irregular for banks to go in for risky investments.

The foreclosure crisis is the result of sub-prime mortgage meltdown that results in millions defaulting loans that should not have been contracted in the first place.