The Common Man and the Foreclosure Crisis

Posted in Foreclosure Crisis, October 21st, 2008 |

It is not just reading and listening about the crisis but the harsh reality is the impact of the foreclosure crisis on the day-to-day life of the common man. Economists say, “Credit is really the lubricant – the oil – of an economy.” To make credit flow the federal government has chalked out a jumbo bail out plan amounting to $700 billion. In what way will the average American be benefited?

Speaking on the specific case of the residents of Hampton Roads, according to the views of Larry Filer of Old Dominion University and Gilbert Yochum also of ODU, the local region will benefit from the inflow of federal funds. Hampton Road being a harbour that is ice-free all round the year is a favorite haunt for USA armed forces. As such it is insulated from outside shocks like the prevailing foreclosure crisis. The latest move will ensure a continuous flow “of spending outside the region into the region.”

In general the bail out is no guarantee that the frozen credit market will thaw overnight. The measures do not address the root causes. It will be impotent if it cannot check the decline in prices. The legislators are at a loss to find the fundamental reasons for the house foreclosures running wild through the country.

The ordinary American is worried about investments, retirement savings, college funds and life savings. The government has said that it will for the time being guarantee the mutual funds. In a routine move the FDIC insures savings till a certain limit. But bonds and stocks are not insured. The hope is that the move will stabilize the market.

If the government had not intervened there was the risk that the total financial system would collapse. Yochum said, “It appears credit markets would cease to function properly.” Without credit flow business comes to a halt sans buying and selling. People cannot go about buying cars and houses. Without credit – the fuel, the economy screeches to a halt.

Speaking on the reasons for this foreclosure crisis Yochum said that there have been many contributory factors – the prime being financial innovation. Lenders groped around for new ways to lend money without foreseeing the future. Gradually during the last few years many of the regulations that had been introduced since the Great Depression were removed leading to disastrous consequences – the foreclosure crisis. The running theme was to allow financial bodies to go ahead along unhindered along new lines.