Foreclosure News Take Precedence Over All Other Issues
Foreclosure news is taking precedence over all other issues – including those coming in from Afghanistan, Iran and South Korea. The international emergency that foreclosures have created poses a greater threat to the stability of the world than blood baths elsewhere in the world. This is the view of Joel p. Trachtman of Fletcher School of Law and Diplomacy, Tufts University. However he feels that the long winter is coming to an end and there are signs of the freeze thawing.
The crisis started in USA but soon became international because the entire financial system had become global by that time. The financial entities that were involved in the sub-prime mortgage fiasco included multinationals within and outside America. Other countries emulated the American system hoping to reap similar benefits. The whole exercise starting from the humble foreclosure of homes of ordinary folks and soon became a contagion that spread like an epidemic. American institutions were threatened. This meant their counterparts across the globe were also threatened. The wildfire of failure also spread through trade routes as exports to USA dropped. There were no takers of consumer goods in foreclosed America.
The root cause of the foreclosure crisis can be traced to the staggering increase in liquidity. This happened largely due to macroeconomics that was not matched by proportionate macro regulation. The excess of liquidity could be traced to low interest rates, China opening up with its exchange rates, rise in wealth from oil and other types of sovereign wealth funds. This led to the blowing up of the asset bubble. Cheap money was floating in the air. The question was – where to park it so that more than average returns could be reaped. Those who promised this came to be regarded as financial wizards and honoured with fees.
This surplus money flowed into the housing sector. There was a great demand, as usual for housing and this demand was fed by money flowing in. Those who engaged in house investments came to be regarded as financial wizards. The mortgage lenders were sure that since the security involved was something solid as real estate there was no fear of losing. Property value could never fall even if there were lending mistakes. This was a traditional belief. Legendary Warren Buffet had aptly summed up the situation and said, “It’s only when the tide goes out that you learn who’s been swimming naked.” The packaging and slicing of loans led to the swelling of the problem.
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