Allowing Foreclosures To Follow The Course Of Classical Economics

Most of the Republicans headed by Bush seriously believe that they have Time on their side and that things will solve itself out by allowing foreclosures to follow the course of classical economics. Many opine that they are wrong.

The river of sorrow will not dry up as it regenerates itself – clouds become rains and rains become clouds. Foreclosures are leading to real estate price decline and real estate price decline leads to more foreclosures. As such the river is spilling its banks and foreclosures are now tainting prime loans. The impact of floundering traditional loans made to credit worthy people is yet to be gauged. The terms of these loans have been tricky and the interest rates too will start to climb.

The Senate Banking Committee continues to make empty noises despite this grave situation.. As yet no bill has been passed to help foreclosure victims thanks to the objections raised by Republican Richard Shelby. The House passed a tentative measure with the support of a mere 39 Republicans. The White House has to yet come forward with a clear-cut step – it continues to sow confusion with its humming and hawing. The net result is delay and delay translates into inevitable foreclosure.

Meanwhile the economy continues to be mauled. The housing balloon has burst causing real estate prices tumble. From the first quarter of 2007 to the first quarter of 2008 the price of single-family houses fell by 7.6%. This is the largest year-over-year fall since 1982. It is apprehended that 2.2 million houses will most probably be foreclosed before this year draws to an end. Another nine million are at risk because of their zero equity. This means they have nothing to fall back on if recession or inflation hits hard. This will make it impossible for them to continue with regular mortgage repayments.

According to theory fall in prices should lead to rise in consumer demand. This rise in demand will send prices upward again. Republicans accept this formula for remedy without demur. This is at the root of their inaction. But the reality is quite different. In many cities the fall in real estate is so grim that buyers are shying away afraid of another tumble. This puts on hold any prospect of recovery.

The housing market affects everybody. So long as it is troubled the entire financial system will be unsettled.