The Feds Take Measures to Allow Free Credit Flow to Prevent Further Foreclosures
The measures taken by the Feds are for allowing the free flow of credit to prevent more foreclosures and a worsening of the situation. Generally the Feds have concentrated more on commercial banks. The latter deal with deposits and loans of ordinary consumers and businesses. Since the 1930’s the Feds have been focusing on the commercial banks because the financial health of the man in the streets depends on it. The Investment banks are the jumbo giants like Merrill Lynch, Morgan Chase, Bank of America, Wachovia and Goldman Sachs etc. Some of these are listed in both categories.
The new measures undertaken by the Feds targeted assistance to the commercial banks because if businesses dried up without free flow of money ultimately the ordinary man suffers. They would not get loans to buy houses, cars or pay bills through credit cards. It would lead to a slowing down of the entire economy. Unemployment increases and stocks as well as other assets tumble.
The foreclosure crisis is largely due to the mess of the sub-prime mortgages. From 2007 the foreclosure crisis gained momentum when the initial teaser rates began to reset. The borrowers began to default by thousands and as a result the flow of mortgage payments to lenders began to dry up. Innumerable houses fell into foreclosures causing huge losses to the lenders. These houses soon became a curse not only to the evicted borrowers but also to the community and the nation. A crisis of national proportions set in that sent out ripples throughout the global community.
The lenders now refused to accept any security whose value was under a cloud. The taboo list kept growing. The fear was that firms losing out on mortgage securities would dump its other assets to make up for the cash lost. This caused the prices of these to drop also. Big banks hesitated to lend fearing that that the borrowers would be unable to repay. The entire system had become frozen.
Wharton professor Richard Marston said, “What we’re learning is that this financial market of ours is very interconnected. When you see a reassessment of risk on one security, the market then very quickly reassesses risks on other securities… What we had was a reassessment of risk, and it affected a lot of securities that had nothing to do with mortgages.” The swelling of the fear factor led to an increasing gap between government bonds and other securities. Investors began to shy away.
