Housing Bubble Calculated Risk

“Reverse mortgages, cash out refinance, HELOCs, consolidate your debts” are all catchy marketing phrases hawking products that are designed to break the “Nest Egg” of the average American. People were unable to save but continued to make their home payments. Drop the interest rates, make interest on a second home tax deductible, create a housing boom, and entice speculators. The housing bubble was a calculated risk accepted by governments, investors, and lenders.

The US Federal Reserve has cut its primary discount rate, which is the rate at which it lends money to banks, from 6.25% to 5.75%. The last time it made such a move was after September 11, 2001, when financial markets were closed. In a statement, the Fed said that there was a danger that the financial crisis could lead to slower economic growth.

I’m confused, is there economic growth if the profits are a result of borrowing more money to repay older debts? Eventually the debts must be paid.

How long will it be before everyone realizes that the stock market has gone the same direction? It wasn’t good enough to save at the individual level. It goes back to supply and demand. Money market accounts, mutual funds, and Individual Retirement Accounts (IRA’s) became the norm. The supply was there in the new investment accounts, and the money had to be channeled and invested somewhere. Stocks, bonds, and real estate prices rose. Real estate prices are falling and more mortgage backed securities are being identified as junk.