Impacts of Subprime Mortgage Crisis
Cypress College Economics Professor James Phillips informs us about the impacts of the subprime mortgage crisis.
Dr. James A. Phillips
Last Updated:9:19 PM PST 8/13/08 Section: Opinion
The Chronicle asked Economics Professor James A. Phillips: What are the impacts of the subprime mortgage crisis?
Here's his response: First, let's consider the short and long-term impacts on the U.S. economy.
1. Homeowners (and speculators) attempting to renew mortgages find mortgage loans too expensive or unavailable, so foreclosures increase, home prices fall and home sales decrease. This causes employment declines (a "multiplier effect") for mortgage banking, real estate, construction, home appliance and other related industries. Falling incomes mean cutbacks in consumer and business spending, and a possible recession develops. Lower interest rates hurt savers and those on fixed incomes.
2. Loans for business investment and other areas are also curtailed because banks and other groups that purchased these mortgage loans must declare losses, and lose confidence that future loans will be repaid.
3. Government response has included Federal Reserve reduction of interest rates, purchase mortgage loans to enlarge bank reserves, and bail out of companies such as Bear Stearns to prevent a banking crisis. The Congress passed a stimulus plan to maintain consumer spending, and is considering moves to reduce home foreclosures. Expect future moves to reform the process of mortgage loans.
There have been international impacts as well, because many of these failed mortgage loans were "packaged" to international banks who must also write off large losses. This could mean future cutbacks in loans to U.S. companies, and contribute to further decline in value of the U.S. dollar. One interesting impact has been an increase in foreign purchase of U.S. homes and properties.
Certainly there are and will be many impacts from this real estate "bubble" that could, and should, have been alleviated if not prevented.
Here's his response: First, let's consider the short and long-term impacts on the U.S. economy.
1. Homeowners (and speculators) attempting to renew mortgages find mortgage loans too expensive or unavailable, so foreclosures increase, home prices fall and home sales decrease. This causes employment declines (a "multiplier effect") for mortgage banking, real estate, construction, home appliance and other related industries. Falling incomes mean cutbacks in consumer and business spending, and a possible recession develops. Lower interest rates hurt savers and those on fixed incomes.
2. Loans for business investment and other areas are also curtailed because banks and other groups that purchased these mortgage loans must declare losses, and lose confidence that future loans will be repaid.
3. Government response has included Federal Reserve reduction of interest rates, purchase mortgage loans to enlarge bank reserves, and bail out of companies such as Bear Stearns to prevent a banking crisis. The Congress passed a stimulus plan to maintain consumer spending, and is considering moves to reduce home foreclosures. Expect future moves to reform the process of mortgage loans.
There have been international impacts as well, because many of these failed mortgage loans were "packaged" to international banks who must also write off large losses. This could mean future cutbacks in loans to U.S. companies, and contribute to further decline in value of the U.S. dollar. One interesting impact has been an increase in foreign purchase of U.S. homes and properties.
Certainly there are and will be many impacts from this real estate "bubble" that could, and should, have been alleviated if not prevented.
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