Credit in America: Part 1

Well, after all the chaos that's been present in my life has somewhat subsided, I can finally begin to write a new post on this blog. =]

Here is part one of my diatribe on credit in America... after this section, I plan to go to address the issue of organic food.

So, today's question on credit relates to the industry hit hardest by the rapid and easy growth of credit in America- the housing industry. Earlier this summer, our stock market took a huge hit in on day. Economic analysts attributed this plunge to a bursting of the housing bubble. The question now is... is the worst of this bubble over?

To a large degree, I'd have to say yes. Here are three reasons why I feel this way.

First, the response of lending institutions to the housing bubble reveals that the housing bubble is starting to rescind. As the CBS News of September 20, 2007 reports the current housing market was largely in part created by the reckless and lax lending policies of lending institutions, namely the subprime lending branch of such institutions: “Banks used to … be careful (often too careful) not to issue a mortgage the borrower could not pay. In the current market [banks spew them out].” Furthermore, as the Wall Street Journal of August 21, 2007 adds, the lending institutions of today hardly even bother to do a background check on the people who are requesting to borrow money from them. All of these factors contributed to the overheating of the housing market, as consumers were able to obtain record-high amounts of money on credit and use that money to buy houses. A Federal Reserve report of March 2007 noted that in 2006, total outstanding consumer credit totally around 11 trillion dollars, which is larger than the current federal debt. However, with the housing bubble popping in summer of 2007, lending institutions have begun to reverse this trend. As the Fox News of CNN of October 2, 2007 reports, lending institutions have already lost 10% of all their subprime loans due to consumer delinquencies and bankruptcies resulting in banks having to foot around $346 billion in defaults. The article also notes that around $700 billion in loans are in risk of going sour for banks and that’s a lot of money. In the face of so many loans potentially going south, banks and lending institutions are tightening their credit standards to ensure that only credit-worthy consumers can get loans. The significance of this trend, as the Fox News of October 3, 2007 notes, is that the housing bubble will start to rescind as less credit is being pumped into the housing market, thereby cooling the industry and decreasing the bubble.

Second, government response to the housing bubble will ensure that the worst of this crisis is over. As the Economist of March 20, 2007 reports, the US federal government had hearing in the Senate Committee on Finance regarding usury laws and credit practices to solve the housing bubble. The primary preliminary result of this hearing was a stern commitment by the government to reduce credit to decrease the housing bubble. One example of this policy can be seen in Freddie Mac and Fannie Mae’s, two government-sponsored lending powerhouses, decision to cut support of subprime mortgage lending. In addition, as the CNN of October 2, 2007 reports, the federal government has been considering enacting stricter regulations upon banks to make sure they do a more though investigation of potential borrowers and their credit score before approving loans to decrease the number of loans given to consumers. Furthermore, the Washington Post of March 15, 2007 notes that the government has enacted new criteria on consumer bankruptcy laws to discourage consumers from obtaining loans they know they will not be able to afford. All of these policies indicate the federal government’s attempt to reduce credit in the economy to cool off the housing bubble. Since these policies have been implemented or are in the process of being implemented, the US economy will being to recover from the housing bubble.

Lastly, current market indicators show that the market once again has confidence in our economy and thus the worst of the housing bubble is over. As the International Herald Tribune of October 4, 2007 reports, consumer confidence in the US economy rose by almost nine percent this past month, indicating a widespread belief on the part of investors and consumers that the worst of the housing bubble is over. Peter Morici, an economist and business professor at the University of Maryland said that "consumers are cautiously more optimistic than a month ago. There is a growing sense that the credit crisis is resolving. It is not wholly resolved but it is resolving." Furthermore, the Federal Reserve’s decision to cut interest rates by a half percentage rate is another market indicator revealing a belief that the worst of the housing bubble is over. As the Economist of September 30, 2007 reports, a decrease in federal fund rate, the first time the Federal Reserve had done so in four years, indicates that the Federal Reserve is trying to spend the economy by promoting investment. If the Federal Reserve believe that the hosing bubble was still a serious problem, then it would be trying to cool the economy to decrease the bubble. However, by pursing an expansionary monetary policy, the Federal Reserve is indirectly asserting its belief that the worst of the housing bubble is over and that increasing inflationary factors would not inflame the housing bubble and cause it to overheat again.

Of course, I'm not an economist. So don't take this as golden advice. Then again, economists can never agree on anything, so it doesn't matter what you think, you'll always be able to find an economist to back you up on it.