Interest Rate Manipulations and the Governments Role in the Foreclosure Crisis

With the possibility of an economy-wide recession becoming clearer every day, and the realization by more and more homeowners that they are experiencing their own personal recession, the outlook for the housing market looks even dimmer than it did even a few months ago. So-called experts can be seen recommending that people spend money and buy to prop up the economy, but an attitude of instant gratification and overspending by both consumers and the government have led us to this economic situation. The problem of overspending should not be met with the solution of more spending.

Actually, spending too much money is exactly what caused some of these problems in the economy. During the real estate boom of the early 2000′s, when interest rates were manipulated downwards to provide economic stimulus after the tech bubble and 9/11, home buyers went out and spent as much as they could getting a home. With the artificially low interest rates, lenders gave every loan applicant as much as possible, believing the rising prices in the real estate market would take care of any potential foreclosure problems. Then the homeowners kept right on spending with their credit cards and HELOCs until they had all the cars, computers, and other consumer goods that they wanted.

But spending on credit means that, eventually, the bills will come due, and homeowners found that out the hard way when their subprime ARM mortgage rates increased. Then, in order to keep the mortgage on time, they had to miss a payment on this credit card or that personal loan, which drove up the interest rates on these loans. When a payment is missed, credit cards often drastically raise the interest rate, doubling or tripling the original, in some cases. Interest rates of less than 10% skyrocketed to 29.99% after a missed payment, and then the homeowners had to decide between paying the mortgage at all or paying the credit cards. In the meantime, collectors from all companies were calling several times every day looking for their money.

Factor in inflation due to government overspending and devaluation of the currency, and prices for transportation, home heating, and food were going up 10% or more per year. For homeowners who did not have to drive to work, heat their home, use electricity, or buy food to feed their families, the financial situation remained stable. For the rest, higher expenses translated into a decrease in the amount of income the homeowners could use for savings, paying down debt, or maintaining their current standard of living.

Thus, homeowners spent their way from a 6% mortgage rate to an 11% rate, and from a 10% credit card rate to a 29.99% rate. And in turn, the government also spent the homeowners’ way from the dollar being the reserve currency of the world to a tripling of oil prices and inflation rates of 30% in some commodities. After all, the government really does not have anything, except what they take from consumers in the form of taxation or inflation, or borrow from other sources.

And what about the savings that homeowners should have been putting away to meet any emergency? Well, that was nonexistent, as the savings rate in America has been negative for years now. Consumers spent so much, that they had to borrow even more money just to make ends meet and continue their spending. Of course, now, instead of borrowing for unnecessary items, they are spending borrowed money just to make their increasing payments on the mortgage and credit cards, while borrowing even more to spend for basic items like food and gas.

Government interest rate manipulation and inflation are the two main reasons for the crisis being experienced now. And the solutions that have been offered so far are simply more rate manipulations and inflation! This is like a doctor giving a patient a medication he is violently allergic to, and then prescribing more of the same medication to combat the additional illnesses caused by the medication in the first place. At some point, either the treatment will need to be changed, or the patient will die. For now, though, if we could get spending under control, and consumers saved even a little bit to get through financial hardships, the fear of recession would probably be much less, and the economic downturn itself would be less dramatic.