Bad Credit Mortgage

Financial markets: Time for America to pay
Joseph Stiglitz

"We warned you," - with satisfaction can now say pessimists, long prediction for American economy are serious problems. Of course, rejoice with malice on the Bad Credit Mortgage crisis caused by the collapse of the stock market extremely unwise. But the fall was really predictable, as well as its likely consequences for the global economy and for the millions of Americans facing in the face of financial tests.

To understand the current situation, you should return to the economic recession in 2001 With the support of Federal Reserve Chairman Alan Greenspan, President George Bush has carried out its programme of tax cuts designed to benefit the richest segment of the population of America, the economy and not withdraw from the recession that followed the collapse of the Internet on the exchange. Given the error, it can be said that the Fed was almost no other way of maintaining growth and employment: it was lowering the interest rate, and that was done for a long time, up to an unprecedented rate of 1%.

This policy has brought results, but not such that normally expected of monetary policy. Typically, low interest rates encourage companies to take more and more loans to invest in the business. A higher level of debt with more than offset by the emergence of productive assets.

But, taking into account that part of the problem that led to a recession, just a surplus of investment in 1990 -., Lowering interest rates did not lead to substantial investment growth. The economy grew, but mainly because the Americans were persuaded to borrow more debt to refinance their mortgages and to spend part of the money. While real estate has risen steadily in price and interest rates were low, Americans could afford not to worry about rising debts.

In fact, even this is not stimulated the Credit economy sufficiently. To draw morepeople in the race Mortgages, banks lower lending standards, which caused thegrowth of subprime mortgage loans category (risky loans to borrowers with low creditworthiness). Were developed new financial products, resulting in lower initial payment, which allowed people to take larger loans.

Mortgage loans, proposed by some banks even have a negative amortization:payments not cover all the interest owed, so debt grew with every passing month. Mortgage bonds with a fixed 6% - Term rate mortgages were replaced witha variable interest rate, where the size of interest payments were tied to the profitability of most short-term liabilities of the United States Treasury (T-bills). The so-called "draznyaschie bid" allowed to establish more low payments during the first few years: they are gullible people, taking advantage of financial literacy many borrowers who understood Bad Credit, in that theyare engaged.

And Alan Greenspan has contributed to an increase risk by encouraging mortgage with a variable interest rate. Twenty-third in February 2004 He said that "many homeowners could save tens of thousands of dollars if it took loans with a variable rather than a fixed interest rate over the last decade." But is Greenspan seriously believed that the interest rate will remain at 1% - a negative real interest rate? Does he not think that awaits poor Americans with a mortgage with a variable interest rate, if interest rates grow? And grow they should have been inevitable.

Of course, Greenspan acted so as to emphasize how well the case came under its control. But the fragility of the situation was evident, and the breakdown was only a matter of time.

Fortunately, most Americans do not follow the Board Greenspan and not moving to a Remortgage with a variable interest rate. But even if short-term interest rates began to rise, to pay a bill hour was delayed, as new borrowers could still raise loans with a fixed interest rate of relatively low interest rates. It was surprising that, despite the rise in interest rates on short-term loans, interest.