Housing Bubble Prediction
While there were economists in the US who had made predictions about the housing bubble bursting, they too did not realize the extent of damage this would wreak. The main reason for this was primarily the real estate sector only accounts for around 6 percent of the nation's GDP. |
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However, at the same time, there were economists who realized that connection between housing and consumer spending. As the prices of real estate rose, many people made use of their home equity to fund their purchases and other expenses. This link between consumer spending and housing accounted for 70 percent of the GDP and around 25 percent of the purchasing power of goods and services.
Congressman Ron Paul was instrumental in proposing the Free Housing Market Enhancement Act in 2002. He wanted this act to be approved by the Congress so that special privileges and subsidies that were accorded to entities like the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the National Home Loan Bank Board were repealed. According to Congress Paul, borrowers would go to these enterprises, which were supported by the government, at the time of economy difficulties, to avail better mortgage terms than what private banks could give. Thus, this created a distortion in the allocation of the capital. In addition, the legislation also looked to repeal the authority that the Federal Reserve had to purchase debt of the government sponsored entities and enterprises related to the housing market.
With the government helping out the housing related enterprises ended up creating a boom in the housing market, but in the long term this same help and assistance proved to be the undoing of the housing sector and the economy as a whole.
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