Dr. Rivlin: View Of Current Economic Landscape
Alice Rivlin is an economist, a former U.S. cabinet official, and she served under Alan Greenspan as Vice-Chair for the Federal Reserve in the late 1990’s. Alice’s presentation on Oct. 29th revolved primarily around the current economic landscape that the United States is facing and the difficulities that lay ahead of us as we attempt to navigate these turbulent times.
Alice began her presentation with what she feels is the root cause of the current financial crisis: the housing bubble. The housing bubble is characterized by the rapid and unrealistic rise in home values that has occurred over the past years. While an increase in home values is indicative of a thriving economy, the unrealistic rise in these prices led to the development of some unprecedented problems. In the 1980’s, it was expected of potential homebuyers be able to provide upward of 20% down payments in the purchasing of new homes. As home values increased rapidly and lending practices lapsed this practice somehow fell by the wayside. Within a matter of a few years, a large percentage of home purchases were made with creative financing instruments such as adjustable rate and sub prime mortgages that did very little to ensure the home buyer would continue to make payments in the event that interest rates increased. This however, did not create problems until home values unexpectedly began to decline.
As home values began to drop, homeowners found themselves in the precarious position of owing more than their home was actually worth. As adjustable rate mortgages began to reset, the number of mortgage foreclosures increased exponentially.
These problems I have just described have greatly affected homeowners. However, these systematic problems began to have a large impact on the U.S.’s financial firms as well. Just as creative instruments had been created to allow people to purchase homes, even more creative instruments had been manufactured for others to make money...
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