The United States of America currently faces a massive financial crisis that has led to numerous foreclosures and a loss of confidence in financial institutions. The United
States government must take decisive action to give those with impending foreclosures the ability to keep their homes. Furthermore, these government actions should focus upon ensuring that people are able to pay on own mortgages, rather than relying upon bailouts from the government. However, the government’s primary goal for all actions taken ought to be long-term stability and preservation of consumer confidence in financial institutions so that another financial crisis may be averted.
In order to solve the problems that America faces, a brief overview of their origin is necessary. Misplaced confidence in the continuous bright future of home prices and the attempts of lenders to profit in every way possible were major causes of the current crisis. Lenders often made mortgage contracts with little consideration for the ability of the recipient to repay. They were able to do this with little risk for themselves because these loans were bundled and sold off to investors. Furthermore, the demand for loans with more flexible standards was tolerated by the lenders because the lenders believed, just as those demanding the loans did, that the increase in home prices had no foreseeable end (Shiller 50). Many people saw an opportunity to make money off of subprime and adjustable-rate mortgages, and the fantasy of endless price increases overcame reasonable judgment.
A national goal of increased home ownership augmented these causes, encouraging financial institutions to make irrational loans and encouraging people to purchase homes they could not afford. Because of this national priority and the fact that government officials at the Federal Reserve also believed the bubble of housing prices would not burst, these officials lowered the federal funds rate, increasing the housing boom and therefore, the magnitude of the crisis when it ended (Shiller 49). These policies and ill-conceived notions created a speculative bubble that would inevitably break because of simple supply and demand. Artificially high prices led to an increased supply, which then caused a massive price downturn in mid-2006. Houses became difficult to sell, and many homeowners who had taken adjustable-rate mortgages with hope of a quick turnover found themselves stuck with unaffordable payments. Many others had little understanding of their situation, and had been sold houses far more costly than they could reasonably pay for after the rates on their mortgages increased. Foreclosure became the easiest way out for many of these homeowners, leading to the foreclosure crisis America now faces.
The next step in finding a solution is defining what an effective solution ought to accomplish. The primary objective is a stable housing market, with drastically reduced foreclosures. The current crisis...