Spring Break
Recession Rebates Demonstrate Incompetence
Daniel Cunningham
Issue date: 1/29/08 Section: Commentary
American families will be happy this summer. The $150 billion stimulus package that Congress recently approved should begin sending checks between $300 to $600 to anyone earning over $3,000 sometime in May. Given that signs of recession were prevalent last April, it is great to know that congress only took nine months to make a decision to offer a tax rebate which will take more than two months for the people to receive. Cynicism aside, the recession is not being caused by a lack of consumer spending in the economy, making it especially disconcerting to know that our representatives can take nine months to make the wrong call on boosting the economy.
Back in September, the Congressional Budget Office published a document that elaborated on the causes of the mortgage market crisis, or subprime crisis. Subprime loans were offered largely to individuals with poor credit or lower incomes. These loans were often beneath the "prime" rate in the market for a few years and then would escalate significantly. These loans are especially risky because they are more expensive over time and offered to those who are least likely to afford it. By the end of 2006, the CBO reported that the subprime market was worth over $1.2 trillion.
The financial market also recklessly reduced their standards for offering credit. By accepting smaller down payments or reducing background check requirements on subprime loans, more borrowers were receiving credit than they otherwise should have. The good news is that at least 85 percent of all people currently holding subprime mortgages are still paying their bills. However, the remaining 15 percent who are likely to foreclose, or go bankrupt, as a result of the loan probably take no comfort in knowing that. Even if it did, it is hard to make a case that earning a $600 check more than two months from now will solve their problems.
After the surge of bankruptcies and foreclosures took place, other parts of the financial market were entrapped in a domino effect. Lenders saw their profits slashed by bankrupted borrowers and are now afraid to lend credit to anyone. Investors have very few ideas as to what markets are safe to invest in and have brought lending in the finance market to a near standstill.
Back in September, the Congressional Budget Office published a document that elaborated on the causes of the mortgage market crisis, or subprime crisis. Subprime loans were offered largely to individuals with poor credit or lower incomes. These loans were often beneath the "prime" rate in the market for a few years and then would escalate significantly. These loans are especially risky because they are more expensive over time and offered to those who are least likely to afford it. By the end of 2006, the CBO reported that the subprime market was worth over $1.2 trillion.
The financial market also recklessly reduced their standards for offering credit. By accepting smaller down payments or reducing background check requirements on subprime loans, more borrowers were receiving credit than they otherwise should have. The good news is that at least 85 percent of all people currently holding subprime mortgages are still paying their bills. However, the remaining 15 percent who are likely to foreclose, or go bankrupt, as a result of the loan probably take no comfort in knowing that. Even if it did, it is hard to make a case that earning a $600 check more than two months from now will solve their problems.
After the surge of bankruptcies and foreclosures took place, other parts of the financial market were entrapped in a domino effect. Lenders saw their profits slashed by bankrupted borrowers and are now afraid to lend credit to anyone. Investors have very few ideas as to what markets are safe to invest in and have brought lending in the finance market to a near standstill.
Viewing Comments 1 - 2 of 2
Kim O'Brien
posted 1/29/08 @ 12:58 PM EST
The subprime morgage crisis is not something that was caused by lack of regulation but due to the natural workings of capitalism itself. Industrial corporations have been buying debit instead of investing it new machinery. (Continued…)
Gary Engel
posted 1/29/08 @ 3:46 PM EST
OK. Let me get this straight. The government wants to send me back some of the money I've been paying it since I got my first paycheck at 16 (I'm now 50) and you think this is a terrible idea! My e-mail address is not going to be published, so I may contact you on the e-mail address listed at the bottom of your liberal Democrat commentary and provide you with my postal address, so you nmay send me your awful old rebate check. (Continued…)
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