The Domino Effect of Foreclosures

 

 

Some pundits said earlier in the year that the economy was correcting itself causing business houses to restock; this in turn led to modest hiring in factories. There were hopes that the wages would lead to spending and more demand. So far hope has not been translated into reality. The reverse is taking place with people saving more than spending. The flat rate of prices is raising fears of deflation.

The fundamental way of tackling deflation is to inject the economy with liquidity. The consumers then will overcome their reluctance to spend. At the forefront in this fight against deflation is the Federal Reserve that oversees bank rates that in turn control the rates banks charge for various types of loans and mortgages. The Federal Reserve has used this lever some time ago and since 2008 it has kept the rate hovering around zero.

The Federal Reserve did something more – during the peak of the financial crisis it took off from the banks the toxic investments on to its own shoulders. The idea was to make the banks free to make more loans. This led to hot debates. Some said that the Federal Reserve took the best step while others blamed it for worsening the budget deficit and inviting another bout of depression.

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