Capitol Hill Blue Forums Political Issues Finance, the economy & Economics High-Risk Credit

As markets went on a rollercoaster ride last week, our economy is coming close to a day of reckoning for loose credit policies being followed by the Federal Reserve Bank. Simply, foreign banks we have been relying on to buy our debt are waking up to the reality of much higher default rates than predicted, and many mortgage-backed securities have been reduced to “junk” ratings. Wall Street fears the possibility of tightening credit and the tightening of America’s belts. Why, they say, “if Americans spend only what they can afford, think of the ripple effects throughout the economy!” This is the cry, as the call comes for the fed to cut rates and bail out companies in trouble.

More inflation is, however, never the answer to inflation.

The truth is that business involves risk, and businesses that miscalculate risk should be liquidated, so their assets can be reallocated to businesses that correctly judge risk and make profits. Instead, the Fed has injected $64 billion into the jittery markets, effectively amounting to a bailout that keeps these malinvestments afloat, but eventually they will become the undoing of our economy.

In addition to the negative reactions in financial markets, many Americans have taken on too much personal debt owing to exotic mortgage products and artificially low interest rates. Unfortunately, these families are now in the position of losing their homes in unprecedented numbers as the teaser rates expire and the real bills are coming due.

The real answers are, and always have been, found in the principles of the free market. Let the market set the interest rates. If we had been functioning under a true and transparent free market system, we would not be in the mess we are in today. Government, like the American household, needs to live within its means to get back on stable fiscal ground. Congressman Ron Paul

It is hard to overstate the seriousness of the global financial crisis. Yet the world's central monetary authorities - the central banks - have been culpably slow to recognise how dangerous things have become.

Initially, the crisis emerged from the US mortgage market, as payment delinquencies among sub-prime borrowers (borrowers in poor credit standing) began to mushroom. Things will get much worse as US unemployment begins rising, perhaps rapidly, making it harder for more and more borrowers to maintain timely interest and principal repayments on their mortgages.

As long as US house prices were rising, it always seemed possible for homeowners who got into trouble to take out additional loans, in effect borrowing to finance their earlier borrowings: a classic Ponzi game. But when the oversupply of new houses in the US began forcing prices down instead of up, the avenues to ever-more borrowing were shut off, at least for late entrants into the game, the people who had been unable to build up enough equity in their houses via the earlier period of rising prices. Bernard Connolly