Introduction
With regard to the housing crisis in the United States, two schools of thought have emerged to explain the causes of the financial crunch. While some people blame the ‘easy money’ policies of the Federal Reserve, others contend that it is the lower interest rates on mortgages that encouraged the euphoric buying of homes, leading to the crisis. This essay argues that the latter is true and proposes that the Federal Reserve should be subjected to the rules governing money supply to contain the crisis and avoid a repeat.
Lower Interest Rates for Mortgages Caused the Housing Crisis
While it is may be right that as the US approached the new millennium the government encouraged Americans to own their homes through the fed-fund rates, it should be noted that it is the increasing ease of obtaining mortgage loans and rising housing prices that encouraged people to borrow funds and invest in houses (Greenspan 2009). As Kenaga (2012) notes, “the catalyst for the housing bust was the vast increase in subprime mortgage loans, which are loans given to borrowers with less than stellar credit history” (40). The lower interest rates on housing loans not only meant that more and more Americans could access cheap mortgages but also enhanced the people’s purchasing power, so they could afford highly priced houses. In a bid to cash in on the boom, banks devised all types of strategies to encourage the people to obtain the easy loans and own their own houses. As such, when an array of factors led to a significant drop in the value of houses, the housing crisis resulted as a characteristic of a serious financial crunch (Olen 2013). Based on the foregoing, it may be seen that while the federal government may not be completely innocent, it is the low-interest loans that caused the housing bubble.
The Federal Reserve Board Should Follow Money Supply Rules
The Federal Reserve Board plays a key role in in managing and regulating the money supply market, which directly affects the stability of the nation’s economy. To this end, the function of the board cannot be overstated and, consequently, its abolishment would not be a wise idea (Greenspan 2009). However, in order to ensure a balanced control of the economy, it is imperative that the board is subjected to specific rules that govern the money supply. This would prevent the agency from exercising certain discretionary powers that could hurt the economy, such as increasing the amount of money in circulation, or lowering interest rates. Subjecting the board to such rules would also ensure that decisions relating to money supply are made subsequent to thorough consultations and market assessments with professionals in the money market. Such a move would possibly eliminate unintentional errors in money supply issues, effectively preventing financial crises in the future (Kenaga 2012). As already mentioned, the Federal Reserve Board may not be blamed for the financial crisis in the US. Nonetheless, it is imperative that this very important agency abides to specific rules governing money supply, as this would go a long way in streamlining the money supply management.
Conclusion
In conclusion, the housing bubble in the US was caused mainly by the low-interest mortgage loans which were easily accessible to all people, including borrowers who lacked a credible credit history. The Federal Reserve Board should be subjected to specific rules that govern the money supply chain to balance the economy.
Works Cited
Greenspan, Alan. The Fed Didn't Cause the Housing Bubble. The Wall Street Journal. The Wall
Street Journal, 11 Mar. 2009. Web. 1 Dec. 2013.
Kenaga, Nicholas. Causes and Implications of the U.S. Housing Crisis. The Park Place
Economist, 20 (2012): 40-46.
Olen, Helaine. What caused the subprime mortgage crisis? Not our math skills. The Guardian.
The Guardian, 27 June 2013. Web. 1 Dec. 2013.
