The Housing Bubble Reflection

Introduction

The housing bubbles are not good for anyone involved. It is important to look at what caused crashes in the economy in order to prevent another from happening.

The American Dream

It is important to look at the idea of the American dream. This idea of the American Dream was a key factor in the appeal of the policies brought about in creating this housing bubble. Creating this image of what it looks like to live the ideal American life helped popularity of the policies put in place to create the housing bubble. This and other propaganda were successful in guiding the public focus to the supposed big picture while shielding them from the realities of the policies put in place. The American Dream downpayment initiative was an act sounded good on paper but did not have actual long-term benefits. By using the term “American Dream” they influenced people to look at a bigger picture and not look at the consequences that would come from this act.

Businesses

In order to start a business normally, you use money that you have in savings to invest directly in the business, or you can ask friends or neighbors that you are on good terms with to invest their own money into your business. This process was good because it created a dependence on trust when having other people invest into a business. You would not invest your own money in a friend who has a history of poor spending habits. People could also choose to take out loans from people they know. With loans come interest rates. Lower interest rates are associated with lots of savings whereas higher interest rates are associated with people not saving as much money. High interest rates encourage people to start saving more. Low interest rates signal to possible entrepreneurs that there is capital available for them. Low interest rates discourage savings. When interest rates are lowered, the government is essentially printing more money. To get interest rates down to 1%, Greenspan was pouring money into the federal banking system. It was almost 2 trillion dollars. This is super alarming to me because that is an extremely large number. As a result, the public thought they were richer than they actually were. They started borrowing money and investing their money in the housing market. As a result, the housing market created an influx in employment connected to the housing market.

Mortgages

With the added money and lower interest rates, people started borrowing money and investing in the housing market. Essentially, they were spending money they did not have. Most times it was through home equity loans. In a simple economics sense, when supply increases in a market, the value goes down. This is what was seen in the housing market because of the rapid increase of houses. A concerning policy that was made was the American dream down payment initiative. This allowed the FHA to approve 0% down payments to certain low-income buyers. It also used some taxpayer money to go to help people pay their down payments. This is something that did not make sense to me. Ever since I was younger, my parents have told me to never spend money that I do not have. I do not understand why this would be a wise thing to put into action because if the potential homeowner could not afford the down payment, then what makes people think they could afford the mortgage payments? It does not make sense in a seller’s perspective to offer a significantly lowered mortgage rate through adjustable-rate mortgages to people who could not afford to make the normal rate payment.

Great Depression

Herbert Hoover tried to fix the problems created in the economy after World War 1. In times of an economic crash, the government cannot take as much in taxes. As a result of this, Herbert Hoover increased government spending as well as increased federal income tax dramatically. Instead of letting the economy fixing itself, Hoover used government intervention and control. This made the depression worse. FDR did the same things with his New Deal, therefore making things worse.

WW2

During times of World War 2, almost all aspects of economic life were controlled by the government. The unemployment rate was down because many people were drafted into the military and many women worked in factories that directly benefitted the war. After the war was over, the government spending was cut, and the economy increased. This was contrary to the belief that the economy and productivity would suffer after the war was over.