The Subprime Mortgage Crisis & its Economic Impact

A current economic issue facing the U.S. is the aftermath of the Subprime Mortgage Crisis. The Subprime Mortgage Crisis coincided with the late 2000s economic crisis and was characterized by a substantial decline in home prices, increases in the rate of foreclosure, and intervention by the federal government through the issuing of bailouts. The causes of the Subprime Mortgage Crisis are directly traced back to several factors. One such factor was the 1999 repeal of the Glass-Steagall Act, which separated commercial and investment banks. The repeal of Glass-Steagall encouraged banks to engage in higher risks to earn a larger return on their investments. Additionally, the Federal Reserve reduced interest rates to 1 percent after the early 2000s recession, thus encouraging investments in high-yield mortgage-backed securities instead of lower-yield government bonds.

Another factor behind the Subprime Mortgage Crisis was misguided intervention by the federal government in the housing market. For example, both the Reagan and Clinton administration sought to encourage higher levels of home ownership through the loosening of mortgage requirements for lower income borrowers through the reform of the Community Reinvestment Act (CRA). As originally established in 1977, the CRA mandated regulators to consider whether a bank was serving the needs of the community in which they operated. New regulations for the program implemented in 1982 and 1995 required banks required the use of flexible lending practices to address loan needs of low-income borrowers. The less stringent standards vastly encouraged speculation in the housing market, spurring a bubble in home prices.

Both the Democratic and Republican parties have proposed several ways to address the subprime mortgage issue. The Democratic party has offered to make it easier for families to refinance their mortgages and to provide tax credits to first-time homebuyers. The Democrats also proposed requiring financial institutions to provide relief to struggling homeowners. In contrast, Republicans argue that the best way to solve the subprime mortgage crisis is to establish a mortgage finance system based on free enterprise and one that promotes personal responsibility on the part of borrowers. Additionally, the Republicans feel that a reduction in federal involvement in the housing sector will be crucial to reducing fears on the part of borrowers.

The policy proposals by the Republican party make the most sense to address the subprime mortgage issue. A key factor discouraging recovery in the housing market is a lack of confidence. Through establishing a mortgage system that balances both regulation and competition, trust in the housing market will improve. Another reason confidence in the housing market remains weak is due to the bailouts by the federal government directed the largest financial institutions involved in the crisis. The Republican proposal for promoting personal responsibility on the part of borrowers will serve as a way to limit federal involvement in the housing market and prevent taxpayer-funded bailouts from being used in the future.

In conclusion, a major economic issue currently facing the U.S. is the aftermath of the Subprime Mortgage Crisis. The crisis came about through actions by the federal government and private sector. Both the Republican and Democratic parties have come up with their own sets of solutions to address the subprime crisis and restore confidence in the housing market. The debate over ways to address the aftermath of the subprime mortgage crisis will continue to define U.S. economic policy over the coming years.