Essay: Troubled Financial Institutions
The prices of houses depreciated significantly, after they had been appreciating for almost a decade up to the year 2006. The rise of the prices of houses was because of the Subprime mortgages, which drew low interest rates and as a result, the demand for houses grew. Since the prices of houses were continuously rising, many borrowers took up loans to buy homes. When the interest rates started to rise, many of the Subprime borrowers could not afford to service their loans and as a result, the lenders repossessed the houses. They repossessed so many houses to the extent that there were no people ready to buy them. As a result, the prices of the houses dropped significantly due to increased supply. .( Nai-keung 2010 available online)
The government should cut the interest rates so that more people can be in a position to service their loans. Since it is the responsibility of the Federal Reserve to regulate the interest rates in US, it should lower the rates. This is because it raised the rates leading to many Subprime borrowers to fail to service their loans; it should as well reverse so that they can repay their loans comfortably. The rules that prevent borrowers who do not have good credit records from accessing loan facilities should be tightened. Most of the financial firms that went under should be helped to go back to business by being offered soft loans.( Richman 2010 available online)
The fact that the troubled financial institutions will be bailed out by the government might lead to the same institutions taking more risky investments in future. Rules and regulations ought to be put in place governing the kind of business a financial institution can do. Investors ought to seek the services of financial advisors to learn the risks involved in a deal before they put their money in the investment. This is because the financial institutions misled investors into believing that there were minimal risks in buying Subprime mortgage.