According to Dr. Robert E. Pritchard, professor of finance (Rohrer School of Business at Rowan University), the US could rebound in one year (12-18 months), if things are handled properly today.
Dr. Pritchard believes that the current economic crisis in the US can be traced to 1977 when the Federal Community Reinvestment Act was enacted. This, and Carter and Clinton administration’s advocacy for encouraging home ownership are the causes of today’s mortgage and the economy debacle.
According to this professor, the US government allowed people who did not meet adequate financial requirements to get mortgages so they could achieve the American Dream of owning a home. This was done by lending to subprime applicants in the subprime lending market. However, institutions who had these subprime mortgages immediately sold them to investors on a worldwide basis. This practice, known as “Mortgage packaging” became a very popular and efficient business.
Subprime lending has been an increasingly profitable business since September 911 when lending with zero down payments and adjustable rates became the norm. This practice led to more buying and selling of homes, more construction activity, and more people borrowing without having the ability to repay.
However, when market forces started to pull down property prices the real estate “bubble” just burst. Stock and commodities prices decreased significantly and people were left without being able to repay they highly leveraged lending position. Many banks and investment firms went down badly because of the credit crunch.
Treasury Secretary Henry Paulson and Federal Reserve Bank Chairman Ben Bernanke have worked out a bailout package that will save the US from meltdown. So they think. But many just see it as a “live saver” for wall street. Professor Pritchard believes is the right step in the right direction.
He sees a big rebound of the US economy in 12-16 months if things are done properly right now. The legislation would allow US government to purchase mortgages injecting liquidity to the market. Also, the government can rapidly renegotiate mortgages so homeowners can pay and keep their home. Many families that would otherwise lose their homes could stay there. Then, a stronger and better-regulated investment and commercial banking system will emerge. The real estate market’s value will bottom and start to rebound latter.
Do you think that the $700 billion price tag is worth? You be the judge.