The Subprime Mortgage Crisis

The current Federal Reserve administration has sought to combat the sluggish economy and the persistence of recession by appealing to a singularly directed monetary policy. Focused on cutting interest rates in order to obstruct economic decline and to prevent the destructive incursion of inflation, the Federal Reserve has acted independently (though with the administration’s endorsement) to counteract mild or regressive growth patterns.

After several years of sluggish economic performance and a response on the part of the Federal Reserve by way of a consistent reduction in interest rates, a number of factors have conspired to produce market bust. Precipitated at its base by an irresponsible level of homeowner loaning at a subprime rate, the market’s current condition is one of marked pressure upon banks to collect on debts which a great many owners cannot afford to resolve.

As a result, the last six months have seen a tumultuous unfolding of market events, with the housing economy taking the biggest hit. With few buyers in the possession of real assets and banks now wary to lend to all but the most resource-wealthy of borrowers, the Federal Reserve has intervened once again. Consistent with its response to flagging market conditions throughout the Bush tenure, “the Fed has also lowered its benchmark rate six times since September to 2. 25 percent from 5.25 percent, and traders anticipate it will cut by at least another quarter point this month to cushion the economy's downturn. ” (Brinsley, 1) 

In the midst of this, a major U. S. bank, Bear Stearns declared insolvency this past month, requiring the Fed to step in an intervene with a multi-million dollar bailout. To this end, “Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. ” (Brinsley, 1)

In the face of the current and overwhelming market condition challenges such as the collapse and merger of major banks, this appeal to monetary policy has been a largely reactionary economic device, ill-equipped to provide opportunities for growth. Instead, it has served as a preventative measure to further decline and the downward spiral of diminished dollar value. Even in this capacity though, it has been considerably nullified in its protection of the economy by the significance of the impact which inflation is now having on the ability of borrowers to attend to their loans..

While monetary policy can be utilized as an immediate stabilizer in times of recession or contraction, it is nonetheless dependent upon the sound propriety of tax policy and discretionary spending in order to functionally serve a market economy. The dependence of both interest rate levels and expansion rates upon a collective of investment means that any policy which is detrimental to that end may likely have a composite effect of contracting the economy. The subprime mortgage crisis is perfectly indicative of the danger with which the Reserve has flirted throughout the reckless tenure of the current presidential administration.

Under the thumb of inflation, dramatic rises in gas prices and associated commodities and the continued decline of the dollar’s value relative to foreign currencies, average borrowers cannot afford to repay their home ownership loans. The outcome is today’s recession, which if continued unchecked by poor presidential policy will spill over into outright depression. The Federal Reserve has spent the past six months intensifying a strategy which has only narrowly averted economic disaster across 8 years.

Indeed, as fiscal trends correlate to the gaining momentum of living costs, and with our policies becoming more apparently unequipped to create jobs, our long recovery from recession continues to stagnate. The explosion of costs for oil, the as yet undetermined cost of war in Iraq, the overall trend of living necessity price growth and the heated competition for jobs opening up overseas through globalization have caused an intertwining cycle of misguided fiscal policy and consequently impotent monetary policy.

The Bush Administration continues to press for a bail out of banks, credit lenders and other institutions largely responsible for hastening this process with their relative irresponsibility, despite the collective of expert evaluations and the already appearing evidence of their present destruction. Such is a threat to the future economic posterity of the United States, given the inevitability that such fiscal policies, under current conditions, will inhibit rather than stimulate spending, long-term consumer confidence and sustainable growth.