The answer is a firm ‘NO’! The root cause of the situation was that the entire premise on which the fragile house of securities was built by The Wall Street is faulty. The premise that the home prices will never fall is wrong and that resulted in a loss of billions of dollars. The Wall Street is unable to fix a value on the mortgage-linked securities until the worth of the houses underlying those securities is determined. Till the time a proper value is assigned to the mortgage linked securities, the credit crunch will spread and intensify. The Housing Industry in US is an important industry and employer. Houses are also American families’ single biggest financial asset. A persistent decline in their value will depress both their wealth and their spirits. Home builders have been cutting down on the new home construction rapidly to match the demand and supply. Yet the backlog of unsold houses seems to be increasing. It is indicative that the home prices needs to fall further and/or the home construction needs to be cut down even further. The key interest rate that has already fallen to 3% from 5.25% in September 2007 needs to be cut further. The Fed may even have to push the rate to as low as 2%. At this rate soon the US economy will be feeling short of the adrenalin from rate cuts and tax rebates. Once the worst is averted, Bernake needs to immediately make sure that he boosts the rates up as fast as he has cut them to avoid inflation.
This entry was posted on Saturday, February 16th, 2008 (I migrated from blog.co.in)
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