Foreclosure Crisis Leading To Recession

Posted on November 12, 2008
Filed Under Foreclosure Homes |

Despite forceful remedial measures taken by the Federal Reserve the situation is grim. It seems that the home foreclosure crisis is leading the way to recession. The Fed president of Atlanta Dennis Lockhart remarked at a business luncheon, “Now is not a time to be tentative. The U.S. economy in September and October appeared to weaken dramatically … Problems are now broad-based”. He hinted that more bold action would be required to check the worsening of the recession.

Lockhart admitted that the American economy is already in recession. The figure might be worse in the fourth quarter in comparison to the third one. He said, “I foresee substantial weakness at least through the first half of 2009. This weakness will exacerbate the employment picture. In my outlook, unemployment will rise some more.”

Incoming data confirmed Lockhart’s prediction with the unemployment number spiking to 6.5% in October. In September it was 6.1%.

From September 2007 the Federal Reserve has cut down rate of interest by 425 basis points to 1%. More than $1 trillion liquidity has been injected into the financial system to counter a global credit crunch. It all had its immediate roots in the foreclosure crisis that led to the collapse of the housing sector.

Addressing a meeting of local business community of Palm Beach County, Lockhart reiterated that two things have to come into force before things get going. He said, “First U.S. house prices need to stop falling and the volumes of defaults and foreclosures needs to stop rising… Second, de-leveraging of the financial system must run its course.

On the flip side it appears that the conditions of the market have somewhat eased recently but it would be too hasty to say that the crisis is over. He clarified, “There have been signs of improvement lately, but concern persists that this is a false dawn and more trouble could lie ahead.” Secondly the Fed does not have to think too much about inflation in the middle of such economic blues. He explained, “As a result of the widespread weakness in the U.S. economy, inflationary pressures appear to be declining.” The Federal Reserve has significantly lowered the inflation warning with a ½% point rate reduction on 29th October. Investors take it as an indication of easing off in the days ahead.
While the sword of Damocles hangs over the nation it will be quite a few weeks before the change of guard actually takes place.