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The U.S. Foreclosure Crisis: A Two-Pronged Assault on the Economy

In: Financial Institutions and Markets

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  • John A. Tatom

Abstract

The foreclosure problem affects real economic activity and financial markets. The timing of developments in the housing market will limit how fast markets restore stability and growth. The Federal Reserve has complicated the problem by creating new lending programs that redirected its credit supply to private financial institutions and in the process violated the first rule of central banking to lend liberally in a liquidity crisis. This failure, compounded by providing a backstop to questionable securities, has slowed market adjustment and risks lengthening and deepening the crisis. This chapter reviews and evaluates the foreclosure crisis, its real impacts in the economy, the financial market effects of the surge in mortgage foreclosures, and the monetary policy response to the problem.

Suggested Citation

  • John A. Tatom, 2009. "The U.S. Foreclosure Crisis: A Two-Pronged Assault on the Economy," Palgrave Macmillan Books, in: Robert R. Bliss & George G. Kaufman (ed.), Financial Institutions and Markets, chapter 6, pages 131-154, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-10324-5_6
    DOI: 10.1057/9780230103245_6
    as

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    References listed on IDEAS

    as
    1. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc.
    2. repec:pri:cepsud:141rosen is not listed on IDEAS
    3. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
    4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    5. F. Thomas Juster & Joseph P. Lupton & James P. Smith & Frank Stafford, 2006. "The Decline in Household Saving and the Wealth Effect," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 20-27, February.
    6. Kristopher Gerardi & Harvey S. Rosen & Paul S. Willen, 2006. "Do households benefit from financial deregulation and innovation?: the case of the mortgage market," Public Policy Discussion Paper 06-6, Federal Reserve Bank of Boston.
    7. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 359-413.
    8. Michel Aglietta & Laurence Scialom, 2009. "Permanence and Innovation in Central Banking Policy for Financial Stability," Palgrave Macmillan Books, in: Robert R. Bliss & George G. Kaufman (ed.), Financial Institutions and Markets, chapter 8, pages 187-211, Palgrave Macmillan.
    9. Shane M. Sherlund, 2008. "An outlook for subprime mortgages," Proceedings 1075, Federal Reserve Bank of Chicago.
    10. Tatom, John, 2007. "Why is the foreclosure rate so high in Indiana?," MPRA Paper 4674, University Library of Munich, Germany.
    11. Kristopher S. Gerardi & Harvey S. Rosen & Paul S. Willen, 2006. "Do households benefit from financial deregulation and innovation?: the case of the mortgage market," Public Policy Discussion Paper 06-6, Federal Reserve Bank of Boston.
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    Cited by:

    1. John Gilderbloom & Katrina Anaker & Gregory Squires & Matt Hanka & Joshua Ambrosius, 2011. "Why Foreclosure Rates in African American Neighborhoods are so High: Looking at the Real Reaonss," ERSA conference papers ersa11p1597, European Regional Science Association.
    2. Tatom, John A., 2014. "U.S. monetary policy in disarray," Journal of Financial Stability, Elsevier, vol. 12(C), pages 47-58.
    3. Tatom, John A., 2008. "New actions on the housing and financial crises—do no harm?," MPRA Paper 9823, University Library of Munich, Germany.

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    More about this item

    Keywords

    Monetary Policy; Hedge Fund; Federal Fund Rate; Federal Housing Administration; Housing Start;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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