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2.5.2 MORTGAGE FINANCE

Although providing affordable housing is certainly an important political objective, encouraging people to take on more debt than they can afford is dangerous, both for them and for their fellow citizens who at least partially underwrite it. Therefore, the minimal suggested and required procedure is the United States should impose circuit breakers on this debt expansion paradigm in the form of an upper limit of 90% on loan-to-value ratios.

Government aid to assist low-income families to buy homes should in the future be provided “on balance sheet,” through explicitly and transparently funded government programs, and not “off balance sheet,” by corrupting the credit markets. As for mortgage interest deductibility, it does nothing to assist low-income families, as few of them pay federal income tax. It merely encourages higher-income families to borrow more to buy bigger homes. It should, together with home equity loan interest deductibility, be dramatically scaled down once the housing market has revived.

3. CONCLUSION

Thus, to conclude the current financial crisis has many indicators that mark its beginnings. The first indicator is that the US unemployment rate which stood at 6.7 percent in November 2008 and is sure to climb in the coming months (U.S. Bureau of Labor Statistics 2008). Between 1995 and 2007, the annual unemployment rate was below 6 percent in every year except 2003. In the period between 1974 and 1994, the average unemployment rate topped 6 percent for 16 of those years and 7 percent for 11 of them. The annual unemployment rate exceeded 9 percent during the worst years 1982 and 1983. During the 1974–75 and 1980–82 recessions, the unemployment rate’s decline coincided with the end of the recession. But the downturns of 1990–91 and 2001 saw unemployment continue to climb even after the recessions ended; declining only a year or more after the economy had started growing again. Thus, recession has its cycles. Recession is not exclusive to the US only. However, it affects the world as a whole because of the trade relations between the United States and the whole world.
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