Handling Economic Crisis in Housing Market

The bursting of the housing bubble in the United States alongside a precarious credit crunch situation has played major roles in precipitating the latest episode of economic recession in many countries. While the advanced nations in North America and Western Europe have borne the brunt of the recession, lesser developed economies and several emerging markets are simultaneously experiencing a slowdown in economic activity. Financial analysts and political commentators point out that the unregulated financial markets of Western democracies make such crises inevitable. The proponents of free market capitalism, on the other hand, do not concede this point. This essay will foray into the conditions that led to the present crisis in the housing market and try to assess the merits of remedial policy measures in this regard. The evaluation of the stimulus and bailout packages is followed by an inquiry into policy directions for the coming years. It will also place the prospects of the housing market in the broader context of the revival of the economy both in the United States and abroad.
The Federal Reserve, which has the power to decide the course of the economy, has been criticized for its lack of foresight. Although the actions of the Federal Reserve in the initial years of the Bush Administration are to be credited for the housing boom, exercising fiscal prudence could have mitigated the present crisis. According to John Gnuschke,
Daily evidence of the continuing erosion of the housing market, the associated disruption of financial and credit markets, and the spill-over impacts to other segments of the real estate industry are taking their toll on the broader economy. While the real estate industry continues to be a major component of the economy, the dramatic and overly-aggressive increases in interest rates promoted by the Federal Reserve Bank (between 2001 and 2007) have caused a major disruption.