The Reason for the recession

All of us know that the US recession was caused by the housing bubble . But have you ever wondered why the housing bubble burst. The reason behind the justification given by numerous analysts and pundits was not enough to satiate my curiosity and here is the result of some extensive research I have been able to gather over the past two months.

September 11,2001 was a sad day for the whole world . But is it possible that the terrorist strikes had a far more telling impact than the attacks on Afghanistan. Was the US government beaten at its own game of economics . Did the government cause the down fall of the world economy and not the investment banks?

Source :Freddi Mac website.

As can be seen from the graph the mortgage rates are relatively constant from 1994 to 2000 at 8% and the volumes of houses are also constant at around 800,000 . From 2000 to 2005 the rates fell from 8.06% to 5.81 % with a sharp fall from 2001 to 2003 .The volumes increased from 877,000 to 1,283,000 from 2000 to 2005.

Here is untenable proof as far as I am concerned.
The US mortgage loan rates pretty constant in the 1990 .
Come 2001 the rates start decreasing .
The volumes of houses being sold starts increasing .

But how are these linked to the Sep 11 events ??
This is how. The US was in a state of panic right after 2001 . The government was scared that people might start losing faith in the government unless some positive steps were taken and pretty fast . The mortgage rates were lowered. This enticed customers to go in for houses . Once a person owns a house he has a sense of security and attachment. The US was trying to win back the peoples' faith .The house is the best place for a person to feel security and the amount of self composure gained by a family when it owns a house is immense, hence this ploy was used. The mortgage rates were lowered and more and more loans were doled out . In the same vein even people with poor credit ratings were given loans to get back the sense of security . The government could not foresee that this step could cause any sort of problem which it eventually did.

As the house sales started increasing a snowball effect took control of the market and it was not kept under check . This prompted the prices to sky rocket and the people bought the houses in a frenzy expecting that the property would appreciate as it had done so. But as the market saturated and the demand for the houses decreased the prices started dropping. All the properties which were sold among the 3-27 and 2-28 mortgage schemes started defaulting from 2006-07 onwards and by 2008 the totality of the judgment error by the govt was for all to see.

The US government tried to play on the psychology of its citizens . But it forgot that in a market driven economy the price is all that matters and when prices are controlled but only partially it can lead to disastrous effects . The blame might be on the banks and the rating companies . But probably the reason lies far higher.Market economics should be tinkered with utmost caution lest it would ravage the world as badly as the tsunami did.