In 2007, a financial storm swept across the globe, with the real estate market serving as the eye of the storm. A fast forward to the present day reveals that there are rumors of another storm in the air.
However, contrary to what most people believe, the storm we are facing today has the potential to be even more catastrophic than the one we experienced ten years ago. How is this even possible when it seems like things are going relatively smoothly in the housing market?
The answer is no; there isn’t a surge in defaults, and the threat posed by subprime mortgages isn’t as great as it once was. On the other hand, as the age-old proverb goes, “this is the calm before the storm.” Even though there has been a decline in home sales, the housing supply continues to be in short supply, which has led to a price that has remained artificially stable.
The financial institutions have set up shop in the perilous waters. The mortgages, which were once thought of as golden tickets during an era of incredibly low interest rates, have now turned into millstones around their necks.
As a result of mortgage rates climbing above 7%, financial institutions are losing money on loans that were once profitable at 3% but now carry a risk of defaulting.
As a result of the financial crisis that occurred in 2007 and 2008, the Federal Reserve cut interest rates, which resulted in an increase in the value of most mortgages that were not in default. This allowed many banks to survive the aftermath of the crisis. Even though many homeowners are making regular payments on their 3% mortgages, the banks are still coming out on the losing end in today’s market. These mortgages with low interest rates, which were once considered assets, are now liabilities, and they are draining banks dry.
But that’s not the end of it. When interest rates are high, there is another threat that banks must contend with, and that is the loss of depositors. Why let money sit in a bank when you can earn a tantalizing 5.5% yield by investing in money markets? Because of this shift, potential loans to the private sector are redirected to the coffers of the government, leaving businesses without access to necessary credit.
The clues are there for everyone to see. It is becoming increasingly obvious that a crisis is on the verge of developing as banks become more reliant on the bailout program offered by the Federal Reserve. But with inflation at an all-time high and previous solutions proving fruitless, how are we going to weather this storm?
Must watch videos on the RTD Blog!!!
- The Price of Dysfunction: U.S. Shutdown & Global Backlash | James Turk Reveals All
- Cracks In The Banking System Could Have Been Avoided w/ Craig Alford
- Mega BRICS+ Bloc: The Ignored Summit That Could Change The World w/ Chris Devonshire-Ellis