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Following the sudden fall in the prices of houses in the US markets in 2007, the worry in the business sector is on the consumer confidence. This is a key microeconomic factor in the market that determines the investments strengths in the mortgage industry. With the kind of interest rates observed, worry was that investments in this sector would be pending loss and, therefore, it would be unwise for anyone to invest in housing and equipment. Another worry was that, with the kind of interest rates observed it would mean that invest would not be ready to sell their houses or equipment and consumers would not be ready to spend. All of these, therefore, are a micro economic issue that would mean economic downfall. Some of the ways that fed used to counter this effect is by balancing the two factors. This, therefore, means that by balancing the prices of houses, consumer confidence would increase and this would save the economy from falling down.
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However, balancing the markets has some side effects. One of the problems of doing this is that, many consumers would receive bailouts from “foolish debts”. Those consumers who never took caution in their mortgages would receive bailout. This would mean that in the future people would still lead to foolish buying. Another side effect is that most of the investors in the industry would take greater risks in the future which might be too risky for the economy.
In order to reduce, this problem in future, the government and all concerned persons in the industry should ensure strict measures on the credit rationing rules available. With credit rationing in the market, lenders and lending institutions can regulate the balance in the market of a certain commodity in this case the house and equipment market (keeton23). It is advisable for the credit rationing be more effective than it was during 2000-2005. This would help the prices of major commodities to stabilize easily in case of an up rise or sudden downfall in prices.
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