The Economic Effects Of The Housing Bubble Collapse

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Between 2004 and 2006, the Federal Reserve decided to increase the interest rate at which it would lend money to banks. The effects of this led to higher interest rates passed on to consumers by the banks. Though this is only part of the issue, it contributed to the housing bubble collapse. The economic effects of what occurred were not fully realized until August of 2008.When the housing market crashed; it had tremendously adverse effects on the US as well as the World economy (Bajaj).Why did raising interest so slightly affect so many people? The simple answer is that a lot of people were living beyond their means. Banks and subprime lenders were lending money to people who realistically could not pay the loans back. President Calvin Coolidge said, “There is no dignity quite so impressive, and no one independence quite so important, as living within your means”. First, we must address what it looks like to live within our means. A study conducted by CNN reported that 76 percent of Americans live paycheck-to-paycheck (Johnson). On top of that, many do not have sufficient savings to cover six months of expenses. According to Johnson’s survey, people do not have enough to save after all of their expenses. Here in lies the problem. If you do not have enough money to meet pay for your expenses and save, you are spending too much. Catherine New compares how the wealthy also live paycheck-to-paycheck. In her article she writes, “My friend and her husband are doing an excellent
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