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Posted on October 11th, 2012, by

The current economic recession has been provoked by a profound crisis that struck the mortgage market and housing market. The crisis in the housing and mortgage market has provoked a chain reaction of the national financial market and has led to the overall deterioration of the economic situation in the USA. In such a situation, the revival of the construction industry and housing market are apparently essential conditions of the recovery of the American economy because housing market was traditionally the foundation of the US economy.

Moreover, the stability of the housing market contributed to the general stability in the national economy since the construction and housing industry was viewed as a reliable industry where companies and individuals could invest to in order to secure their savings, while the drop of housing prices and crisis in the housing market, which undermined the steady development of the construction prevents the national economy from recovery and normal functioning. In such a situation, the role of the Government and policies conducted by the Government are crucial because it is obvious that without the assistance of the Government the construction industry cannot recover fast, while the state support or stimulating policies are likely to revive and encourage the development of the construction industry that will lead to the improvement of the situation in the housing market of the USA.

On analyzing the Government policies and the steps the Government should to undertake, it is important to lay emphasis on the fact that the Government policies aim at the stabilization of the market. At the same time, today, as well as in the course of the crisis, the Government and the Fed, attempted to support the housing market through the minimization of the financial pressure on the mortgage market to encourage bank loans which could support the industry. For this purpose, the Federal funds rate dropped consistently and approached zero level. Form the monetary point of view this measure could have been quite effective to slow down or even stop the downfall of the mortgage and housing market. At this point, it is worth mentioning the fact that the decrease of the Federal funds rate normally stimulates banks to give more money to the national economy since the low Federal funds rates creates favorable conditions for bank loans which can be taken at lower interest rates.

Taking into consideration the situation in the housing market and mortgage market after the crisis has begun, it is obvious that a considerable part of house owners were unable to afford paying off bank loans. House owners needed lower interest rates to be able to pay off their bank loans and the Fed along with the Government attempted to decrease bank interest rates. In such a situation, the construction industry was even in a worse position than housing market. The reasons are quite obvious for the mortgage crisis led to a consistent drop of house prices, while many Americans faced a risk of losing their homes. Hence, the offer of houses increased, while customers could not afford paying exorbitant prices for the houses offered on the market. As a result, house prices have dropped as well as the demand for the construction of new houses. The latter was a real disaster for the construction industry because customers would readily by houses on the secondary market rather than construct new houses. In addition, customers could not afford buying new houses, which have been constructed recently or which could be constructed, if there was a demand. In such a situation, the construction industry has started to decrease construction of new houses dramatically.

At the same time, measures undertaken by the Government and the Fed to prevent the ongoing crisis on the mortgage and housing market had quite a controversial effect on the construction industry. To put it more precisely, the decrease of the Federal funds rate, which was supported by the recapitalization of banks and Governmental support of leading banks, which faced serious problems and could run bankrupt, was supposed to stimulate the revival on the mortgage and housing markets. At first glance, the lower interest rates could stimulate the revival of the housing market, but, in actuality, this measure did not really bring positive results, while in the context of the situation in the construction industry, this policy also had little positive effects. As the revival of housing market failed, the construction industry did not face a substantial decrease of demand. In stark contrast, the downturn of the construction industry continued and crisis persisted. Moreover, the decrease of the Federal funds rate along with the Governmental support of banking industry slowed down but did not stop the downfall of housing and mortgage market. As a result, the construction industry failed to increase the production because customers were and still are oriented on secondary market, where they can buy houses at lower prices and still the supply is consistently higher than demand.

Furthermore, the situation is deteriorated by the low buying power of Americans who cannot pay high prices either for new or used houses.

In addition, the mortgage crisis and the downfall of the housing market provoked a profound economic recession. Today, monetary methods solely do not work and they cannot improve the situation in the housing market, construction industry and the national economy at large. In this respect, it is necessary to focus on the macroeconomic stabilization, which is crucial according to Keynesian principles. To put it more precisely, the Government policies should focus not only on the support of certain industries, such as banking industry for instance. Instead, the Government should mainly focus on the macroeconomic stabilization that means that the Government should work on three major problems: unemployment, inflation, and GDP growth. Supporters of Keynesian views (Elekdag, et al., 2006) argue that without the stabilization of major macroeconomic factors, which have been just mentioned above, it is impossible to overcome the overall crisis in the national economy and in the construction industry and housing market in particular.

On extrapolating Keynesian views on the Government policies, it should be said that, in the current situation, the Government needs to prevent high inflation rate. At this point, monetary policies conducted by the Government and Fed are effective enough to restrain inflation and prevent galloping prices. At the same time, the Government’s stimulus plan implies the involvement of unemployed into projects funded by the Government, including the construction of roads, infrastructure, etc. In such a way, the Government can solve the problem of high unemployment rate or, at least, slow down unemployment. The low inflation and unemployment rate can stimulate the economic revival, but still many industries need the Governmental support, which can contribute to the GDP growth. However, it is important to understand that the GDP growth is possible only on the condition that the Governmental interference in the national economy and support of some industries and largest companies are effective. In other words, the Government should use its funds effectively and measures it undertakes should bring positive results. Otherwise, the effects of such policies would by quite the contrary and, instead of the GDP growth, the USA risks to face the ongoing economic recession which has already started to outgrow into economic depression (Howard, 2008).

Therefore, the Government needs to develop common principles of the state support of the national economy, instead of selective support of some companies or industries.

Thus, taking into account all above mentioned, it is possible to conclude that the Governmental policies have proved to be unable to prevent the economic recession and the situation in the construction industry and housing market in particular still remains to be very difficult. In fact, the construction industry and housing market are in a profound crisis but the monetary policies, including the decrease of the Federal funds rate, are not enough to help them overcome the current economic recession. Instead, the macroeconomic stabilization is needed, while monetary policies should be supplement tools which can help the national economy to recover. Hence, as soon as the national economy is stabilized, the construction industry and housing market will start to recover.

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