Thursday, January 17, 2008

A bad aspect of the free market

One of the worst aspects of free markets, like the one in the U.S., Europe and Japan, is that its main propeller is the personal consumption. When the personal consumption goes down then the financial sector is in trouble.

This can happen if the real estate prizes fall and the owners of the estates have mortgages that become less the value of the estates (you have a house that cost you 1 million dollars to buy and you took a mortgage on it to buy it, then the value of the house drops and it is only worth 800.000 dollars) this looks bad in the eyes of the one who gave you the mortgage.

Her is a scenario that could happen:

1. The real estate prizes drop
2. The banks need money to lend to consumers so they can consume as much as they used to before the prizes of their houses went down
3. The banks foreclose on their mortgages and people start loosing their homes

This is bad I think. Of course this is only one scenario, if you have enough money to pay out your mortgage then the bank just takes your money and not your house but most people who took out the mortgages in the beginning do not have that amount of cash lying around so this scenario (which is probably the one that happened now in the U.S.) is worst on the poor, like always when were talking about financial problems, they always hit hardest on the poor.

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