Alan Schwartz, last CEO of Bear Stearns before it fell apart during the previous credit crisis and was sold to JPMorgan, warned that government policies could be setting the stage for a sequel to the credit crisis, according to CNBC.
The U.S. Federal Housing Finance Agency announced it would allow Americans to put as little as 3% on a down payment in order to stimulate home buying. Schwartz notes this policy is what led to the housing bubble in the first place, as banks were stuck with mortgages signed on by unstable borrowers who walked away from their mortgages and housing prices collapsed. Currently prospective homeowners have to put down 5% for a down payment. The Mortgage Bankers Association predicted a 7% increase in mortgages. “The U.S. economy became very credit dependent, ” explained Schwartz, “and there is a tendency to go back to being credit dependent.”
Schwartz is also concerned about deflationary pressures; “It is still rearing its ugly head, and we have not conquered it.” Annualized inflation in the Eurozone was 0.3% compared to 1.1% last year. Schwartz thinks fiscal policy rather than stimulus is the way to address global deflation.