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Impact of Financial Markets on Economic Stability and Growth: The Case of Sub-Prime Mortgage Lending - page 25 / 42

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1/23/2015

Jamshid Damooei, PhD

25

Accumulation of Debts and Emergence of Economic Crisis

During "good" times, businesses in profitable areas of the economy are handsomely rewarded for raising their level of debt.

The rising profit attracts other entrepreneurs to join in and encourages them to raise their level of debt.

Since the economy is doing well and borrowers' financial health shows visible improvement, this makes lenders more eager to lend.

As time goes by, the pace of debt accumulation starts to rise much faster than borrowers' ability to repay and serve the debt.

It is at this stage that the foundation for an economic bust begins to develop.

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