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Impact of Financial Markets on Economic Stability and Growth: The Case of Sub-Prime Mortgage Lending - page 28 / 42

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1/23/2015

Jamshid Damooei, PhD

28

Accumulation of Debts and Emergence of Economic Crisis…..Continued

The chase for making more profits causes players in financial markets to place their money in various investments that have very little substance — such as subprime-mortgage-backed securities.

What makes these investments attractive is sophisticated packaging and the relatively high rate of return (creative financing methods).

Once economic conditions change, the true state of many borrowers comes to the surface and leads to a crisis.

Lenders curtail their supply of funds and borrowers are pushed to bankruptcy, for they cannot renew their borrowing to pay debts a financial crisis emerges.

According to Minsky's story, then, as time goes by, both borrowers and lenders tend to become reckless, which ultimately leads to a financial crisis.

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