Vicious Circles in The Subprime Mortgage Crisis
The contemporary subprime mortgage crisis is a complex of vicious circles, both in its genesis and in its manifold outcomes, most notably the late 2000s recession. A specific example is the circle related to housing. As housing prices decline, more homeowners go "underwater", when the market value of a home drops below the mortgage on it. This provides an incentive to walk away from the home, increasing defaults and foreclosures. This, in turn, lowers housing values further, reinforcing the cycle.
The foreclosures reduce the cash flowing into banks and the value of mortgage-backed securities (MBS) widely held by banks. Banks incur losses and require additional funds, also called “recapitalization”. If banks are not capitalized sufficiently to lend, economic activity slows and unemployment increases, which further increase the number of foreclosures.
Economist Nouriel Roubini described the vicious circles within and across the housing market and financial markets during interviews with Charlie Rose in September and October 2008.
Read more about this topic: Virtuous Circle And Vicious Circle
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