In Edward Chancellor’s “Devil Take the Hindmost” he references and describes the process for a mania to take place. Specifically, in the third chapter, Chancellor highlights Charles Kindleberger’s theory for the development of speculative manias. This economic theory claims that first displacement occurs in the form of an exciting new investment opportunity, positive feedback quickly ensues resulting in a euphoria, new risky financial products are created, corruption takes place, and then, finally, the corruption is exposed and expectations are not met resulting in a market crash. Chancellor then goes on to supplement this economic model with both a social and a political condition. I believe this model is closely replicated in the 2008 subprime
…show more content…
Homeowners were buying houses that they could not afford at their current income level, however they believed the value of their home would rise allowing them to grow their equity during their time living there.
Kindleberger’s second stage, positive feedback, began quickly as an influx of capital began to flow into the housing market which in turn drove up housing prices and profits. Compounding the problem was the fact that mortgage rates were extremely low, encouraging prospective buyers to take on massive levels of debt in order to finance such …show more content…
The social condition is that actors must be self-interested. This holds true in the subprime mortgage crisis for every party involved. Homeowners wanted nice homes, lenders wanted to make profits from lending, banks wanted to generate fees, investors sought investment income, and the government hoped to boost its reputation through increased home ownership. The second stipulation is that there is limited government oversight in the mania. In the housing bubble, this is true as well. Not only did the government not regulate the lending process thoroughly, it took an active role in lowering lending standards while also securitizing such mortgages. As we’ve seen throughout history, manias tend to repeat a certain process. Kindleberger does an excellent job at identifying this, which I’ve shown is closely resembled in the housing
Homeowners were buying houses that they could not afford at their current income level, however they believed the value of their home would rise allowing them to grow their equity during their time living there.
Kindleberger’s second stage, positive feedback, began quickly as an influx of capital began to flow into the housing market which in turn drove up housing prices and profits. Compounding the problem was the fact that mortgage rates were extremely low, encouraging prospective buyers to take on massive levels of debt in order to finance such …show more content…
The social condition is that actors must be self-interested. This holds true in the subprime mortgage crisis for every party involved. Homeowners wanted nice homes, lenders wanted to make profits from lending, banks wanted to generate fees, investors sought investment income, and the government hoped to boost its reputation through increased home ownership. The second stipulation is that there is limited government oversight in the mania. In the housing bubble, this is true as well. Not only did the government not regulate the lending process thoroughly, it took an active role in lowering lending standards while also securitizing such mortgages. As we’ve seen throughout history, manias tend to repeat a certain process. Kindleberger does an excellent job at identifying this, which I’ve shown is closely resembled in the housing