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Lessons from the Subprime Meltdown

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  • L. Randall Wray

Abstract

This paper uses Hyman P. Minsky's approach to analyze the current international financial crisis, which was initiated by problems in the U.S. real estate market. In a 1987 manuscript, Minsky had already recognized the importance of the trend toward securitization of home mortgages. This paper identifies the causes and consequences of the financial innovations that created the real estate boom and bust. It examines the role played by each of the key players—including brokers, appraisers, borrowers, securitizers, insurers, and regulators—in creating the crisis. Finally, it proposes short-run solutions to the current crisis, as well as longer-run policy to prevent "it" (a debt deflation) from happening again.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_522.

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Date of creation: Dec 2007
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Handle: RePEc:lev:wrkpap:wp_522

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Cited by:
  1. Pereira Reichhardt, Joaquín & Iqbal, Tabassum, 2014. "Investment Decisions: Are we fully-Rational?," MPRA Paper 57686, University Library of Munich, Germany.
  2. alberto, botta, 2011. "Fiscal policy, eurobonds and economic recovery: some heterodox policy recipes against financial instability and sovereign debt crisis," MPRA Paper 33860, University Library of Munich, Germany.
  3. Christine Sinapi, 2011. "Institutional Prerequisites of Financial Fragility within Minsky's Financial Instability Hypothesis: A Proposal in Terms of 'Institutional Fragility'," Economics Working Paper Archive, Levy Economics Institute wp_674, Levy Economics Institute.
  4. James Crotty & Gerald Epstein, 2008. "Proposals for Effectively Regulating the U.S. Financial System to Avoid Yet Another Meltdown," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2008-15, University of Massachusetts Amherst, Department of Economics.
  5. James Crotty, 2009. "Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 33(4), pages 563-580, July.
  6. Ognjen Radonjić & Miodrag Zec, 2010. "Subprime Crisis and Instability of Global Financial Markets," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(2), pages 209-224, June.
  7. Eric Tymoigne, 2010. "Detecting Ponzi Finance: An Evolutionary Approach to the Measure of Financial Fragility," Economics Working Paper Archive, Levy Economics Institute wp_605, Levy Economics Institute.
  8. Calem, Paul & Henderson, Christopher & Liles, Jonathan, 2011. ""Cherry picking" in subprime mortgage securitizations: Which subprime mortgage loans were sold by depository institutions prior to the crisis of 2007?," Journal of Housing Economics, Elsevier, Elsevier, vol. 20(2), pages 120-140, June.
  9. Eduardo Strachman & José Ricardo Fucidji, 2012. "The Current Financial And Economic Crisis: Empirical And Methodological Issues," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 95-123, June.
  10. Özgür Orhangazi, 2011. "“Financial” vs. “Real”: An Overview of the Contradictory Role of Finance," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp274, Political Economy Research Institute, University of Massachusetts at Amherst.
  11. Nikola Kojucharov & Clyde F. Martin & Robert F. Martin & Lili Xu, 2009. "The subprime mortgage crisis: irrational exuberance or rational error?," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jan.
  12. Juan Pablo Mateo Tomé, 2011. "Financialization as a Theory of Crisis in a Historical Perspective: Nothing New under the Sun," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp262, Political Economy Research Institute, University of Massachusetts at Amherst.
  13. Iancu, Aurel, 2011. "Models of Financial System Fragility," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 230-256, March.
  14. Leszek Kąsek & Marek Lubiński, 2010. "hyman," Contemporary Economics, University of Finance and Management in Warsaw, University of Finance and Management in Warsaw, vol. 4(1), March.

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