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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.

Suggested Citation

  • L. Randall Wray, 2007. "Lessons from the Subprime Meltdown," Economics Working Paper Archive wp_522, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_522
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    Cited by:

    1. 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, issue Jan.
    2. Jan Toporowski, 2013. "The Elgar Companion to Hyman Minsky," Review of Political Economy, Taylor & Francis Journals, vol. 25(1), pages 175-177, January.
    3. Alberto Botta, 2011. "Fiscal Policy, Eurobonds and Economic Recovery: Some Heterodox Policy Recipes against Financial Instability and Sovereign Debt Crisis," Economics and Quantitative Methods qf1114, Department of Economics, University of Insubria.
    4. Leszek Kąsek & Marek Lubiński, 2010. "hyman," Contemporary Economics, University of Finance and Management in Warsaw, vol. 4(1), March.
    5. 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, vol. 20(2), pages 120-140, June.
    6. Ognjen Radonjić & Miodrag Zec, 2010. "Subprime Crisis and Instability of Global Financial Markets," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(2), pages 209-224, June.
    7. 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, vol. 33(4), pages 563-580, July.
    8. David A. Zalewski & Charles J. Whalen, 2011. "Towards a more rapid recovery: incorporating subsidiarity into macroeconomic policy," Chapters,in: Financial Instability and Economic Security after the Great Recession, chapter 5, pages 93-113 Edward Elgar Publishing.
    9. Yun K. Kim, 2017. "Rise of Household Debt and the Great Recession in the US: Comparative Perspectives," Working Papers 2017_03, University of Massachusetts Boston, Economics Department.
    10. Dimitri B. Papadimitriou & L. Randall Wray, 2010. "Introduction: Minsky on Money, Banking and Finance," Chapters,in: The Elgar Companion to Hyman Minsky, chapter 1 Edward Elgar Publishing.
    11. Quinn, William, 2016. "Technological revolutions and speculative finance: Evidence from the British Bicycle Mania," QUCEH Working Paper Series 2016-06, Queen's University Belfast, Queen's University Centre for Economic History.
    12. Pereira Reichhardt, Joaquín & Iqbal, Tabassum, 2014. "Investment Decisions: Are we fully-Rational?," MPRA Paper 57686, University Library of Munich, Germany.
    13. Barry Z. Cynamon & Steven M. Fazzari, 2016. "Inequality, the Great Recession and slow recovery," Cambridge Journal of Economics, Oxford University Press, vol. 40(2), pages 373-399.
    14. Cynamon Barry Z. & Fazzari Steven M., 2008. "Household Debt in the Consumer Age: Source of Growth--Risk of Collapse," Capitalism and Society, De Gruyter, vol. 3(2), pages 1-32, October.
    15. Marshall Auerback & Paul McCulley & Robert W. Parenteau, 2010. "What Would Minsky Do?," Chapters,in: The Elgar Companion to Hyman Minsky, chapter 6 Edward Elgar Publishing.
    16. Juan Pablo Mateo Tomé, 2011. "Financialization as a Theory of Crisis in a Historical Perspective: Nothing New under the Sun," Working Papers wp262, Political Economy Research Institute, University of Massachusetts at Amherst.
    17. 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 wp_674, Levy Economics Institute.
    18. Strachman, Eduardo & Fucidji, José Ricardo, 2010. "The Current Financial and Economic Crisis: Empirical and Methodological Issues," MPRA Paper 27130, University Library of Munich, Germany.
    19. repec:eme:rpeczz:s0161-7230(2011)0000027006 is not listed on IDEAS
    20. James Crotty & Gerald Epstein, 2008. "Proposals for Effectively Regulating the U.S. Financial System to Avoid Yet Another Meltdown," UMASS Amherst Economics Working Papers 2008-15, University of Massachusetts Amherst, Department of Economics.
    21. Gary A. Dymski, 2014. "The neoclassical sink and the heterodox spiral: political divides and lines of communication in economics," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(1), pages 1-19, January.
    22. Thomas Goda, 2017. "A comparative review of the role of income inequality in economic crisis theories and its contribution to the financial crisis of 2007-2009," REVISTA FINANZAS Y POLÍTICA ECONÓMICA, UNIVERSIDAD CATOLICA DE COLOMBIA, vol. 9(1), pages 151-174, February.
    23. Iancu, Aurel, 2011. "Models of Financial System Fragility," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 230-256, March.
    24. Eric Tymoigne, 2010. "Detecting Ponzi Finance: An Evolutionary Approach to the Measure of Financial Fragility," Economics Working Paper Archive wp_605, Levy Economics Institute.
    25. Özgür Orhangazi, 2011. "“Financial” vs. “Real”: An Overview of the Contradictory Role of Finance," Research in Political Economy,in: Revitalizing Marxist Theory for Today's Capitalism, volume 27, pages 121-148 Emerald Publishing Ltd.

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