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Old Wine in a New Bottle: Subprime Mortgage Crisis—Causes and Consequences

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  • Michael Mah-Hui Lim

Abstract

This paper seeks to explain the causes and consequences of the United States subprime mortgage crisis, and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that, despite the recent financial innovations, the financial strategies—leveraging and financial risk mismatching—that led to the present crisis are similar to those found in the United States savings-and-loan debacle of the late 1980s and in the Asian financial crisis of the late 1990s. However, these strategies are based on market innovations that have heightened, not reduced, systemic risks and financial instability. They are as the title implies: old wine in a new bottle. Going beyond these financial practices, the underlying structural causes of the crisis are located in the loose monetary policies of central banks, deregulation, and excess liquidity in financial markets that is a consequence of the kind of economic growth that produces various imbalances—trade imbalances, financial sector imbalances, and wealth and income inequality. The consequences of excessive risk, moral hazards, and rolling bubbles are discussed.

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  • Michael Mah-Hui Lim, 2008. "Old Wine in a New Bottle: Subprime Mortgage Crisis—Causes and Consequences," Economics Working Paper Archive wp_532, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_532
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    Cited by:

    1. Ashwani Saith, 2011. "Forum 2011," Development and Change, International Institute of Social Studies, vol. 42(1), pages 70-86, January.
    2. Edward Stringham, 2014. "It’s not me, it’s you: the functioning of Wall Street during the 2008 economic downturn," Public Choice, Springer, vol. 161(3), pages 269-288, December.
    3. repec:mes:ijpoec:v:44:y:2015:i:4:p:325-340 is not listed on IDEAS
    4. Ernesto Screpanti, 2010. "La grande crisi e l’imperialismo globale," Department of Economics University of Siena 590, Department of Economics, University of Siena.
    5. Lino Sau, 2015. "Do the International Monetary and Financial Systems Need More Than Short-Term Cosmetic Reforms?," International Journal of Political Economy, Taylor & Francis Journals, vol. 44(4), pages 325-340, October.
    6. Bill Lucarelli, 2011. "The Economics of Financial Turbulence," Books, Edward Elgar Publishing, number 14252, April.

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