The Subprime Crisis: The Result of an Explosive Cycle in the USA | Chapter 5 | New Advances in Business, Management and Economics Vol. 9

 

The subprime crisis, considered by experts to be the worst since the 1930s, is mainly linked to the American mortgage policy. According to the contemporary cycle theory, the origin of the crisis lies in the manipulation of key interest rates by the Federal Reserve. This study aims to analyse the causes of the subprime mortgage crisis. It is based on a general analytical framework for the problem of crises. Drawing on the theory of financial cycles and principles of political economy, the study explores how speculative bubbles emerge and burst.

 

Speculative bubbles are not new in economics; the first identified as such was the "Tulip Crisis" in the 17th century. Other crises followed. This study primarily focuses on the subprime mortgage crisis, marked by the bursting of a speculative bubble in the real estate sector in the United States. This study analyses the events of this crisis and may serve as an early warning in identifying bubble patterns in the economy.

 

An analysis of financial cycles indicates the existence of several phases inherent in financial cycles and applicable to the subprime mortgage crisis. Analysis of the cycles in the study clearly shows that the optimistic and "sheep-like" behaviour of financial markets contributes to the formation of speculative bubbles. Moreover, while the Federal Reserve (FED) can be blamed for the subprime mortgage crisis, economists failed to mobilise existing and well-known theoretical economic principles to prevent this turbulence. This study concluded by discussing the COVID-19 crisis and the government's response.

 

Author(s) Details

Xavier Brédart
Accounting and Management Department, Warocqué School of Business and Economics, University of Mons, Mons, Belgium.

 

Please see the book here:- https://doi.org/10.9734/bpi/nabme/v9/5822