subprime mortgage crisis, the
Christopher Foote () and
from Palgrave Macmillan
During the subprime mortgage crisis of 2007–2008, previously profitable loans to subprime borrowers turned sour and investments thought to be as safe as government debt sustained severe and unexpected losses. The crisis reconfigured the US financial services industry and helped spark the worst economic crisis since the 1930s. While the consequences of subprime losses for Wall Street are well understood, the reason that the crisis occurred is not. The fundamental outstanding question is why so many people made decisions that turned out to be so unprofitable. Millions of borrowers took out loans they could not repay. Thousands of lenders lent them money. And investors advanced billions of dollars, either to fund the firms involved in subprime lending, or to purchase the mortgage-backed securities that these firms created. This article outlines and evaluates two potential explanations for the subprime crisis. One is based on ‘insider/outsider' frictions in the subprime lending industry. The other interprets the crisis as the consequence of a classic asset bubble, which in this case occurred in the US housing market. The article concludes by discussing the implications of these explanations for policies designed to prevent financial crises in the future.
Keywords: bubble; default; foreclosure; insider/outsider theory; mortgage (search for similar items in EconPapers)
JEL-codes: F2 F3 G1 G2 (search for similar items in EconPapers)
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pal:dofeco:v:5:year:2011:doi:3856
Ordering information: This item can be ordered from
http://www.dictionar ... lp/faq#_Toc198623697
Access Statistics for this chapter
More chapters in The New Palgrave Dictionary of Economics from Palgrave Macmillan
Bibliographic data for series maintained by Sheeja Sanoj (). This e-mail address is bad, please contact .