Collapse of the U.S. sub-prime mortgage lending Market explained through The Kindleberger-Aliber-Minsky Paradigm

ABSTRACT

In this paper we examine the stages of the recent sub-prime mortgage financial crises through the models of the Kindleberger and Aliber paradigm from their book “Manias, Panics, and Crashes: A History of Financial Crises” and its aftermath. Kindleberger and Aliber’s paradigm is adapted from Hyman Minsky’s idea where events leading up to a crisis begins with a type of “displacement,” a type of outside shock to the macroeconomic system. The KAM model explores the three stages in which a financial bubble crisis is formed, fueled, and then popped. The Mania, also commonly known as the “bubble,” arises from aggressive investing in the market where the product’s liquid or real assets no longer plays a role in determining it’s worth, instead it’s values are based on pure optimistic speculation for prices to continually rise. Then Panics occur in the sub-prime mortgage area when there are insufficient funds available to repay the interests on loans and or the credits owed have mounted too high. At last, the Crash becomes imminent since banks nor lenders are willing to lend more money or to buy securities that have been formed by sub-prime mortgages. The securitization of the sub-prime mortgages were originally the profit makers but also ultimately the cause of the financial bust (Kindleberger and Aliber, 2011).

INTRODUCTION

The financial bubble’s origin is born from a displacement in the market. According to the KAM paradigm, the most likely shock factors which caused the displacement is related to the government’s change in policies and the technological advances associated with the internet. With the increasing popularity and the ease of accessing information via the internet, loans were more readily accessible as the lending market