Irrational Exuberance

Introduction

For quite a long time already, financial speculation has been something that people perform in order to get substantial amount of money. The role of speculation in the crisis will also be discussed as it is one of the most understated reasons why the crisis arose. It is unclear when exactly the crisis began to take place, but there is a belief that the crisis began right after the 2001 recession, as people took their money out of the stock market and began to look for a much more reliable investment. Yale economist Robert Shiller believes that the “irrational exuberance” was displaced from stock to housing market.

Isolated Variant

This paper will talk about this economic crisis in the year 2007-2008 that is mainly caused by the subprime mortgage crisis and followed by oil price increases. Apparently, mortgage interest rates also followed the federal funds rate down as the average interest rate on 30-year fixed rate mortgages fell to 5.25% in 2003. As stated above, after the dot-come bubble burst, real estate starts to displace stock as a more reliable investment vehicle since real estate is believed to always grow in value overtime (Inge 45). The notion appeared to be true as home price is always rising since the Great Depression. In addition, a culture of consumerism is being initiated by the government. Investing in real estate attracts all kind of investors, including investors that have low income or bad credit history. Fortunately for them, they were able to assume a special kind of mortgage, known as sub prime mortgage. As the demand for real estate increased, the price increased as well. Additionally, a little drop in mortgage interest rates would actually result in an increase in house price. Therefore, this stimulated even more construction as government figures prove that 6.2 million new single-family homes were finished between 2003 and 2006, which is the highest in the history of real estate.

Money Supply

It turns out that their notion that real estate will always appreciate in value overtime is not right. Apparently the price of houses got too high and people would stop buying them. Plus these homebuilders forgot the simple rule of economics: when the supply increased, the price decreased. Therefore, when the building led to over-supply of housing properties, the housing prices started to decrease after the peak in mid-2007 (Herold ; Fedor; Caldwell & Liu 346-357).

The abrupt crisis practically ...