Homeowners were buying houses that they could not afford at their current income level, however they believed the value of their home would rise allowing them to grow their equity during their time living there.
Kindleberger’s second stage, positive feedback, began quickly as an influx of capital began to flow into the housing market which in turn drove up housing prices and profits. Compounding the problem was the fact that mortgage rates were extremely low, encouraging prospective buyers to take on massive levels of debt in order to finance such …show more content…
The social condition is that actors must be self-interested. This holds true in the subprime mortgage crisis for every party involved. Homeowners wanted nice homes, lenders wanted to make profits from lending, banks wanted to generate fees, investors sought investment income, and the government hoped to boost its reputation through increased home ownership. The second stipulation is that there is limited government oversight in the mania. In the housing bubble, this is true as well. Not only did the government not regulate the lending process thoroughly, it took an active role in lowering lending standards while also securitizing such mortgages. As we’ve seen throughout history, manias tend to repeat a certain process. Kindleberger does an excellent job at identifying this, which I’ve shown is closely resembled in the housing