Bubbles Begetting Bubbles

As is widely understood, the process of cutting interest rates to recover from bursting bubbles creates a sequence of bubbles. Other methods of coping with the consequences of bursting bubbles can also help to generate new bubbles

Here is a suggestion that the Savings and Loan crisis helped set the stage for the recent real estate collapse:

Adams, Johnathan. 1996. “CMBS Structures and Relative Value Analysis.” In Anand K. Bhattacharya and Frank J. Fabozz, eds. Asset-Backed Securities (New York: John Wiley and Sons): pp. 207-26.

208: “The first substantial surge in commercial mortgage securitization may be traced to the Resolution Trust Corporation (RTC) and its decision to use the CMBS [Commercial Mortgage-Backed Securities] market to liquidate the assets of insolvent thrifts. Between 1991 and 1993, the RTC issued an extraordinary $13.8 billion of CMBS.”

Inspired from a hint from

http://online.wsj.com/article/SB122091498820212291.html?mod=todays_us_money_and_investing

2 comments so far

  1. Jeff Rauth on

    well what the suggestion?

  2. mperelman on

    I didn’t intend to make any suggestions. To me, the delayed impact of the efforts of the Resolution Trust Corporation served as a reminder that bubbles are part of the DNA of capitalism. Efforts to contain the bubbles set the stage for subsequent bubbles.


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